Time to Re-Examine Prop 13

Written by Ralph E. Stone. Posted in Housing, Opinion, Politics

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Published on November 13, 2012 with 28 Comments

By Ralph E. Stone

November 13, 2012

In his November 11 “Willie’s World” column in the San Francisco Chronicle, Willie Brown suggests Gov. Jerry Brown’s next “bold move be to enlist Warren Buffett for a joint effort to reform Proposition 13.”

No matter what you think of Willie Brown, he is politically savvy. Democrats now have a super-majority in the California Senate and when all the votes are counted, will likely have a super-majority in the Assembly. Times have changed since the passage of Proposition 13 and now may be the time for the Democrats to re-examine it.

Proposition 13 added Article XIII to the California State Constitution. It provides, among other things, that taxes on real property are limited to 1 percent of 1975 market value, no new property taxes may be imposed, and market value may be increased from its 1975 value up to 2 percent a year or when property is sold or is newly constructed.

Excluded from reassessment are transfers between spouses, between parents and children, and in some circumstances from grandparents to grandchildren. Proposition 58, passed in 1986, lets parents give, sell or bequeath their primary residence – plus as much as $1 million worth of other property – to their children without a reassessment. Proposition 193, passed in 1996, allows transfers from grandparents to grandchildren without reassessment, but only if the parents of the grandchildren are deceased at the time of the transfer. In 2007, the State Board of Equalization extended to domestic partners the same property tax relief as married couples. In 2007, Proposition 39 lowered Proposition 13’s two-thirds requirement to 55 percent for local school bonds.

Proposition 13 unfairly treats commercial property like residential property. In San Francisco, for example, prior to Proposition 13, commercial property owners paid 59 percent of property tax revenues and residential property owners paid 41 percent. In 2008, commercial property owners paid just 43 percent of property taxes, while residential property owners paid 57 percent.

In Los Angeles County, residential property owners paid slightly more than half the burden in 1975 and now they now pay nearly 70 percent. In Contra Costa County, it was a ratio of 48 percent to 52 percent in 1970 and the ratio is now 73 percent to 27 percent.

In Santa Clara County, the proportions were roughly even in 1978, but the residential property owners now pay about 65 percent of property taxes while commercial property pays 35 percent.

I believe a majority would approve reversing current ratios.

Why have these ratios changed so dramatically? Because property taxes are assessed when there is a change of ownership and commercial property changes ownership a lot less than residential property. And many commercial properties are held by holding companies and oftentimes these properties are sold or merged but ownership remains with the holding company. Therefore, no property tax is due.

The major immediate effect of Proposition 13 was to excise $7 billion from local governments, or almost a quarter of their total anticipated 1978-79 revenue. Local governments lost the right to determine property tax rates by Proposition 13’s 1 percent limitation and had to depend on the state legislature to determine both their share of remaining property taxes and state aid. Local governments were forced to add or expand taxes and fees such as development fees on new residential and commercial construction, hotel taxes, utility taxes, and taxes on the transfer of property, sales tax increases, and business license taxes. However, the drastic downturn in the economy made these new taxes and fees less palatable to the public. Do these new or increased fees make for better public policy today than if the same amount of money could be raised from property taxes?

According to the Howard Jarvis Taxpayers Association (www.hjta.org/faq), Proposition 13 has saved California taxpayers $528 billion so far. But this taxpayer savings comes at a steep price for many see a direct link between the inherent inequities in the Proposition 13 tax scheme and state and local budget problems. The obvious direct results have been to cut public services, raise other taxes, and lose credit rating. In 1978 we had a surplus in Sacramento. Since then we have raised business taxes, income taxes, sales taxes and gas taxes, but seem to go broke every June. For example, California public schools in the 1950s and 1960s were ranked nationally as among the best, but have now fallen to 46th.

If there was no Proposition 13, would we have needed a Proposition 30 in the past election to save our schools from planned spending reductions?

There are many factors favoring a re-examination of Proposition 13. In 1978, there were runaway housing prices, large increases in property taxes, and an unfair burden on the older generation. Today, we see a slow recovery from housing prices and construction; slow, steady tax increases that negate benefits of Proposition 13; higher profits for the older generation coupled with burdens on the younger generation; population growth; and the accumulated deficit of years of underfunded public services.

In addition, median home prices have fallen. Thus, the gain in assessed value and property taxes from new construction has plummeted. Some construction gains are expected in the coming years, but construction levels are unlikely to return to peak levels any time soon. The gain in assessed value and property taxes from changes in ownership of residential property have plummeted. A large share of the assessed value in most California counties is in properties with a recent base year valuation, including many bought at peak prices. As a result, we will see lower gains from change in ownership, for many years to come.

There have been a number of ideas for changing Proposition 13. One, of course, is to repeal it. Another idea is to tax commercial property periodically on its resale value, not when there is a change in ownership. Another idea that has been floating around for years is the so-called “split roll” property tax, which applies higher tax rates to commercial property than for residential property. Another approach is to assess homeowner property at a lower rate than commercial property. Or if the objective is to provide tax relief to low and middle-income property owners, then give a homestead exemption to these taxpayers only.

Perhaps the time is right to at least begin a serious re-examination of Proposition 13.

Ralph E. Stone

Ralph E. Stone

I was born in Massachusetts; graduated from Middlebury College and Suffolk Law School; served as an officer in the Vietnam war; retired from the Federal Trade Commission (consumer and antitrust law); travel extensively with my wife Judi; and since retirement involved in domestic violence prevention and consumer issues.

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  • Radlysf

    Where is the petition for me to sign to undo Prop 13’s damage to this great state?

    • JSebastian

       Prop 13 didn’t do any damage. Per capita tax collections have increased faster than both inflation and population since 1978.  Try again. 

      • ProBizProFuture

         No damage?  Go tell that to the homeowner who’s paying $3,000 a year towards fire/police/schools, living next to a renter who’s paying $350.  Especially since that homeowner is only getting $2,200 of public services — and may very well be using fewer services than the renter.  

        Even liberals resist having to spend, spend, spend in order for ‘conservatives’ to take, take, take.

        • Gilroy1

          Even liberals own property….

        • JSebastian

           How does that work that a renter is paying 350?

          That isn’t Prop 13’s fault btw…the method of charging tax based on a transaction value is stupid to begin with.

        • JSebastian

          That’s not damage, that’s simply the natural result of a stupid assessment method ; the implication was that Prop 13 killed revenues and that the damage was to the fiscal capability of the State.   But the truth is that tax revenues per capita AFTER prop 13 accelerated and grew to be higher, on an inflation adjusted basis, than before. Hence…it did no damage. 

          What you’re talking about is the iniquity created by an idiot system – ad valorem taxation.  Its inherently inequitable.  The property tax functions as nothing more than a recurring sales tax – this is arbitrary and has no connection to anything in the real world, such as the cost of providing municipal services to the inhabitants of the parcel being taxed.  How could it? There is no mathematical or other relationship between the mere transaction price of a piece of property – which is just an arbitrary number, and the services extended or made available to the inhabitants. 

          However, prop 13 didn’t create the ad valorem tax assessment method. It merely compounded its already disastrous ill effects on fairness in the tax system.

  • Gilroy1

    If prop 13 gets hammered by our elected officials, I promise to pass the cost on to my renters.. They can bear the brunt of bad decisions and FEEL the pain.

    • Supermajority for me, not you

       You mad bro?

      • Gilroy1

        Prop 13 is here to stay. Everybody wants someone else to pay higher taxes.. Even the libs own property.. We can rest easy that prop 13 will continue to save the private sector for a long long time.

    • ProBizProFuture

      And have you been passing your Prop 13 savings on to your tenants?  Didn’t think so.  Why should you?  The market sets rental prices and Prop 13 savings give you the opportunity to cherry pick your tenants.  Any extra savings line your pockets.

      Prop 13 created a highly uneven playing field for landlords.  Those who’ve bought recently — and are actually contributing towards the local services their tenants use — have no flexibility.  Those who bought years ago or inherited their property have a nice cushion of advantage — especially since they’ve often paid off any mortgage debt to buy the property.

      Since rental housing tenants are the MOST expensive kids to educate (more likely to be non-English speakers, more likely to move schools and districts, more likely to need extra reading, counseling and homework services), it’s a travesty that rental housing turns over much less frequently than homeowner-occupied housing … hence contributes much less to funding each child’s schooling.

      Rental commercial tenants are likewise no less demanding — and arguably require more services — than long-established businesses that own their properties.

      • Gilroy1

        Yes, I do pass along the Prop 13 savings on to my tenants. My tenants enjoy lower than market rents. I promise to raise my rents if prop 13 gets a thrashing… Make no mistake.. All property owners will have to follow suit.. Rents, as a general rule, will go up.. Demand for rentals is increasing due to the foreclosure markets.. Property values are down.. My rents are based on a simple formula that has served me well over the years. My tenants enjoy high quality dwelling at lower than market rents.. It’s the right approach to property management. It works for me. This approach also gives me room to raise the rents. My renters will suffer the higher tax bills. They all know it. I have explained it to them.

        • ProBizProFuture

          You seem like a straightforward person trying to be fair to your tenants.  What do they say in return?  How do they justify enjoying the tax benefit that was supposed to keep “old people in their homes?”

          How do they feel about the fact that someone buying a home at the same time that they moved into your rental is paying many times what they are towards the schools/police/fire/parks/libraries that both use? 

          How do they feel about Gilroy Unified having only $8,200/pupil to spend — about 91% of the state average —  despite having 62% of its students on the free-lunch program, 62% getting compensatory education, and 28% learning English? 

          Frankly, if you have been straight-forward, rather than simply threatening, then, hopefully, they’ll want to see a system where they pay more and get a decent public school system. 

          Of course, I’m talking about a change to Prop 13 that curtails commercial property to some reasonable number of years — 10?  15?  20? — to mesh with home-owner property.  The other options — stopping Prop 13 all together for commercial and/or raising the rate from 1% — are counter-productive … but could easily be what happens if fair and reasonable landlords simply scream and threaten, rather than noting the inequities of granting perpetual tax relief to a random group of renters, or real-estate investors.

          • Gilroy1

            In my analysis, you act like property owners are making out like bandits and not paying taxes? I don’t see where allowing the public officials to visit their spending issues on the lowly property owners will benefit society as a whole.. Yes, possible a short term fix, then chaos as the consequences of high property taxes darken California’s future even more. What happened to all the lottery money?

        • JSebastian

          Sure you do….you’re just a regular philanthropist, aren’t you…with your below market rents.  The reality is probably that you can’t get a market rent for your substandard tenement.

          • Gilroy1

            I can get at least $350 more a month on a duplex where a single mom lives with her son. She has had her hours cut back and I help however I can. You’re simply wrong. In another property, I’m under by $250.00 a month. The man and his wife are older and are living on Social Security.. Both worked hard all their lives then lost their nestegg to a foreclosure.. We’re talking about decent people in trouble. The guy next door rents to a section 8 family and is ripping and is getting $2,100 a month..( exact same floorplan) How is that helping anyone? Neither the government and in this case, the property manager are doing a value to society. By authorizing and paying higher rents to property managers, the government is driving the price of rents higher. Additionally its and abuse of our taxes but I don’t find it surprising.. Government is not spending money wisely, but they sure spend. Let me tell you that not one of my tenants will be supporting anything having to do with getting rid of prop 13..

            • JSebastian

               Well perhaps you are telling the truth, so I am going to extend the benefit of the doubt. However, as most people may not know, its expensive to change tenants, so it makes good business sense not to raise rents over small amounts of money left on the table if it is going to result in a vacancy.  Because even one month unpaid can wreck a full year of profits for a LL, the more recent ones particularly so.

              I agree with you that government subsidies drive up the costs of things, unfairly to consumers.  This is true in education and housing. 

              • Gilroy1

                I am telling you the truth. You make some valid points.. When you own rentals, as an investment, one has to figure in vacancy factors.. This is a given. Lower rents tend to lower the turnover rates but it doesn’t guarantee lower turnover. It’s not a constant.

                So when I calculate my returns I allow for around a 5% vacancy factor. This equals to around a 2 year turn over with a month of downtime..

                Additionally, $350 and $250 are not small amounts of monthly rent, especially to my tenants. As much as it seems like a foreign idea to you, I would rather charge my tenants lower rents than to give it to the State of California. The State has a horrible record of spending and can’t budget properly. Prop 13 has provided benefits for my tenants over many years. I make sure they understand theses benefits. I will be sending out Rental notifications reminding them that because of Prop 13, I will not be adjusting the rents up this year.

      • JSebastian

         How are rental commercial tenants more demanding of municipal services? See, that’s the thing that is infuriating about the left’s assault on taxpayer protections.  They lie and dissemble.  Commercial properties SHOULD be taxed less than a residence. People do not LIVE in a commercial property. It is people, not parcels, that consume municipal services.  Aside from the obvious blanket “protections”, however minimal they might actually be, of police and fire, commercial properties don’t use schools or welfare programs, or libraries, or parks.  People use those things. 

        • ProBizProFuture

           And commercial tenants are what … robots?  The customers for the businesses in commercial property are … overseas?  These businesses employ … leprechauns?

          First of all, if you actually read my point, it was that businesses that own their own properties are no more demanding than businesses that rent.  So why should commercial property owners who buy have to contribute more *towards local services of all kinds* than those who rent from landlord heirs, real-estate trusts, and commercial property companies who hide changes of ownership behind LLCs?

          Second, to your half-point, if you look at any sales or rental prospectus for a commercial property, you will see demographics highlighted — particularly the education and income levels of the local population.  Commercial property values are directly correlated to the educational value-add in the immediate population — the skills of the people they hire and the income of the people they sell to. 

          Finally, if you feel that commercial property should be taxed less than residences — go for it.  But that isn’t what Prop 13 has produced!  Prop 13 has produced a world where over 50% of commercial property and 60% of homes are now paying full freight … while 20% of commercial owners and 15% of homes are getting a massive senior-citizen discount … only the commercial folks are in no danger of being thrown out of their homes.  They just sit and enjoy watching the rest of us fight.

          • Gilroy1

            So I think we all agree.. Keep prop 13 and cut back on Government spending…

          • JSebastian

             No, the tenants are people, but they live somewhere else…they don’t live in a commercial building. They have a home of their own that they already pay taxes for.  So do the customers.  And the workers. So why should a commercial property be taxed to pay for something that the people associated with the business already are paying for separately?
             
            I agree with you that there are gross iniquities in the tax
            system. But these don’t come from Prop 13, they exist inherently in the method of taxation – ad valorem taxation is stupid. It is a medieval, antiquated system that makes no sense at all in a modern society. 

            In our system, the tax levied on a parcel has no relationship to the value of the services consumed or made available to the inhabitants of the parcel. And that is fundamentally the flaw. People use services…not buildings. 

            Users of services should pay for the services they use.  That simple objective of fairness is what is broken (and absent) in a tax system based on “ad valorem” assessments.

  • ProBizProFuture

    Excellent summary.  Perhaps the only major effects you’ve missed are the civic disruptions that Prop 13 has created:

    – the majority of homeowners are paying top-dollar property taxes and can’t understand why they’re receiving bargain-basement local services
    > which kicked off the redevelopment craze in the 80’s, allowing cities to incur extraordinary levels of debt to ‘fight blight’ (i.e., funding yesterday’s local services out of tomorrow’s taxes)
    > and has allowed local government to be tarred as ‘spendthrift’ when, in fact, officials have been frantically trying to create ways to give the majority of voters what they’re paying for

    – a few counties (Los Angeles being the elephant in the room) cut their school allocations down to less than 25% after Prop 13 (vs. the 45% most counties pay towards schools)  — thus forcing state taxpayers everywhere else to pay for LA’s schools
    > and allowed counties like LA to continue to fund large county salaries, benefits, and staffing levels, creating a crooked yardstick for all other municipalities’  union negotiations
    > until the so-called “Educational Revenue Augmentation Fund” tried to claw some back in 1992 …
    > until it was repurposed to back-filling counties’ and cities’ losses due to the so-called Vehicle License Fee reduction in 2004

    – and all of these machinations have both put state government in the middle of school funding (while contributing almost nothing to the top 15% of school districts) and allowed it to claim that it was spending 40% of the state budget on schools — ignoring the fact that, no, the majority of this is still local property taxes and not state tax dollars at work at all

    Having studied Prop 13’s effects closely at a local level, it is clear that the major beneficiaries now are real-estate investors — not productive companies or individuals at all.  The major losers are the majority of residents who struggle to reconcile the high taxes they pay with the low benefits they receive.

    • Gilroy1

      Obvious that you missed the prop 13 benefits.. What happened to all that wonderful lottery money? Prop 13 is the scapegoat for politicians that want to spend and spend. Yes, we do have an out of control spending problem in California and that my friend, is the problem.

      • ProBizProFuture

         Missed them?  Uh, no.  But, like other parents and businesspeople across California, I’ve watched as all my Prop 13 “benefits” — along with all my Prop 58 “benefits” (on inherited property) — have been swallowed up by private school tuition, municipal fees, and other civic fees I’m forced to pay — just to get back to what was a free public service in the seventies.

        So why is spending out of control?  By continuing to feed the gush and sputter of property-value based tax funding, Prop 13 has strengthened the hand of every deep-pocketed special interest (unions, developers) that can patiently wait at the revenue spigot.  In bad times they agree to postpone wage increases or civic infrastructure — but take soft concessions like pensions or sales-tax cuts or RDA funding.  Then, in good times, the wage demands and project plans roar back at the front of the queue, and all those  bad-time ‘gimmes’ kick in as well. 

        • Gilroy1

          Good points…but Prop 13 should not be sacrificed. I think it’s a benefit to actually keep government’s feet to the fire regarding their spending habits. Everyone hate’s fees..

          You mentioned “forced to pay” Well, they can’t “force you to pay” higher property taxes …they have to look at the other feed bags… This sheds the light on their spending problems.. That, by itself, is worth every cent. This is why I respect your views on the matter, but we must be careful what we really vote for..

          I

        • Gilroy1

          Oh… one more thought… Most of any savings on prop 13 was likely spent on improving my property, even during the epic decline in values. If you own rental property and fail to do pro-active repairs it all catches up one way or another.. Managers who defer maintenance always suffer with lawsuits, property values, and pissed off tenants. Personally, I won’t run my business with those ethics.. It makes life difficult and doesn’t provide any value to either party.

  • http://www.facebook.com/paul.milstead.54 Paul Milstead

    CALIFORNIA  NEEDS COMMON SINCE THEY DO NOT NEED ANY MORE MONEY

  • For CA Kids

    I like your ideas and your knowledge is it possible to email you (sorry if this was already posted I cannot see it).