Who’s Afraid of Proposition 13?

TAX REVOLT
Cartoon by Steven Greenberg, Seattle Post-Intelligencer

By Ralph E. Stone

July 29, 2009

As the dust settles over another budget battle, we should expect some action to eliminate or at least ameliorate future budget battles. This should include changing the two-thirds rule to pass a budget and amending Proposition 13. California cannot continue to engage in battles each budget season. Because it could not find a supermajority to raise taxes, the state had to cut or reduce many of the public assistance programs serving as social safety nets for children, the poor, and the sick and the elderly. The Budget calls for taking $4.7 billion from the counties, which will force many counties to cut services even further. And again, the governor and the legislature had to resort to budget gimmickry to pass a budget, albeit an unbalanced one. It is time for change.

Proposition 13

Proposition 13, an amendment to the California Constitution, passed by the voters in 1978, changed the way real property is reassessed. It also requires a two-thirds supermajority in both legislative houses for future increases in all state tax rates or amounts of revenue collected, including income tax rates. It also requires a two-thirds supermajority in local elections for local governments desiring to raise special taxes, but not general taxes which go into a city’s general fund. It only takes a simple majority to amend Proposition 13. Proposition 13 foreshadowed a so-called “taxpayer revolt” that swept the country in the late 1970s and early 1980s.

Real Property Reassessments in a Nutshell

Under Proposition 13, real property is reassessed only when it is sold or transferred and between sales, the assessed value can be raised no more than 2 percent a year plus the value of improvements. 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.

It has been estimated that Proposition 13 saved California taxpayers over $526 billion dollars. 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 48th. According to a February report by UCLA’s Institute for Democracy, Education and Access.California schools now rank at or near the bottom nationally in academic performance, student-teacher ratios in middle and high school, access to guidance counselors and the percentage of seniors who go directly to four-year colleges. The 2009 budget takes away $9.3 billion from education, which will put California even further behind.

Possible Amendments

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. I believe a majority would approve reversing these 2008 ratios.

Why? 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.

One 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.

Two-Thirds Tax Rule

Changing the requirement for a two-thirds supermajority to a simple majority or supermajority of 55 percent will be a tough nut to crack. California taxpayers are leery — and with good reason — of making it too easy for our legislature to raise taxes. While I am somewhat optimistic that voters would approve lowering the two-thirds rule for passing a budget, I believe changing the two-thirds rule for raising taxes would be a tough sell.

Two-Thirds Rule

California is one of only three states – Arkansas and Rhode Island are the others – to require a supermajority to adopt a budget. A statewide poll by the Public Policy Institute of California in January 2009 found that for the first time, a majority of voters, 53 percent, favored lowering the threshold to 55 percent. Two months later, when the institute asked the question again, support for changing the requirement declined 10 percentage points. Obviously, there is work to be done to change the two-thirds rule.

Conclusion

Who’s afraid of Proposition 13? Proposition 13 has been considered a sacred cow to many and challenging it is to touch a political “third rail,” that could end a political career. Although the road to fiscal sanity will be a rocky one, California must make the journey. The danger, however, is now that this year’s budget has passed, all will be forgotten until next year’s budget is due. Perhaps, it is time to have a Constitutional Convention for California to help address the state’s structural deficit problems.

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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