Time To Re-examine Proposition 13

By Ralph E. Stone

January 9, 2011

Commenting on the $28 billion budget gap, Governor Jerry Brown stated that “everything should be on the table.”  Later Governor Brown met with county officials to discuss shifting responsibility for state-run programs to the local level.  This, of course, will require providing sufficient revenue to fund these programs.  This in turn may mean reexaming Proposition 13 which, among other things, consolidated revenue-gathering responsibility to the state, leaving cities and counties dependent on the state.

Is Governor Brown serious about reversing parts of Proposition 13, or was he just throwing out ideas? And if he is serious, why not re-examine every provision in Proposition 13?

Proposition 13 and Jerry Brown

During his first term in office, then Governor Brown vehemently opposed Proposition 13, calling it a “fraud” and a “rip-off” among other things. When it won with 65 percent of the vote, Brown quickly reversed himself and embraced Proposition 13. After his flip flop, some called him “Jerry Jarvis.” Howard Jarvis, Propostion 13’s godfather, rewarded Brown by cutting a campaign commercial for his re-election. Of course, Jarvis cut a campaign commercial for his Republican opponent too. Maybe Brown is ready for another flip-flop?

Proposition 13

Proposition 13, an amendment to the California Constitution, was passed by the voters in 1978. It foreshadowed a so-called “taxpayer revolt” that swept the country in the late 1970s and early 1980s. Proposition 13 changed the way real property is reassessed in California. 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 would take only a simple majority to amend Proposition 13.

Real Property Reassessments in a Nutshell

Under Proposition 13, real property is reassessed only when 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.

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.

Proposition 3,  also passed in 2007, lowered Proposition 13’s two-thirds requirement to 55 percent for local school bonds.

The Jarvis Taxpayers Association claims that Proposition 13 saved California taxpayers over $528 billion. 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.  While the taxpayers saved, California and the counties and cities were starved for funds. The obvious direct results have been to cut public services, raise other taxes, and a low credit rating. In fact, the three biggest U.S. credit rating agencies — Standard and Poor’s, Moody’s, and Fitch — have all given California’s General Obligation bonds the lowest ratings of any state.

In 1978, we had a budget surplus in Sacramento. Since then we have raised business taxes, income taxes, sales taxes, and gas taxes, but seem to go broke every June.

Proposition 13 unfairly treats commercial property like residential property. In San Francisco, for example, according to Assessor Phil Ting, 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 voters would approve reversing these 2008 ratios.

Why has the ratio shifted so dramatically? 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.

Possible Amendments

A number of possible amendment to Proposition 13 have been floating around for years. One possible amendment is to tax commercial property periodically on its resale value, not when there is a change in ownership. Ting estimates that assessing commercial property at market rate, instead of under Proposition 13, would generate an additional $7.5 billion in tax revenue.

Another idea is the so-called “split roll” property tax, which applies higher tax rates to commercial property than for residential property.

Still 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.

Conclusion

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. Is Governor Brown up for the challenge and, if so, will California voters approve changes to Proposition 13? I bet the Jarvis Taxpayers Association will be leading the opposition to any proposed changes to Proposition 13.

Disclaimer: My wife and I are beneficiaries of Proposition 13. We bought our San Francisco home in 1972 when real property was reasonably priced and mortgage interest rates were low.

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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