Much Needed Prop 13 Reform Is on It’s Way with ‘Schools and Communities First’ Ballot Measure

by on August 26, 2019 · 15 comments

in California, Education, Under the Perfect Sun

By Jim Miller

There is a movement afoot to reform Proposition 13, with community organizations aligned with labor promoting the Schools and Communities First ballot measure.  Why would anyone want to touch the third rail of California politics? The answer is simple: we can keep its central benefit to homeowners while closing an unnecessary corporate loophole that will help our schools, cities, and counties across California.

Ever since its passage in 1978, Proposition 13 has starved California’s schools and local governments of funding.  While the measure was pitched as a way to keep individual homeowners from being buried by taxes, the real beneficiaries of Prop. 13 were not elderly folks or other vulnerable groups struggling to hang on to their homes, but super rich corporate property holders.

What most voters don’t know about Proposition 13 is that it gave huge commercial property owners like Disneyland the same tax break as your grandmother.  In fact, rather than liberating homeowners, Proposition 13 shifted the property tax burden away from commercial property owners and onto individual households.  As Robert Reich has noted, before the passage of Prop. 13, property taxes on houses accounted for 55% of property tax paid while commercial property contributed 45% of the total.  Today, homeowners shoulder 72% of the tax burden versus only 28% for big commercial properties.

And even the benefits to the average homeowner are exaggerated, as Michael Hiltzik has pointed out in the Los Angeles Times, “most of the proposition’s benefits went to wealthier Californians –two thirds to homeowners earning more than $80,000, and most of that to those earning $120,00 and up.”

Researchers from USC have documented that as a result of the post-Prop. 13 property tax system, schools, cities, and counties have lost over $11 billion in revenue annually with 80% of the losses coming from the largest 8% of commercial properties. Thus, this cooperate tax loophole put a huge hole in California’s finances that we have never recovered from.  It’s why we are 41st in the nation in per pupil spending and dead last in teacher to student ratio for instance.

Indeed, the biggest legacy of Proposition 13 has been that California, despite being the world’s 5th largest economy, has schools, counties, and cities that frequently struggle with austerity, particularly during economic downturns.  Another way of putting it is that Proposition 13, the spawn of right-wing backlash politics, was very effective at what folks like Reagan administration official David Stockman charmingly refer to as “starving the beast.”  That is, preventing government from being effective by limiting resources and then calling for more cuts because of that ineffectiveness.

In recent years, Californians have shown more appetite for progressive taxes than for draconian cuts, as the passage of Propositions 30 and 55, with their temporary taxes on the rich to fund education, showed.  Now, with the Schools and Communities First measure, progressives are aiming to put Proposition 13 reform on the ballot in 2020 in an effort to finally address some of the glaring inequities that resulted from that ill-conceived initiative.

What Schools and Communities First would do is simply close the commercial property tax loophole by reassessing the top 13% of commercial properties valued at over $3 million at current rates.  For instance, huge commercial properties that haven’t changed hands for decades, like Disneyland, are still billed at 1970s rates while newer homes and businesses in the same community pay a much higher rate. This measure would leave individual homeowners completely untouched and level the playing field for small and newer businesses that are not receiving the same protections as the richest commercial property owners.

This simple, much-needed reform would bring in about $11 billion annually to help finally restore more adequate funding for California’s schools and local governments. It is already being fiercely opposed by the corporate sector that is happy to continue benefiting from this tax loophole despite that fact that it is both unfair and bad public policy.

The early social media ads funded by corporate interests call on voters to “Fight for Proposition 13” against an effort they characterize as designed to “destroy Proposition 13” and “increase taxes in California on homeowners and businesses.” Of course, this is inaccurate because the measure leaves individual homeowners untouched and instead focuses on wealthy businesses with property valued at over $3 million.  Why the lie? Perhaps because, the merits of the actual reform are much tougher to dispute. Hence the strawman argument with its appeal to fear.

Elsewhere in the San Diego Union-Tribune, the editorial page took a different tack, calling on their readers to ignore any discussion about education and focus on what they call, “the larger context.”  Of course, the context that matters for the SDUT is not the history of the anti-tax movement in California or the decades of austerity that Prop. 13 produced for the public sector and education, it’s union bashing: “It isn’t about ‘fairness’ or ‘helping the kids’ or any of the other clichés with which it’s going to be sold. It’s about propping up costly public employee pensions.”

From there, the editors go on to pit “government unions” against private sector unions and the public at large.  Not surprisingly they don’t discuss the actual history of Proposition 13 or how California’s education spending stacks up against other states.  Nothing either about how public education spending has never fully recovered after the massive cuts the system took in the wake of the Great Recession.  That might get in the way of their anti-union tirade.

For the SDUT, which it should be noted busted all its unions, the solution is not to close a corporate tax loophole that helps fund education and deals with rising teacher pension costs, but rather to demonize public sector workers and call for yet another effort to shrink the middle class.

Of course, the purpose of the SDUT’s editorial is to defend what they call a “business friendly measure” but Prop. 13 hasn’t even been particularly fair for small businesses who’ve ended up with the short end of the stick when compared to their super rich corporate counterparts. We can and should do better.  It’s time to level the playing field.

In the face of these kinds of dishonest and divisive attacks, the campaign for Schools and Communities First will not be about pitting working Californians against each other or dragging somebody down, but about raising everyone up by building a better future.  It will be a big fight, to be sure, between those peddling fear and recrimination and those struggling for social justice and hope.

{ 15 comments… read them below or add one }

Avatar Geoff Page August 26, 2019 at 11:49 am

The only question I have is “Why hasn’t this ridiculous flaw in Prop 13 been fixed before now?” Don’t be fooled by the ads folks, this change needs to be made, it perverted the original intent of Prop 13. We need this reform.

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Avatar ZZ August 26, 2019 at 1:08 pm

I love this idea!

I think they made a bit of a mistake not bundling this with an income tax cut however. We have the USA’s highest state income tax rates combined with nearly the lowest commercial property tax rates. While the commercial property rate is absurd, unfair, and way too low, raising it will generate enough money to both cut the state income tax and still provide billions more for education.

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Avatar Geoff Page August 26, 2019 at 2:06 pm

This should include a rollback of all the “fees” that were created to make up for the lost revenue.

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Avatar Elise Mills February 5, 2020 at 12:01 am

A lot of business fees are to be discarded for businesses as part of this initiative.

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Avatar Dickie August 27, 2019 at 9:59 am

Fine article Jim. The people I live among up here in rural Shasta County are just the folks who need to hear this myth-busting information. With your permission I will print it up and give it to friends and acquaintances. I know it will be a big issue.

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Avatar Bearded OBcean August 27, 2019 at 1:02 pm

Seems pretty clear to me that this a slippery slope. Once additional tax revenue starts rolling in from commercial property owners, it’s only a matter of time before homeowners are hit with the same. Think about how much more money that could generate.

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Avatar Geoff Page August 27, 2019 at 1:13 pm

I would not worry, bearded. There are millions more homeowners than there are commercial property owners.

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Avatar ZZ August 27, 2019 at 1:31 pm

It looks like it isn’t fully decided if this initiative will need a super-majority or not. Probably it won’t since it is a citizen initiative.

https://www.hoover.org/research/californians-are-losing-their-supermajority-protection-over-tax-increases

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Avatar Will August 28, 2019 at 11:54 am

The devil is always in the details, isn’t it? By looking at the quoted statistics, you’d think there was some sort of tax rate inequity between property owned by individuals and property owned by a company. But there is no inequity. Both entities pay the same property tax rate.

Homeowners pay a larger portion of property tax because the assessed valuation of homes is higher than commercial property. There are more homes that commercial property! And who gets the greatest value from property taxes? Homeowners!

So go ahead and vote to increase commercial property taxes and guess what will happen? Your rent will go up. The goods and services you buy will go up. Your favorite family restaurant, probably held as a sub-S corporation, will charge your more for your meal to pay for the increased property taxes.

All you’ll be doing is shifting the property tax burden from many to few and now you know that that means.

Hey, I have a better idea! How about we push for smaller government that steals less of our tax money. That’s it, shrink government first!

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Avatar Geoff Page August 28, 2019 at 12:09 pm

Commercial property taxes are tax deductible the same as they are for private homeowners. So there won’t be a need to fully recover them by raising all those prices. And, ever since Prop 13, all kinds of “fees” were created to make up for the shortfall in tax revenue. That will be the next task, getting those fees removed as the tax revenue comes back.

Your comment is Chicken Little-ish, I think, but if you have any studies to back up what you said, then share that here. Sorry if your personal opinion is not sufficient. If you have the credentials to make such a comment, please share those too.

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Avatar Michael August 28, 2019 at 2:56 pm

It makes no sense that commercial property is protected under prop 13. The purpose was to give some certainty to families who buy homes and try and own them after 30 years. A for profit enterprise is valued utlizing its income which will be reduced via mark to market taxes.

We need to reform the blanket protections provided by prop 13. The goal was to protect families, not to have one group of homeowners subsidize another. Why do homeowners who have $3M homes pay on the same base value of a starter home for a young couple.

There are plenty of homes in PL worth millions and they’re paying of a $400,000 base. I know of a La Jolla house worth $22M with a $3M base. Makes no sense to me.

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Avatar Geoff Page August 28, 2019 at 3:24 pm

The other flaw in Proposition 13 is that it lets families hand down the low tax assessment to their kids even if the property has increased in value. Much as it pains me because I have two kids, I think this should be fixed so that whenever the property changes hands it is reassessed. I think the 1% should remain for a property owner as long as they occupy and own the property, that’s what the intent was so seniors could stay in their homes. The $20 million value of a home that was once worth $3 million means nothing unless the home is sold, otherwise, it is just a paper value.

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Avatar Tom January 7, 2020 at 7:01 pm

I will vote no.

Public employees are not to be blamed; they have worked for relatively lower wages in exchange for relatively higher employment stability and much richer pensions and health care (again relative to private employees). Those pension promises are coming due.

Let’s not forget that traditional pension plans have basically disappeared for everyone except public employees. Private employers realized they’d go bankrupt continuing to make pension promises, so they stopped 20 to 30 years ago.

But during that time, governments have continued to make pension promises to a whole new generation of workers. These governments have failed to set aside enough funding each year, paying for more current projects. (Just google “public pension underfunding” for horror stories.) Now that the bill is coming due, higher taxes are the only way to pay the bills. Property taxes are doubling in some parts of Illinois for this reason!

We need to tell governments that CA’s total tax burden is far higher than in other states, and they need to understand we can’t pay more. In the short run, this proposition won’t hurt me, so hey why not say yes? It’s not the public employees’ fault their pensions are underfunded.

But we’ve got to break the culture of special deals and handouts. As noted above, parents can leave their primary home PLUS another $1 million of real property to their kids WITHOUT reassessment when they die, generation after generation. There are Prop 13 breaks for people over 55, the blind, veterans, disabled, you name it…of course I am not against these people! I am against willy nilly handouts. We even let low income people apply to pay lower rates for the toll roads in LA county…like we need to subsidize the poor to use the FasTrak??

We have statewide rent control (which the legislature decided to impose RIGHT AFTER THE VOTERS TURNED IT DOWN in last year’s initiatives)…that’s a handout from property owners to renters (because renters generally vote for more handouts). And rent control means apartment owners may not be able to pass on these proposed property tax increases to tenants. (I know rent increase can be up to 10% above inflation, but government can cut the 10% to 5% pretty easily now that the mechanism is in place, and market rents have been going up WAY faster than 5% per year. I know this only hits properties over $13 million in value, but you’ve seen lots of apartment complexes with over 50 units near our own neighborhoods; why should those property owners get screwed while the individual or company that owns 5 buildings down the street, each with 10 units, still enjoys Prop 13 protections? It’s your 401(k) or pension or insurance company or mutual fund that probably owns or lends to that big apartment complex…don’t think you’re not affected.)

California politicians have perfected a culture of tax the large guys who represent few votes, to hand out money to the little guys who offer many votes. NOBODY wants to screw the teachers and cops, who are counting on their employers to keep their promises. But we as homeowners, property owners, and large or small business owners need to tell the politicians LOUD AND CLEAR that we don’t want them to screw us any more to pay the cops and teachers. Cops and teachers are homeowners, too! It’s not someone else’s problem!

Start paying public employees market rates, kill off future public pensions, replace them with “defined contribution” plans like private industry has used for 40 years now, and stop letting politicians make promises that will basically force us to pay double the property taxes in the not too distant future (google “Illinois property tax increases”if you don’t think it’s possible).

Killing future public pension contributions is PAINFUL but private industry did this in the 1990s and so far we have let governments pretend it isn’t an issue.

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Avatar Patricia Tostenson February 4, 2020 at 9:13 pm

I agree with your article but did not see mentioned that currently large corporations must have 51% or more of the property change hands in order for it to create a reassessment. For instance when Michael Dell and his wife sold their hotel with each owning 50% their was no reassessment. The new owners took over their old tax base. Not the case for homeowners. This is the loophole. Lets end it.

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Avatar Elise Mills February 4, 2020 at 11:57 pm

In addition to this SCF gives us the chance to bring $ back to local schools and communities so that the local needs can be addressed – not just what Sacramento legislators or administrators have targeted. This update – essentially closing a loophole for commercial entities is long past due in being addressed – please sign on to support it & vote for it in the fall!

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