Because voters approved Proposition 13 in 1978 — the ballot initiative that capped property tax hikes at 2 percent per year and required a two-thirds vote of the Legislature before taxes could be added or increased — California became known as the birthplace of the anti-tax movement that swept the nation. After President Ronald Reagan got a 25 percent income tax cut through Congress in 1981, antipathy toward taxes became a defining feature of modern conservatism.

The Howard Jarvis Taxpayers Association, business groups and Republican activists enjoyed decades of success in fighting off tax hikes in the Legislature and on the ballot. And in 2010 — long after California’s emergence as a progressive redoubt — this potent partnership won voter approval of Proposition 26, which targeted local and state efforts to get around laws like Proposition 13 by defining taxes as “fees” which only need majority approval by legislative bodies. It eliminated this loophole and applied the two-thirds approval threshold for tax hikes to local governments.

But less than a decade later, anti-tax groups have the right to feel besieged in California. In 2012, voters approved Proposition 30, which increased sales taxes for four years and income taxes for those who made $250,000 or more by seven years. In 2016, voters approved Proposition 55, which extended the higher income taxes on the wealthy until 2030.

Teacher unions push for Prop. 13 ‘split roll’

And in November 2020, it appears increasingly likely that voters will be asked to consider two separate ballot measures that would each raise state taxes by about $11 billion.

One measure — the California Schools and Local Communities Funding Act — has already made the ballot. Sponsored by the League of Women Voters and pushed by teachers unions, it would create a “split roll” exception for commercial property from Proposition 13, allowing the parcels to immediately have sharply higher assessments based on their current value and exposing many businesses to the possibility of large annual property tax hikes in an era in which property values are soaring. 

About $5.5 billion of the annual revenue would go to counties and cities for local services. Roughly the same amount would go to K-12 schools and community colleges.

But with school districts around California reeling from the phased-in 132 percent increase in payments to the California State Teachers’ Retirement System required as part of the CalSTRS bailout approved by the Legislature in 2014, that funding boost looks inadequate to the California School Boards Association. The group recently released a poll that showed public support for tax hikes on personal incomes of $1 million or more and on corporate income of $1 million or more, which it said would generate $11 billion in annual new revenue.

School boards seek relief from cost of pension bailout

EdSource reported that the CSBA was considering launching a “Full and Fair Funding” signature-gathering campaign to get such tax hikes before voters in November 2020. K-12 schools would get 89 percent of the new revenue and community colleges the remainder.

A May 26 analysis in the Los Angeles Times suggested that each tax hike measure might benefit from focusing on helping public schools.

But voters may question why two major tax hikes are needed less than two years after state leaders boasted about having a $20 billion-plus surplus. Democratic state lawmakers’ nervousness about the optics of adopting a first-ever tax on water when the state treasury was flush led to that proposal’s death even after months of lobbying by Gov. Gavin Newsom.

And the June 4 special election in the Los Angeles Unified School District raised questions about the value of linking tax hikes to school improvements. Measure EE would have imposed a parcel tax based on the square footage of commercial and residential property to generate $500 million a year for the state’s largest school district.

But even though advocates had a much better-funded campaign than opponents, Measure EE got only 46 percent of the vote — far less than the two-thirds necessary for approval. Analysts argued that many local voters simply didn’t trust L.A. Unified to spend the money in the ways that district leaders promised.

A group of moderate California Republicans that wants the party to rebrand itself as both pro-business and pro-environment and show a willingness to work with Democrats on some issues is back in the news this week. Led by Assemblyman Chad Mayes (pictured), R-Yucca Valley, and supported by former Republican Gov. Arnold Schwarzenegger, the New Way California group announced the launching of a website devoted to transforming the state GOP.

“There isn’t an overnight fix,” former Assembly GOP Leader Kristin Olsen of Modesto, a New Way board member, told the Sacramento Bee. “This is a slow journey that requires us to get out into communities.”

New Way officials cited the recent news that the GOP had fallen to third in state political registration behind Democrats and decline-to-state voters as evidence of the need for a new approach.

But Mayes, Olsen and their allies may have an even more uphill challenge than they think. A prototypical “New Way California” deal that Mayes cut last year when he was Assembly GOP leader arguably hasn’t yielded any dividends. He helped Democratic Gov. Jerry Brown round up eight Republican state lawmakers so an extension of the state’s cap-and-trade program until 2030 could receive the two-thirds support it needed – in keeping with Mayes’ thesis about the party needing to alter its direction.

But Mayes’ move triggered a firestorm among Republican activists who cited a state Legislative Analyst’s Office letter from March 2017 forecasting that cap-and-trade could lead to a 63-cents-per-gallon increase in gas prices by 2021. He was deposed as Assembly GOP leader within weeks after cutting the deal with Brown.

Meanwhile, the big concession Mayes secured in return for lining up Republican votes for cap-and-trade flopped with voters. That concession: the Legislature’s vote to place what would become Proposition 70 on the June 5 primary election ballot. The complex measure could have given state GOP lawmakers a chance to kill new funding for the embattled state bullet-train project in 2024 by requiring that the use of cap-and-trade pollution emission fees be approved with two-thirds votes of both the Assembly and the Senate.

Gov. Brown joined the state Chamber of Commerce in backing the ballot measure. But after it was savaged by other Democrats as a stealth effort to protect polluters, Proposition 70 lost 65 percent to 35 percent.

Recall showed anger over approval of higher fuel taxes

Further undercutting Mayes’ push for a rebranded GOP was another June 5 development: the recall of state Sen. Josh Newman, D-Fullerton, by a 59 percent to 41 percent landslide. The recall effort was triggered by Newman’s vote last year for a 10-year, $52 billion increase in vehicle fuel taxes and fees to fund road and transit projects and improvements.

This is widely seen by political analysts as evidence that the California Republicans’ most traditional policy position – a sharp opposition to higher taxes – continues to be potent.

This is also evident in the ease with which a Republican-led effort to repeal the tax hikes gathered enough signatures to make the November ballot.

Some Democrats depict the campaign as benefitting from a coincidental rise in gasoline prices during signature gathering in the winter and spring. But Republicans point to a recent poll showing a majority of state voters are ready to scrap the tax hike and say Californians are as inclined as ever to oppose higher taxes that affect everyone – as opposed to Proposition 55, the successful 2016 ballot measure that renewed “temporary” income tax hikes on the very wealthy.

Continuing a longstanding bipartisan tradition, California Attorney General Xavier Becerra came

Assemblyman Travis Allen, R-Huntington Beach, is sponsoring a measure to repeal the fuel tax and vehicle fee hikes approved this spring. The description given to Allen’s proposal by Becerra’s office didn’t mention taxes or fees. Instead, it said the measure “eliminates recently enacted road repair and transportation funding by repealing revenues dedicated for those purposes.”

Allen’s lawyers said the description was fundamentally deceptive. Last week, Sacramento Superior Court Judge Timothy M. Frawley agreed: “The Attorney General’s title and summary … must be changed to avoid misleading the voters and creating prejudice against the measure,” he wrote.

The revision Frawley ordered: “Repeals recently enacted gas and diesel taxes and vehicle registration fees. Eliminates road repair and transportation programs funded by these taxes and fees.”

The perception of attorneys general using ballot language to manipulate voters has been common for decades.

When Becerra’s predecessor, fellow Democrat Kamala Harris, was attorney general before her election in November to the U.S. Senate, Republicans alleged she was particularly ready to put her thumb on the scale. The ballot description for 2016’s successful Proposition 58 made it seem as if it reinforced English-learning standards in state public schools when its primary intent was to repeal mandatory English-only immersion programs required by 1998’s Proposition 227. In 2015, Harris was trashed by the San Francisco Chronicle’s editorial board for effectively killing pension reform measures with what the board called ballot descriptions that sounded like “union talking points.”

When Gov. Jerry Brown was attorney general before Harris, his office also courted controversy. Two of his ballot descriptions were castigated by state judges in the same week in August 2010.

One was for Proposition 23, an unsuccessful measure which would have suspended implementation of state climate-change pollution rules. The initial ballot language was condemned as prejudicial and misleading by Frawley, the same judge who recently ruled against Becerra.

Two days after Frawley’s ruling, Sacramento Superior Court Judge Patrick Marlette rejected ballot language for Proposition 25. The successful ballot measure’s key change was to allow the state Legislature to approve a state budget on a simple majority vote. The ballot language Brown approved made it appear as if the measure’s main intent was to reinforce the requirement that the Legislature could only approve tax increases on a two-thirds vote of both the Assembly and the Senate.

Republican attorneys general also accused of voter manipulation

But in the 20th century, when it wasn’t unusual to have Republicans holding statewide office in California, GOP attorneys general drew fire as well for their perceived ballot language machinations.

The most famous example was in 1978, when California voters approved Proposition 13 to put sharp limits on how much property taxes could increase annually. Neither the ballot title or summary approved by GOP Attorney General Evelle Younger mentioned that it also would raise the threshold for raising taxes in the Legislature to a two-thirds vote.

In 1996, Republican Attorney General Dan Lungren also drew fire over the ballot language he approved for Proposition 209, a successful measure limiting the use of racial preferences by state government. In 2012, Chronicle editorial page editor John Diaz revisited criticism first made in 1996, arguing that Lungren used “loaded words” to sell opposition to affirmative action.

A ballot measure is likely in 2018 that aims to eliminate some or most of Prop. 13’s protections for commercial property — a concept known as “split roll” that has been discussed for decades. In May 2015, a coalition of unions set up a group called Make It Fair that originally talked about launching a 2016 ballot measure before pulling back over concerns it could harm chances to pass a November 2016 ballot measure extending the “temporary” income taxes on the wealthy that voters approved in 2012.

Split roll advocates say property taxes should be a much more important part of paying for government in a sprawling state with many needs. They cite evidence that economically successful mega-states Texas and Florida have much higher basic property tax rates.

Critics cite a 2012 Legislative Analyst’s Office report that challenged the assumption that Prop. 13 had starved the state of revenue. “Since 1979, revenue from the 1 percent rate has exceeded growth in the state’s economy,” the LAO noted. Other studies have found that property tax revenue has gone up by higher percentages that income and sales tax over the same span.

Record annual revenue of $60 billion looms

Now there’s fresh evidence that despite limits on property tax increases, revenue growth in the tax category can be robust. Reports this month show that homes and businesses changing hands and having assessments go up along with new construction could mean annual property tax revenue will be $3 billion higher than expected by Gov. Jerry Brown’s Department of Finance; the state could receive a record $60 billion.

The Bay Area is leading this surge.

San Francisco City/County is 8.8 percent ahead of predictions; Santa Clara County is 7.9 percent ahead, San Mateo County is 7.6 percent ahead; Napa County is 7.1 percent ahead; and Alameda County is 7 percent ahead.

Gains are more modest in Southern California, paced by Los Angeles County and San Diego County each running 5.6 percent ahead of expectations and Orange County up 5.4 percent.

Nevertheless, these gains are unlikely to head off a 2018 split roll ballot battle. That’s partly because perhaps the most powerful critic of the idea — Gov. Brown — will be in the final months of his fourth and final term.

Last October, Brown raised eyebrows — and prompted rebukes — when he likened efforts to tinker with Prop. 13 to a “tar baby.” The racially tinged term comes from 19th century folklore. Brown’s spokesman said his intent was plain: to suggest it was a bad idea and nothing more. At the same event, the governor also specifically opposed split roll.

‘Split roll’ likely focus of 2018 governor’s race

The topic is likely to be a factor in the governor’s race in 2018. Lt. Gov. Gavin Newsom has been an intermittent critic of Prop. 13 over the years. Last year, Treasurer John Chiang has said he would consider reforms but was cool to split roll. Former Los Angeles Mayor Antonio Villaraigosa has long backed split roll.

Another signature-gathering campaign targeting Prop. 13 is possible in 2018 that takes a different approach. Southern California nonprofit groups that advocate for anti-poverty programs have proposed subjecting real estate properties assessed at more than $3 million to a 1 percent property tax surcharge.

It was formally floated in 2015 before being dropped early this year because of concerns about other tax measures on the crowded November 2016 ballot. The proposal was initially forecast to raise nearly $8 billion a year.

“We’re here to talk about SCA 5, new legislation that will finally reform our commercial property tax system and make it fair,” said Sen. Mitchell, during the announcement of the new legislation. “We have large corporations and wealthy commercial property investors that have used loopholes in the law to avoid paying their fair share. We have large, multi-billion dollar corporations that actually have a competitive advantage over smaller start-ups simply based on when a property was purchased. In short, we have a few businesses that are benefitting from far lower taxes than their neighbors and competitors. That’s what this legislation is all about.”

The bill authors stressed that SCA 5 “would finally make California’s property tax code fair by assessing commercial and industrial properties at their market value, after a phase-in period.” They also stated the legislation would “provide significant tax relief for businesses, protect homeowners and renters from any changes to their property tax status, and create strict new accountability measures for new revenues.”

“This legislation will address flaws in Prop. 13 that have allowed a minority group of wealthy corporations and commercial property owners to dramatically lower their tax bills and shift that responsibility onto homeowners and renters,” said Senator Hancock in a prepared statement. “Our homeowners are now being asked to pay the vast majority – 72 percent – of property taxes, while the commercial side pays only 28 percent. In 1978 when Prop. 13 passed, each paid about 50 percent. That’s not fair, and it has strained the community services our residents rely on.”

Opposition to SCA 5

Other legislators are not so impressed.

“I am disappointed, but not surprised, that the majority party would introduce legislation to weaken Prop. 13. This assault on California’s most important taxpayer protection measure not only threatens to raise taxes on struggling small businesses, but the net effect would be higher prices for consumers and fewer jobs for hardworking families,” Assemblywoman Young Kim, R-Fullerton, said in a statement.

Senate Republican Leader Bob Huff, R-San Dimas, echoed the sentiment in a release:

“There will be a ripple effect. Small businesses will be hit hard by this tax increase. They may pass on the cost to California families or take the loss and see if they can survive.

 

“What California families need are good paying jobs, not new taxes on small businesses. Increasing taxes on employers by $9 billion dollars annually will mean less money to hire and retain workers. Taxing small businesses will not raise anyone’s wages, will increase consumer costs, and is likely to drive businesses out of the state.”

Teresa Casazza, president of the California Taxpayers Association and co-chair of Californians to Stop Higher Property Taxes, said in a statement, “SCA 5 is an attack on property owners, and just by being introduced it sends a damaging signal to anyone thinking of starting a business in or moving a business to California. Lawmakers introduced more than $132 billion in new taxes and fees in the current legislative session and SCA 5 would only add to that unfathomable number.”

Poll results on a split-roll tax initiative

In May, the Public Policy Institute of California released survey results regarding the issue of changing Prop. 13 and moving towards a “split-roll” tax on property, defined as “taxing commercial properties according to their market value while leaving limits on residential property taxes intact.” As Joel Fox noted in a previous CalWatchdog story, “50 percent of likely voters favored the proposal while 44 percent opposed.”

A different poll from the California Business Roundtable released in June revealed that over 72 percent of all Californians would approve Prop. 13 in its totality if it were to be voted on again. Only 21 percent of the respondents were interested in changing to a split-roll tax on property.

SCA 5 requires a two-thirds majority vote in both legislative houses before it can be placed on the 2016 ballot. Two split-roll ballot initiatives have been voted on in the state of California — Prop. 8 in 1978 and Prop. 167 in 1992 — but both propositions failed.

The legislation has since been referred to the Senate Governance and Finance Committee.

Phil Isenberg wants to end California’s water wars. The member of the Delta Stewardship Council and its past chair wants to connect the cost of water more closely to its users.

According to a report by the California Economic Summit, he points out that the cost of water is about $30 billion a year for the state. And it breaks down to 4 percent from federal spending, 12 percent from state spending and 84 percent from water users.

    Yearly Water Spending in California by Source (2008-2011) in $ billions

Result

The result, Isenberg said:

“Well for one thing, because this is directly contrary to popular perception and most of the recommendations of interest groups who come to Sacramento — or at least the ones who talk to us. … Most of the water decisions about what to build and who pays are made locally in California — and grumpy ratepayers pay the majority of the cost.”

He noted that only $1 billion of that $30 billion the state spends on water comes from bond funds. Yet California spent about $25 billion on five voter-approved statewide water bonds since 2000.

The state hasn’t derived a drop of water storage from these bonds to lessen the impacts of the current combined drought and man-made water shortage; 54 percent of that funding went for open-space acquisitions.  Another 14 percent went for restoring wetlands.  None went for water storage, as shown by the graph below, from p. 47 of the recent study, “Paying for Water in California,” by the Public Policy Institute of California.

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Because these were statewide bonds, there was no link required between the funding and any water services provided as there is in local water projects under Proposition 218.

Local taxes

The problem leads the PPIC study to the following analysis:

“The flip side of the cost challenge is shrinking revenue alternatives. A series of constitutional reforms adopted by the state’s voters, starting with the landmark Proposition 13 (1978) and followed by Proposition 218 (1996) and Proposition 26 (2010), have made it increasingly difficult for local water agencies to raise funds from local ratepayers, and they have also set up higher hurdles for new local and state taxes to support this sector.”

The PPIC report concluded the tax reforms approved by voters for the local level are “impeding efficient and equitable funding of California’s water system.

Isenberg concurred. “Some provisions like Prop 218 are just nutty, but they serve another goal of the public, which is to reduce costs for themselves,” he said. 

In the California Economic Summit summary, “He believes any changes to Prop. 218 will have to show they’ll provide something the public wants just as much: ‘A regular supply of cheap water.’”

The specific reforms sought by the PPIC include:

• Provides that reviewing courts must uphold a public agency’s determination of a need for a tax or rate hike over the objections of any citizen initiative or petition to the Public Utilities Commission or water board;
• Allows “service fees” that don’t service those paying the fee;
• Specially carves out water projects from the two-thirds vote requirement of Proposition 13 so that only a majority vote would be required. In other words, there would be no Proposition 13 for water projects.

The PPIC also wants to use “regulatory fees,” which are limited under Prop. 26 as a source of funding for water projects. This would provide an incentive for government agencies to declare benign environmental substances as toxic as a way to end-run voter review of taxes for water projects.

For example, PPIC proposes a regulatory fee on the agricultural and residential use of fertilizer, which they say contains nitrates that contaminate water. There have been a number of previous attempts to justify taxing fertilizer to fund water projects in California, including the non-existent “blue baby syndrome.”  This has compelled agricultural researchers to find ways to escape such taxes by genetically modifying crops to take nitrogen out of the air, as sugar cane does, rather than from the ground.

Tax wars

However, ending California’s water wars might only spark tax wars.

If Prop. 26 were gutted to remove the provision requiring a tax or regulatory fee to benefit those who are taxed, it might undo a recent water rate court decision.  Last month a Sacramento judge ruled, based on Prop. 26, that the water rates of the Metropolitan Water District of Southern California would overcharge the San Diego County Water Authority by $2 billion over 45 years. Without Prop. 26, the court may have had to rule differently.

Finally, any attempt to change Prop. 13 would be met with string resistance from anti-tax groups, such as the Howard Jarvis Taxpayers Association. Such groups contend that any weakening of Prop. 13 might lead to gutting the whole proposition, leading to much higher property taxes for homeowners.

Proposition 13 still garners broad support across California 36 years after the tax-limitation measure was passed.

According to the latest opinion poll conducted by the Public Policy Institute of California,  support for loosening Prop. 13’s two-thirds vote requirement for approving local parcel taxes for schools has dropped from 46 percent in April 2011 to 39 percent in April 2014.

Democrats have lost their supermajority in the state Senate this year when three senators were suspended from office due to scandals. Thus, the Legislature is unlikely to be able to surmount Republican opposition to any modification of Prop. 13.

The two-thirds requirement for passing school construction bonds already was dropped to 55 percent when voters passed Prop. 39 in 2000. The PPIC question was about doing the same thing for school parcel taxes.

The PPIC poll is the first to measure any change in public opinion on taxes since the passage of Proposition 30 in Nov. 2012. It increased income and sales taxes $7 billion to fund revenues for K-12 public schools.

The PPIC poll also found that, compared to when it asked the questions in 2011:

• 6 percentage points fewer would vote Yes on a school parcel tax, down to 48 percent.
• 10 percentage points fewer believe funding for public schools is “not enough,” down to 49 percent.

The only school-related tax for which slightly stronger support was expressed was for school construction bonds, up 2 percentage points to 55 percent.

However, the track record so far for passing such taxes already is high. “Since 2001, the statewide passage rate for local school bonds has been 81 percent and for local school parcel taxes, 60 percent,” reported EdSource. However, it said the PPIC poll could mean “trouble ahead” for future school tax ballot measures.

Whether the PPIC poll actually indicates a slight shift downward in approving such local taxes will be seen next month in the primary election.

Democratic voters

The percentage of likely majority Democratic Party voters, 44 percent, did not change since 2011. Thus, because PPIC surveys quotas of likely voters by political party registration, there was no change in the percentage of Democratic voters polled from 2011 to 2014.

The percentage of Republican registered voters dropped 3 percentage points. But that did not make an apparent difference in the direction of the opinions on school taxes.

Voter concern

EdSource also wrote:

“It is possible that voter concern about school funding needs will surface later this year, as school districts implement two dramatic changes: the Common Core Standards in the classroom and the Local Control Funding Formula, which provides more money for districts with higher proportions of English learners and lower-income students. These changes could offer two new avenues to engage voters about the need for local school funding.”

The new funding formula sends more money to low-performing schools, largely in poor areas, by taking it from high-performing schools, largely in wealthy areas. This could prompt local schools officials in the wealthier areas to make up for the lost funds by putting parcel taxes before voters.

The controversial Common Core program already has cost the state education budget $1.3 billion, with $1.6 billion total being expected. It replaces more rigorous 1998 standards.

The PPIC survey also asked about Common Core. It found:

“A majority of Californians (56%) say they have heard either a lot (19%) or a little (37%) about the new set of English and math standards, while 43 percent say they have heard nothing at all. … Awareness among public school parents is much higher today than it was last April (9% a lot, 36% a little, 54% nothing at all).”

As Common Core is implemented, it will be interesting to see how those numbers rise in next year’s PPIC survey.

Who is Piketty and why does he matter? His 700-page book, “Capital in the Twenty-First Century,” newly translated into English, is the best-selling book on Amazon. No largely academic book has ever achieved this distinction before.

Piketty’s central thesis is that the world has returned to its pre-World War I norms of extended periods of slow growth that will result in a further stratification of wealth in which the 0.1 percent fare better than everyone else. This is not because of the Occupy theory that the economy is rigged in an evil way to help them. It’s because of Piketty’s theory that during extended periods of slow growth, the mega rich will see their sophisticated investments in capital (stocks and other financial instruments) gain more share of a society’s wealth than everyone else accumulates through their earnings (salaries).

Many economists on the left love this thesis as providing a grand theoretical way to understand how the world has come to be the way it is — a way they don’t like. Paul Krugman leads the way, proclaiming, “This is a book that will change both the way we think about society and the way we do economics.”

It’s gotten respectful reviews from some free-market economists, and some pretty good takedowns, starting with Tyler Cowen’s essay. (Here’s a round-up of links.)

But whether you think it’s hooey or too high-falutin’ or just arcane, if you’re a believer in Proposition 13, Piketty’s emergence gives you fabulous ammo with which to shoot back at the George Skeltons, Peter Schrags and Harold Meyersons — all the lefty pundits who say it is the prime evil force driving California’s downfall. Piketty says states that have property taxes that penalize homowners if their homes increase in value are imposing what amounts to “America’s secret middle-class tax.”

Property taxes (outside of CA) a ‘secret middle-class tax’

This is from a Matt Yglesias piece in Vox:

“Piketty’s big point about the United States is that we actually do engage in substantial wealth taxation in this country. We call it property taxes, and they’re primarily paid to state and local governments. Total receipts amount to about 3 percent of national income. The burden of the tax falls largely on middle-class families, for whom a home is likely to be far and away the most valuable asset that they own. Rich people, of course, own expensive houses (sometimes two or three of them) but also accumulate considerable wealth in the stock market and elsewhere where, unlike homeowners’ equity, it can evade taxation.

“Piketty also observes that the current property tax system is curiously innocent of the significance of debt. A homeowner is taxed on the face-value of his house, whether he owns it outright or owes more to the bank than the house is worth.”

So the next time you face Prop 13 critics, call them “middle-class haters,” and say that’s the view of Paul Krugman’s favorite economist, too. If Piketty’s PR boomlet continues, you can just use his name and skip the Krugman framing.

With or without Piketty, noting that homes are the single biggest repository of reliable wealth for most middle-class families is a strong defense. But if Piketty proves to be the enduring “rock star” of the progressive community that many lefties think, that gives this pro-13 argument way more juice.

Doubt Piketty is the big deal that I say he is? Today’s NYT opinion page has both Krugman and David Brooks weighing in on his book.

May 22, 2013

By Wayne Lusvardi

David Crane has come up with a tax reform proposal, “Jerry Brown’s Last Chance to Save California.” A Democrat, he was an economic adviser to former Gov. Arnold Schwarzenegger, especially on pensions. Crane wants to change Proposition 13, the landmark 1978 tax limitation initiative.

There are some merits to Crane’s proposal to end the effects of the boom and bust system of taxation on government, the university system and public schools.  But as he concedes, tampering with Prop. 13 would bring a firestorm of opposition from anti-tax groups and voters.

‘Uncertain revenues’

Crane sees the major problem of California’s tax system as one of “uncertain revenues” dependent on the swings of the stock market to produce capital gains taxes.  Crane believes the Commission on the 21st Century and the Think Long Committee for California have come up with reforms that are defective because Prop. 13 is left untouched.

Instead, Crane’s solution proposes to end Prop. 13 and impose an oil and gas severance tax.  Crane sees California’s problem as reliance on sales and income taxes that are mobile.  Thus, people and corporations are able to escape taxation by moving across state and legal corporate lines.  He wants to shift the bulk of the tax base to immovable assets such as real estate, oil and gas.

The mistake is that Crane views taxes mechanistically instead of historically. His proposal would return us to the 1970s. The ups and downs of taxes would be shifted back onto homeowners and small businesses. It would be back to 1975, when widows’ homes were sold to pay skyrocketing taxes from inflating home prices.

California sometimes has real estate busts, as was painfully clear from 2007-09. But generally, prices keep going up, especially in coastal areas. If real estate taxes are allowed to rise apace, then it really would be a rerun of “That ’70s Show.”

Growth controls 

Yes, Prop. 13 affects housing prices by encouraging home ownership. But more important are California’s basin geography, which limits the supply of land; and unique growth controls, such as the California Coastal Commission, which was enacted by another 1970s initiative.

Nothing can be done, of course, to make our beautiful California coastline as flat and seemingly endless as the land in and around Houston, Tex., which has some of the cheapest real estate in America. And there’s no chance the CCC will be repealed. So we’re stuck with these limits.

And it’s these limits — geography and the CCC — that would produce a boom and bust cycle in real estate even if Prop. 13 didn’t exist. If Prop. 13 were eliminated, property tax receipts would jump up and down with the booms and busts in property. So the tendency of the state government to spend too much when revenues surge would continue, in turn producing the inevitable deficits during slumps.

Indeed, getting rid of Prop. 13 might not even help with the state budget. Real estate markets would adjust property values downward due to the larger and more unpredictable tax load.  

Ironically, any large shift of taxes back onto homeowners well could lead to a revitalization of the moribund Republican Party. Homeowners’ tax rates now are fixed by Prop. 13, so there’s little incentive to worry too much about real-estate politics. But if Prop. 13 were repealed, Republicans low-tax stances would make them more attractive to homeowners resisting tax increases.

Pensions

Crane is one of the most astute analysts of California’s budget problems, especially the pension crisis. As he wrote in his article, “Governments would first need to reduce pension and health-care liabilities because, if not, most of the new revenue raised from lifting Proposition 13 would go to retired employees, instead of to current services.”

So although his proposal to get rid of Prop. 13 should be a non-starter, he’s right that any budget reform must be preceded by pension and health-care liability reform.

There are other ideas for reforming the yo-yo budget problem. One would be to bring back the Gann Limit, which lasted from 1979 to 1990. It successfully limited state spending increases to the increases in population plus inflation. Excess revenue actually was returned to taxpayers with rebate checks in 1987.

Another idea came from former Rep. Tom Campbell during his run for governor in 2010: Limit one year’s spending to the receipts from the previous year.

And Arthur Laffer has proposed a simple, flat income tax that would include repealing all other state taxes.

David Crane has advanced the discussion with his proposal. But the discussion needs to retain Prop. 13.

By Wayne Lusvardi

The attacks on Proposition 13 never seem to end. The 1978 tax-cut initiative’s enemies, such as former Assembly Speaker Willie Brown, conjure up a misleading image of large corporate owners of commercial real estate dodging taxes by selling commercial properties through “stock transfers.” They call for a “split roll” that would increase taxes on commercial property, while leaving residential property tax at current rates (for now).

The reality is that 97 percent of businesses in California are small. And small commercial properties are not sold by stock transfers. Moreover, stock transfers of large commercial properties are only a tiny fraction of the 3 percent of large commercial properties in the state.

Neither politicians nor the public seem to have an understanding how hard changes in Prop. 13, increasing property taxes, would hit small commercial properties with low tax-assessed values:

* A small mom and pop store or restaurant on a 5,000 square-foot lot could be hit with a combined added split roll property tax up to $6,250 per year.

* A family-owned small office building on a typical 10,000 square-foot lot could be facing up to $12,500 in added taxes per year.

* A 3,000 square-foot historical home leased for offices on a 12,000 square-foot commercial-zoned lot in a primed downtown location could experience $15,000 in added property taxes; or about half of the existing net office rent.

* An older convenience store and gas station on a 15,000 square-foot lot could face up to $18,750 in added property taxes.

* An older family-owned grocery store on one acre of land could incur up to $54,450 in added property taxes.

Demolished

In each of the above-described properties, the only way to afford the property tax increase would be to demolish the older, under-improved buildings and construct new, multi-story apartments, condominiums or offices.  This may be highly speculative.  Thus, taxes on sales of older commercial properties could occur.

Just as senior citizens on fixed incomes had to sell their homes for taxes in 1975 prior to Prop. 13, small businesses with older structures would likely have to sell, as they would be unable to pay the higher taxes.  This is because property taxes are assessed on the highest and best use of commercial land, not on its existing use.

Theoretically, such older properties are under-assessed for property taxes.  But in the real world, such properties may be the only current economic use other than letting the land remain vacant.

Ending Prop. 13 for older structures on commercial-zoned land also would end one of the favorite public policies of many liberal elites: historical preservation. Without the lower tax assessment afforded under Prop. 13,  many historical properties would have to be demolished, replaced by three to five floors of condos, apartments, offices or mixed-use residential projects.

The only other alternative would be for small commercial property owners to insulate their properties from such higher taxation by signing 100-year land leases or leasing their properties to non-profit agencies that have property-tax exemptions.  This strategy might escape the higher taxes, but it also would lead to disinvestment and the deterioration of the commercial building stock.

Under-assessed?

There is a perception problem that commercial property owners are under-assessed when it comes to property taxes as a result of Prop. 13. Many single-family property owners believe they are being overtaxed and that businesses should pay their fair share of taxes.

However, an impartial 2008 study by economists Jose Albero and William G. Hamm found that commercial properties were assessed at 60 percent of their market value and residential properties at only 53 percent. The study estimated that a split-roll property tax alone would result in the loss of 86,000 to 152,400 jobs; and 48,700 families, or about 170,450 people, would migrate out of the state for economic reasons.  That would equate to California losing the population — and the tax base — of a city about the size of Santa Rosa, Santa Clarita or Oceanside.

Nonetheless, homeowners that more recently bought their homes and pay full taxes often feel that any under-assessed properties are shifting added taxes onto them.

With their new supermajorities in the Legislature, Democrats already are taking aim at Prop. 13. As the Mercury News reported, “‘It is time for a fix, because Proposition 13 is broken,’ said Assemblyman Tom Ammiano, D-San Francisco, who plans to introduce a bill … aimed at forcing businesses to pay higher property taxes.”

If the tax increase is passed, it will hit small businesses the hardest. A small commercial property owner by the name of “Maureen” in Contra Costa County described her plight in a comment left on the Political Blotter of the ContraCostaTimes.com for Dec. 5, 2012:

“We have owned a small piece of commercial property for several years. The rent on this property is our only livelihood. We are not a corporation. If the split roll goes through either our 2 renters pay more rent (who are already doing badly) or we lose our property to the state, as we won’t be able to afford the taxes. In either case we all lose.”

“Maureen” goes on to explain that it will also be apartment renters — not just big corporations — that will be affected by the ending of Prop. 13 for commercial properties:

“[W]e bought the property in 1979. Because this is land it is an unusual piece of property as there isn’t much land in our area. Not only will we become victims of the state but our renters will [be] out of a place to rent for their needs (as there will be no other available) & will also go under.

“I know several other people in the same boat who are definitely not wealthy people. Our property taxes will probably go up 4 or more times to about $30,000/year. This is 1/2 the rent we collect. Our renters can’t afford to pay more. You do the math. The renters at trailer courts & apartment buildings will find their rent will increase for the most part. Read the Pepperdine University report which says minorities & female owned businesses will suffer the most from the impact & that is just the beginning.”

This is the reality of the battle over Prop. 13. It’s not the “big corporations” that would pay, but the small property owners, the backbone of the economy and jobs creation.

                        Estimated tax increase on underimproved
            commercial-zoned land due to split-roll property tax