Battle Brewing Over California’s Prop. 13, Business Property Taxes

December 5, 2019 Updated: December 5, 2019
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News Analysis

Both sides of California’s political arena are squaring off for an impending battle over state property taxes and a popular ballot measure: Proposition 13.

The landmark ballot measure, approved by 65 percent of California voters on June 6, 1978, limits the amount of property tax homeowners must pay to one percent of a home’s purchase price when it’s sold. It also restricts increases of that market value to a maximum of two percent a year.

Under Prop. 13, the owner of a house or a business that sold years ago at a lower price pays much less in property taxes than the owner of similar house or business sold at a higher price today.

However, over the last four decades, some California politicians have blamed Prop. 13 for a multitude of issues, including education cutbacks, insufficient pay for teachers and other public employees, poor school performance, murders, thefts, potholes, fee hikes, racial inequality, traffic congestion, too much commercial development, pollution, and a dearth of affordable housing—all seemingly due to the limited amount of tax revenue available to the government.

Last year, a Public Policy Institute of California (PPIC) survey found that support for Prop. 13 hadn’t waned at all in 40 years, with 65 percent of likely voters saying it has been “mostly a good thing.”

The PPIC survey found: “At least half across all demographic groups—except African Americans (39 percent)—say the measure has been mostly a good thing. Republicans (71 percent) are more likely than independents (61 percent) and Democrats (55 percent) to hold this view. Nearly two-thirds of homeowners (65 percent) say it has been mostly a good thing for California, compared to half of renters (50 percent). Californians age 55 and older (66 percent) are more likely than those age 18 to 34 (54 percent) and age 35 to 54 (52 percent) to say it has been mostly a good thing.”

Recently, more than 400 groups and individuals called the Schools & Communities First initiative launched a statewide campaign to revise Prop. 13 and raise business property taxes. The coalition promises to “close commercial property tax loopholes that corporations and wealthy investors use to avoid paying their fair share of property taxes” and to “ensure strict accountability so that money goes directly to our schools and communities.”

The coalition pledges to “reclaim $12 billion per year for K-12 schools, community colleges and local communities.”

Although residential property is already protected under Prop. 13 the way it stands, the coalition says the initiative, if passed, would “protect all homeowners and renters by maintaining tax protections for all residential property.” Coalition organizers must garner about a million signatures for the proposed initiative to make the Nov. 3, 2020 ballot.

In the November election, the contest will come down to individual voters, but for now groups like teachers’ unions are filing into the left side of the political arena, and business owners are headed to the right.

In reality, the lion’s share of money collected from raising commercial property taxes will go to local governments—not schools, according to tax expert Joel Fox, co-publisher and editor of Fox and Hounds Daily.

The proposed reforms have less to do with supporting education, and more to do with dumping more tax dollars into the pensions of public sector employees, Fox contends.

“One of the things that is driving this, of course, is the cost of pensions for the public sector, because it’s risen dramatically over the last number of years. I know, for example, in the city of Los Angeles, just a decade or so—maybe a little more than that—ago, they would have taken three percent of their budget out to cover pensions. It’s gone up to 20 percent,” Fox told California Insider in a recent interview.

“So when you have to spend money for that obligation, then you have less money to provide services, or you have to go back to the taxpayer. And it becomes a real burden on the taxpayer one way or another. Either they have fewer services or more taxes.”

While it sounds warm and fuzzy to tax the rich for schools and communities, the reality is that business owners will foot the bill. And, when business owners are forced to tighten their belts, they raise the cost of goods and services, lay off employees, relocate to a state with lower taxes or even close their doors.

“What they’re doing is they’re adding to the cost of living of all Californians, and they want to change the property tax formula for businesses and say the business property has to be reassessed every year, and that means the taxes are going to jump up dramatically,” Fox said.

Eventually, when some or many of the same “tax the rich” voters lose their jobs, their easy fix to fund schools and local government won’t seem so warm and fuzzy anymore.

“And they’ll turn back maybe to taxpayers for more taxes, and it won’t just be the rich guys or the corporations this time. It’s going to affect everybody,” Fox said.

When it comes to slickly worded ballot initiative summaries, voters can’t always trust what’s on the label. Too often they are so convoluted and confusing that even the most politically astute voter with a “buyer beware” attitude can get lost in the messaging. After all, who would be against funding schools for children? But, then again, who really favors raising business taxes—and all the economic repercussions that come with the package?

Because of these challenges, the news media needs to do a better job of educating voters, Fox said.

“That’s the responsibility of the press, because I can guarantee you government doesn’t really want to educate you, because then they may not get the results that they want to get,” he said.

Many business owners have already left California for greener pastures—other states that offer cheaper housing and lower taxes. The exodus “is driven by the taxes and the politics of the state,” said Fox, adding astronomical housing costs are the last straw for many who pack up and leave the Golden State.

“You know, you can buy the same house in Texas, that you spent almost a million dollars for in California, for $350,000,” he said.

The sky-rocketing high cost of living combined with high taxes could eventually lead to other tax revolts like Prop. 13, Fox suggested.

“Because what Proposition 13 was, was a tax revolt—a tax revolt that affected the entire country, recognized all around the country, brought other tax reforms back in those days, [and] helped Ronald Reagan. He used the Prop. 13 tax revolt as part of his platform to get elected president of the United States, so it had a major effect back in the late ’70s, early ’80s,” Fox said.

“Right now, the dominant political ideology in California is that we don’t have enough taxes, despite the fact that we have the highest income tax, the highest sales tax, one of the highest gas taxes—that we just don’t have enough and we need more …. It’s driven by some of the politicians who, you know, the more money they control, the more power they have.”

Fox doesn’t see a tax revolt on the immediate horizon, especially because many of the tax increases on ballot measures are passed by voters, but he said it could happen again if the tax burden reaches a threshold or breaking point.

“I think history often repeats itself, and there’s a possibility that if we continue to pile more and more taxes on and more and more middle-class taxpayers leave the state, that there’ll be some kind of a revolution on the tax front,” Fox said.