After 40 years, let’s finally reform Proposition 13

By Lenny Goldberg

Lenny Goldberg is a consultant to the Sacramento-based California Tax Reform Association, and lives in Portland, lennyg916@gmail.com. He wrote this commentary for CALmatters.

I was working as a staffer in the Legislature when Proposition 13 passed 40 years ago. It brought about a seismic shift in governance in California.  

Suddenly, local government, schools and the state had to contend with budget cutbacks. Anti-tax ideology became part of California’s Constitution with new two-thirds vote requirements for tax increases. And Proposition 13 set the tone nationally for the Reagan years and many subsequent years of fiscal austerity.

A decade later, as director of the California Tax Reform Association, I set out to examine its impacts. Homeowners were protected, the point of the measure. Local governments and schools had significantly cut back employees, budgets, infrastructure and services, as supporters may have intended.

But one surprising fact jumped out, emphasized in my report in 1991: business property was a huge winner, gaining massive tax reductions which had nothing to do with the reason for Proposition 13.

In the 1990’s, I participated in consensus-building discussions on how to solve California’s deepening fiscal problems. But one rule of the discussion was that reforming commercial property taxes was off the table. Later, business defeated a legislative effort to simply examine the issue, which they said would lead to split roll, as they called it.

I called it the Empire’s New Clothes.

Businesses and their representatives had good reason to avert their eyes. Companies such as Chevron, Intel and IBM were and are paying taxes based on land values from 1975. Commercial property based on ridiculously low assessed values can use loopholes and pass property on to heirs to maintain those low taxes forever.

Business knew that discussion could reach only one conclusion: there was no rational way to defend these massive tax breaks.

In the 2000s, we at the Tax Reform Association continued to document the failures in the system. We documented the abuses of the loophole-ridden law, and the shift in the property tax burden away from commercial property and on to residential property in virtually every county.

Massive disparities in property taxes developed for otherwise similar hotels, shopping centers, office buildings and high-tech industrial property.

In this decade, researchers at USC determined that this system cost cities, counties, schools and special districts $11 billion in lost revenue annually.

Other facts uncovered by on-going research:  

• 80 percent of the revenue losses comes from the largest 8 percent of properties.
• The majority of revenue comes from under-assessed land, not buildings.
• Local government tax support has declined over 40 years, while residents pay higher fees and other charges.

The failure to reassess land has rewarded sprawl and speculation, with miles of vacant and underutilized land in our commercial strips. School funding in this supposedly advanced state is far below the rest of the nation. And a majority of business properties are close to market value, with the biggest tax breaks accruing to large long-held properties.

It doesn’t have to be this way.

In 2020, 42 years after Proposition 13’s passage, voters will have an opportunity to reform property taxes for commercial and industrial property.

The straightforward measure will:

• Provide for regular reassessment of commercial and industrial property.
• Distribute revenue to cities, counties, and school districts consistent with the current property tax.
• Eliminate the property tax on business equipment for small business.
• Reaffirm Proposition 13’s protections for all residential property.

The results will all be positive:

• $11 billion yearly into our parks, libraries, infrastructure, public safety and schools.
• The economy will benefit, as housing will increase and land use decisions will become more rational, as a recent UC Santa Cruz study affirms.
• There will be less pressure on local government to raise fees while current debt for infrastructure will be paid off more rapidly.
• The tax system will become more equitable, as corporations and wealthy investors will pay their fair share.

And perhaps one more: it can place California at the forefront of a new national direction as Proposition 13 did 40 years ago, only this time we’ll be on a path to fair taxation and a healthier public sector.