Massive transition of property taxes from commercial to residential
by Brian Leubitz
First, as something of a preface, let's just posit that Prop 13 has been an overall disaster for the state. After all, this is a progressive blog. If you want details of how that is the case, well, just use that google box to the left. We have plenty of information about that. You could argue that it did put a reasonable check on property taxes, but it also tossed the baby right out with the bathwater by making the property tax system ripe for the gaming.
And that's what has happened. As Peter Schrag outlined today, corporations now use Prop 13 as one of the great California tax loopholes, if not the King of all loopholes:
It's been just a third of a century since the passage of Proposition 13 in June, 1978. In that time few of its offspring have caused more damage than the great loopholes allowing corporations to evade hundreds of millions in local property taxes that they'd owe in any fair and economically rational revenue system.
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In Santa Clara County, the booming Silicon Valley center of high tech, where the proportions were roughly even in 1978, residential property owners now pay about 65 percent of property taxes; commercial property pays 35 percent. In Los Angeles County, where residential property owners carried just over half the burden in 1975, they now pay nearly 70 percent of all property taxes. In Contra Costa County, it's gone from 48-52 in 1970 to 73-27.
To be clear, you can point to the dramatic outperformance of residential real estate as compared to commercial real estate for part of that. However, there is a lot more than that going on here. Since 1978, the house that you are living in has probably had several owners. Sure, some people stay in a house for 50 years, but for most people, you don't stay in a home forever. According to the super scientific opinion of one realtor, housing needs change every 5 to 7 years for most families. Meanwhile, commercial property will stay in the same hands for far longer.
Of course, there is that tricky question of ownership. As in, who owns that building if, as Schrag points out, typically more than 50% of the ownership of a publicly traded corporation turns over every three years. If that happened in residential real estate, you would trigger a new appraisal. That is not true with a corporation. So, if a skyscraper has been held by one big corporation since 1978, its appraisal is stuck at a figure tied to its 1978 valuation which likely has very little to do with its current value.
We need to fix this issue, and unfortunately, it will likely take action at the ballot. Asm. Tom Ammiano has been focused on this issue during his three years in office, and he hopes to bring it back in January. But a fix seems just as far now as it did years ago. If we are to really repair our state finances, we have to look at the totality of the system, not just dwell on small chunks. We can't cut our way out, our pension reform our way out, or even raise revenue enough to solve the problem.
Arnold Schwarzenegger was found of rhetorically putting everything on the table. But with his recent pension reform proposals, Gov. Brown is doing far more in terms of action than Arnold was ever willing to discuss. If we are to really discuss pension reform, we need to also discuss how we fix the other, more badly wounded, systems of state government.
“Proposition 13 set up an unfair and dysfunctional two- tiered system of property taxes. It choked off a source of revenue, and the lack of that revenue has brought California to the edge.” –Kevin Starr, historian and California State Librarian Emeritus
Many Californians would agree with Kevin Starr that our state is teetering on the edge of disaster. Unemployment remains the second highest in the nation, 32 percent of all mortgaged homeowners are underwater, public schools have been cut to the bone and public universities are unaffordable for the middle class.
Big business and their Republican allies have repeated the laundry list of why California’s economy is struggling so many times that it is practically written in stone—Taxes, Regulations, Public Employees. These are the unholy trinity that supposedly crashed California’s economy and threatens to smother any business growth in the future.
The facts, however, contradict the well-worn talking points of big business. The Council on State Taxation, a business-friendly group led by CEOs of major corporations, found that California has a moderate tax burden, taking less in taxes from business than many other states, including the sweethearts of the right, Texas and Florida.
Many experts look at regulations as job creators, in addition to the benefits to public health and worker safety. Roger Noll, co-director of the Program on Regulatory Policy at the Stanford Institute for Economic Policy Research breaks down the GOP’s obsession with regulations:
The effect of regulation on jobs has nothing to do with the mess we’re in. The current rhetoric about regulation killing jobs is nothing more than not letting a good crisis go to waste.
He goes on to state that regulations may affect job distribution, but not the total number of jobs, eliminating the possibility that California’s landmark environmental laws crashed the global economy causing the current recession.
As for public employees, it requires leaps of logic to understand how laying off thousands of teachers, nurses, home health aides, crossing guards, librarians and public works crews makes the state a better place to do business. California already has the 4th fewest state employees per capita as any other state—even Texas has more state workers per capita than we do! And more than a third (37 percent) of those public employees are at UC or CSU—I doubt laying off professors, economists and business school personnel will please the business community too much.
That begs the question, then, why is California on the edge? Putting aside the deregulation of Wall Street and their subsequent destruction of the global economy through risky and irresponsible gambling, why is California in such a dismal economic state?
A reporter recently put that question to state historian Kevin Starr. He traced the beginning of California’s decline to 1978, the year Proposition 13 passed. Prop 13 capped property taxes, limited local governments’ ability to raise revenue and imposed a two-thirds majority to raise revenue.
Prop 13 has had profound negative consequences for California on all levels. Local government is starved of revenue and dependent on the state to keep schools open and local employees on the job. In turn, the budget crunch forces deep cuts to UC, CSU and every public program that impacts the lives of Californians. At the same time, elected officials can’t vote to raise revenue without a supermajority, giving the minority of anti-tax Republicans disproportionate veto power.
While Prop 13 was seen as a populist measure, corporations have been the true winners. Across the state, the burden of property taxes has shifted radically from corporations to homeowners. A recent report by the California Tax Reform Association (CTRA) cites numbers for all counties showing how homeowners have taken on a significant burden of funding public services, while corporations have shirked paying their fair share.
Since Mayor Antonio Villaraigosa opted out of the 2010 Governor's race, he has been fairly quite on state level politics. However, he stepped right up, and at the Sacramento Press Club, took on Prop 13:
He implored politicians to muster the courage to stop shying away from the third rails in California politics, including Prop. 13′s property tax on businesses and the constitutional requirement for a two-thirds vote on taxes.
And he framed it as direct challenge to Gov. Jerry Brown:
"To Governor Brown, I say, we need to have the courage to test the voltage in some of these so-called third-rail issues, beginning with Proposition 13," Villaraigosa said. "We need to strengthen Proposition 13 and get it back to the original idea of protecting homeowners." (Political Blotter)
Of course, these are traditional issues of import to California progressives, and critical to reestablishing democracy in California. Even if Democrats are able to get 2/3 in the Legislature, changing the tax rules still matter. Look at it this way, if we are working with majority rules, we can afford to lose some conservative Democratic votes. But with the supermajority rules, the right-leaning lobbies have far more sway over a 2/3 Democratic majority as they can pick off members of the "Mod Squad."
It is good to see Villaraigosa take on Prop 13, as the more conversation the better. Whether anything comes of this is another question.
You don't have to dig too hard in the Calitics archives to find our disdain for Prop 13. Or for that matter, I doubt many astute observers of politics would be surprised at the position repeated here many times. However, it has been so sacrosanct for so long, that few have dared to touch it. Sure, there have been a few haphazard attempts to tweak it, or even "split the rolls" by allowing reassessment of commercial property. The one that comes to mind first is Phil Ting's recent Close the Loophole campaign.
But nothing really took off. We've been stuck with Prop 13 for an entire generation with no real signs of movement. It's strangled our schools, left us with a wildly variable tax base, and led to many a budget crisis over the years.
But Jerry Brown understands that it is the third rail. After all, some point the finger to his administration's slow reaction to the growing anti-tax movement in the 1970s. And it was Brown who proclaimed himself a "born again tax cutter" after it passed. So he's not going to challenge it directly. But, you know, those mean unions, they aren't down with the big landlords like he is. They are really something of a wild card that he can't really control:
Gov. Jerry Brown hinted Thursday that if the budget talks with Republicans break down, the initiative fight that would follow would not be limited to Brown's plans to raise sales, vehicle and income taxes. He said he expects labor groups to pursue changes to Proposition 13, tweaking the current caps on commercial property taxes, if no bipartisan deal can be reached.
"I would expect there will be efforts to accelerate the reassessment of commercial property tax," Brown said. (LA Times)
Of course, such a campaign would be bloody and expensive. It certainly won't be taken up lightly. That being said, if you want stability, and you want tax equity, Prop 13 is the big target on the board.
Over the weekend, the authors of California Crackup (a worthy read, by the way), penned an op-ed in the Bee about Prop 13. It wasn't my traditional attack on Prop 13, but more of a "stuck in a rut" argument against it.
And here's a final irony: Nearly every proposal to realign local-state responsibilities, with the exception of Brown's redevelopment plan, leaves the central pillars of this system in place.
Real realignment requires a total unwinding of this system - and a return to the pre-Prop. 13 rule that local governments should themselves decide on the taxes for the programs they fund.
Ask yourself: Would county boards grant lavish retirement benefits to public workers if they had to raise the tax rate to pay for them - and then defend it to voters? Would city councils approve lavish redevelopment subsidies if they had to justify the tax increase to pay for them?
In the jargon of computer programmers, the Prop. 13 operating system is an endless loop. We are all living in the crash.(SacBee)
I suggest a read of the entire piece, but don't worry, there are plenty of folks to stand up for the status quo. Joel Fox responds by remembering how awful property taxes were, though he doesn't seem to have quite as sharp of a memory for the budgetary stability back before Prop 13.
Prop 13 made the business of government just ridiculously hard. It made representative democracy useless, and left us to the wolves of direct democracy in an era of a changing media landscape. Great for FoxNews, not so great for good governance.
If Brown is successful in getting the budget passed, he might bring a temporary reprieve. However, it is on the backs of those who can least afford it. Meanwhile Prop 13 and its progenitors don't even allow localities to decide for themselves how to run their communities. If we are to experience another California renaissance, we must do something about Prop 13.
We've all heard the classic stories about the one-light towns out there that keep the books balanced by keeping the police busy writing tickets.
We don't usually think of these rural towns as models of a transparent and progressive administration. That's why we shouldn't adopt these kinds of "gotcha" revenue-generating tactics here in San Francisco by turning our entire city into a parking trap.
Unfortunately, just this past week the San Francisco's Municipal Transit Authority announced its plans to instruct our already hard-working traffic officers to increase the number of parking tickets they issue. The revenue from parking tickets - which MTA had projected to be right around $99 million - has fallen short. So now they are setting higher quotas to raise additional revenue.
We certainly do need more revenue in San Francisco. And one of the city agencies that needs additional funding the most is the Municipal Railway. But we need to make sure this new revenue is generated in a way that is fair to all and in a fashion that takes into account a person's ability to pay.
What's wrong with the new MTA parking ticket quotas is that they are the exact opposite - they are essentially a tax lottery, with the unlucky paying more than the lucky. They are unfair, with taxpayers fortunate enough to own garages (usually the wealthier homeowners) less affected than those who do not (usually the less-wealthy renters). And at their core, they are regressive, with the very poor paying just as much as the very rich.
As Assessor-Recorder in San Francisco, my job is to make sure we have a fair property tax system. And I have not been shy about taking on some powerful players - like big banks and other politically connected institutions when I thought they were not paying what they owed. Along with a number of others I have also helped form Close the Loophole - a statewide organization dedicated to reforming Proposition 13 so that commercial property owners start to pay their fair share.
These new revenue sources have several important things in common - they take into account the ability to pay and they are assessed in a predictable fashion. Property taxes, assessed fairly, are progressive in the truest sense because the more expensive the property the higher the revenue generated. And when a person buys or transfers property, they can predict what taxes they owe.
San Francisco has been seeing a healthy debate recently about progressive values. Let's extend this debate to discussing the many problems with regressive and random revenue generation.
We already have some of the nation's most expensive tickets. And pity to the person who has his or her car towed - the fees can quickly soar to $500 and above. I have been deeply involved in the movement to fight unfair foreclosures, and I know that $500 for many families is the difference between staying in their homes and eviction.
What has crept into this debate is some sense that people are to "blame" for driving and if they get tickets, then they simply should give up their cars or be more careful.
Certainly, we do not want to tolerate violations of our parking laws. And we do want to continue to pursue a city policy that draws people out of their cars with better public transit, smarter planning and walkable and bikeable streets. But enforcement should be based on safety - not new revenue. And, we need to understand that given the state of our Municipal Railway right now, some people simply must drive.
The parent with two kids at two different schools is going to have trouble on a bicycle. People with mobility issues sometimes need to drive. And most of us know others who have no other real choice - like the janitor who reports to work at 7:00PM. These San Franciscans deserve a tax system that is fair and progressive - not a random lottery that targets them to raise revenue.
Let's certainly raise more revenue. But let's do it in a way that reflects our progressive values - with a progressive tax system.
You can make the difference in two clicks. First, sign my petition to tell City Hall to tear up the unfair ticket plan. And second, join the movement I have been leading for nearly two years called Close the Loophole and let's fix what's broken in Proposition 13 and bring real solutions to San Francisco.
Across California, businesses are paying a far smaller share of property tax than homeowners since Proposition 13 was approved because of legal loopholes that allow companies to avoid a reassessment upon a change of ownership, a new study says.
The disparity exists in virtually all of California's 58 counties, according to the 122-page report by the California Tax Reform Association and the Alliance of Californians for Community Empowerment. The full study is available here.
In some counties, residential property is shouldering two-thirds of the property tax load, sharply higher than when tax-cutting Proposition 13 was approved more than 30 years ago. (CapWkly)
The Right won this battle by showing commercials of little old ladies getting kicked out of their homes b/c they couldn't pay their taxes. But the fact of the matter is that Prop 13, rather than shifting the burden off of home owners, has been shifted to them from commercial property.
Asm. Tom Ammiano is working on a bill to close the loophole that allows mega corporations to merge or sell off a subsidiary and avoid re-assesment. The issue here is that some of the biggest buildings in the state are still being assessed at 1978 levels despite the fact that they've changed ownership, sometimes slowly, sometimes through a quick corporate move. But Prop 13 is rigid and won't allow us to update the values on these corporate hijinks, and the homeowners pay ever increasing portions of the property tax pie.
This is fundamentally unfair, and it exposes the truth behind Prop 13. It is a corporate dream come true, and anything but a friend to the people of California.
On November 19th, 52 UC Davis students were arrested after peacefully protesting the new 32% fee increases established by the UC Regents. As a second year undergraduate, I was hopeful that students were beginning to see the bigger picture: California is broken.
Students, so far, have been forcing most of the blame on the UC Regents. While it is true that the 20 Regents who voted for the increase certainly deserve a heaving portion of the blame for borrowing tens of millions (from a non-CA bank, NY Merrill Trust) while forcing students into a cycle of debt in order to protect UC's eerily superb bond rating, the only way for students to move towards enacting change is to recognize that UC's woes are symptomatic of the larger disease that has infected the entire state.
The UC student, to widen the umbrella for a movement that might have the capability of rallying support for reform, should understand that he or she risks turning people off by angling attacks towards the Regents and the Regents only. It is important to recognize that while it is a travesty that UC is becoming an unaffordable option for many California families, it is nearsighted to think that UC fees are anything more than a slice of the pie that is California's broken political system. The state workers that have been furloughed, the elderly Californians that are losing their access to Medicare, the thousands of previously middle-class Californians that have had their homes foreclosed, and the over 12% of California that is unemployed might tell students that UC is not the only government program that is underfunded, mismanaged, and increasingly unavailable to the people who need it.
After a year of public discussion and behind-closed-doors drafting, the Bay Area Council has filed their two initiatives for the November 2010 ballot to allow Californians to call a Constitutional Convention.
The first and fairly noncontroversial initiative would change the existing constitution to allow voters to themselves call a convention. Currently only the legislature can do so.
The second initiative is the biggie, the one that actually convenes the convention and lays out how it operates, including how delegates would be picked and what the scope would be.
The delegate selection process would be as follows: 3 delegates randomly selected from each AD (total of 240) and delegates selected by county Boards of Supervisors, one delegate per every 175,000 in a given county, with cities of over 1 million (currently LA and SD, maybe San Jose) get to pick some of their county's delegates. Federally-recognized Indian tribes get to send a total of 4 delegates (they decide themselves who the 4 will be). This is interesting, since tribes' primary relationship with with the federal government, and states are very strictly limited from regulating tribal affairs or lands. Still, better to have them in the process than outside it, especially since they were banned from the 1849 and 1879 conventions.
Significantly, all delegates must be citizens. Permanent residents are not eligible to participate. There are a series of other restrictions designed to keep political insiders out of the convention - rules that exclude yours truly (since I serve on a party central committee), but those are much less problematic than the exclusion of California's considerable non-citizen population.
Preliminary analysis offered to me by Gus Ayer over email, which I hope he'll share in the comments, indicates that this structure would be highly likely to produce a delegate body that is right of center. California's large-population counties tend to be in Southern California and have Boards of Supervisors dominated by Republicans.
The convention's scope is also interesting, and skewed toward the right. Have a look at the language on "Government Effectiveness," included as one of four items the Convention MUST consider (along with "Elections and Reduction of Special Interest Influence," "Spending and Budgeting" and "Governance"):
Government Effectiveness, including a method for periodically reviewing each State agency, department, board and commission to determine whether it is performing its functions to meet the needs of the people of the State and whether it should have its enabling legislation modified, be merged into another new or existing entity, or cease to exist.
The convention it would also be barred from altering existing constitutional language regarding taxes (including but not limited to Prop 13) if there's any chance that the alteration "changes the fundamental nature of" the tax or might cause the tax to rise. In his response to my question during last week's live interview on Calitics, Gavin Newsom said Prop 13 should be part of a Con-Con.
The initiative also proposes to limit the scope of the convention in this way:
the convention may not include new language, or alter existing language, directly affecting marriage or abortion rights, gambling or casinos of any type, affirmative action, freedom of the press, freedom of religion, immigration rights, or the death penalty.
I don't know if they simply forgot to include "freedom of speech" or the state's Equal Rights Amendment or any number of other elements that make our state's Bill of Rights far, far stronger than the federal bill of rights, or if they deliberately want that to be altered. (Businesses have never been very happy with the Pruneyard decision, which used the state's freedom of speech constitutional language to extend many speech rights onto private property, specifically shopping centers.)
Needless to say, this is not how I would have written a Con-Con initiative.
UPDATE by Robert:Joe Mathews offers his take on the initiatives, noting that the FPPC will be in charge of the Convention, picking the staff and training the delegates. He also points out that the "clerk" of the convention will be an extremely important role, could be anybody, and can only be fired by a 2/3rds vote of the Convention.
I've shortened up the questions for this poll in the table here, and some may have gotten a little confusing, but most is fairly self-explanatory.
The state wants some sort of big change, it just doesn't really know how it wants, what it wants, or why it wants it. But, it just wants to start all over again.
Except keeping Prop 13 apparently. The split roll and the majority vote for revenue faired very poorly, but what can you expect? The question was basically, would you like consensus to raise taxes. Well, sure, and I like apple pie too. But when one party refuses logic, what then?
The problem with a poll like this is that these concepts are very loose in voters minds. They are almost completely defined by the question that is asked by the pollster. For an example of that, on the Parsky Commission Flat tax question, it was asked two different ways, and the answers changed by nearly ten points.
Finally, "waste and fraud delusion" in the chart refers to a question that asks respondents about waste and fraud. This makes me both sad and increases the chances that my head will explode by a factor of 10.
By a 57% to 37% margin voters believe the state can provide about the same level of services by simply eliminating waste and inefficiencies, even if its budget had to be cut by billions of dollars.
Not only is this so astronomically off the mark as to be laughable, it shows that the Republicans have destroyed us at messaging. They have made "public employee" into a synonym for all that is evil and wasteful. Despite the fact that our state employees work in some very demanding positions, the conservative movement has repeated over and over again how the government is just stealing. And now the state believes it.
Despite all the evidence to the contrary, California believes that it is "waste" that is bankrupting the state. Despite the fact that the Republicans couldn't come up with anything near even a billion dollars of identifiable waste. Despite the fact that the Republican budget slashed services, cut to the very core of what Californians have requested, nay demanded, since the days of Pat Brown.
Californians want their yummy chocolate cake, but they also want to eat the tasty carrot cake on the shelf. The key is that we can't give up, and give in to this. We must continue to fight for changes that will make the state productive once again.
But I refer back to the problem with a poll like this: the questions define the answers. The poll on this last question sounds like something you'd hear on Fox and Friends:
The state government has been facing large budget deficits over the past several years. Some people believe that by simply eliminating waste and inefficiencies our state government can provide roughly the same level of services that it currently does, even if its budget has to be cut by 20-25 billion dollars. Do you agree strongly, agree somewhat, disagree somewhat or disagree strongly with this view?
Really? Some people believe? Care to name one of them that doesn't have a financial or electoral stake in that fact gaining traction? And even given that standard, you would be hard pressed to find anybody that really pays attention to the state government who thinks you can cut $20 billion from a budget that is now well below $100 billion and expect no service cuts. I would love to chit-chat with that person.
In the end, polling for these kinds of nebulous question goes only so far, no matter how good the pollster. This is the problem with all of this direct democracy, it allows one person or another to put their finger on the scale, whether in the form of the AG's description or the pollster's question.
We elect representatives to think about these issues for us, to come up with good answers. Yet we have consistenly knee-capped them over the last 30 years. Californians want big change, they just don't want to change.
Incidentally, if you'd like to see some different questions get asked, you could look to George Lakoff. Some progressive activists are seeking money to fund a poll. They've raised $10,000 and are looking for another $25,000. You can help by giving on ActBlue.
UPDATE by Robert: This morning Brian beat me to the Field Poll post. What I was going to say is: It's easy for Californians to say they want change, just as it turned out be fairly easy for the American people to say they wanted change by electing Obama last fall. As we're seeing in Washington D.C., actually implementing change is the hard part. Are people - and legislators - really willing to give up long-held assumptions, beliefs, and ways of doing business, without which change cannot happen?
We're witnessing the same thing here in California. Voters want change, but they are wary of the details, and are not yet abandoning old ideologies. That's not to say they'll refuse to do so - instead, in the absence of a clearly articulated and defined alternative vision for California, polls show that voters are not automatically going to give up on the 1978 model of California governance, even though its failure is obvious to all.
I agree with Brian that we've been getting "destroyed" at messaging. Even now, progressive and Democratic organizations still do not want to accept the importance of doing the basic work of creating and actively, consistently, and coherently pushing progressive frames. The consultantocracy still believes in playing for the near-term narrow victory, and has no confidence in their ability to produce fundamental changes in voter thought or voter behavior.
These poll numbers do show that Californians want change. And they are a starting point for how we can produce it. The numbers on Prop 13 are a baseline, not a sign that we should stay away from the topic. And the numbers on the Parsky Commission proposals show that voters do want progressive solutions. It's time we offered them.
Dan Walters has an apology piece for Prop 13 this morning. Apology piece is being a bit generous, as it is more of a "LEAVE PROP 13 ALONE" kind of thing. He notes that its critics demand piece-meal reform because a complete repeal won't pass. Well, yes, Dan, we DFHs are pretty crazy that way, we aren't into tilting at windmills and have a strange compulsion to go where victories are easiest. Shocking!
By the way, I don't think you will find many liberals who would say that a complete repeal of Prop 13 would be a bad thing. I support a full repeal myself, anyway.
But once you get beyond tactics, Dan has fun with numbers, citing the large increase of property taxes since 1978. He notes that:
Since then, property taxes have risen 800 percent to more than $50 billion, according to data from the state Board of Equalization - far faster than other revenues, thanks to new construction and transfers.
Of course, he doesn't note whether this is in inflation adjusted dollars or not, so I'll assume it isn't. So, knock off a big chunk right there. Further than that, this is a more meaningless statistic. Yes, property taxes have gone up a lot, because there is a lot more valuable property in California today than there was 30 years ago. THere are more homes, more office buildings, lots more strip malls, and even a few more gas stations. So, yes the property taxes have gone up substantially because there are many new properties. In other words, this is a completely irrelevant statistic.
A more useful statistic would be the share of the income tax of state revenue. It's way up (PDF). But instead of useful statistics, we get talking points from the California Taxpayers' Association. The fact is that if we split the rolls for commercial properties and merely taxed them at their current assessment, the state would get an additional $7 Billion in revenue for the next fiscal year. Not raising the tax rate, nothing that new properties do not face, just taxing properties based upon what they are actually worth today. It is a move that would actually increase fairness and the business climate for new businesses.
But guess what, you know what has really risen in the past 30 years in California? Well, that would be people. People in California who need schools, who need police, who need firefighters, who need streets and who need all sorts of services the state provides. With many properties taxed like it's 1978, they do not provide for their fair share of services.
While Mr. Walters really enjoys the status quo and pinning blame on the "Capitol political culture that's utterly incapable of acting responsibly", he ignores the facts that the system does not allow for anybody to behave responsibly. Let the majority govern, and see if the public supports it. Instead, the supermajority binds the hands of the legislators.
What he means is that Proposition 13 allows the state to reach deep into the pockets of people and businesses that buy property at market value. But it does precious little to get a piece of the action from those with long-held properties that have soared in value over the years.
Prop 13 is not only a bad governing principle, it is a bad economic rule. Whether or not Mr. Walters chooses to ignore reality, the fact is that Prop 13 needs to go.
I wanted to add a little more about this "loophole" I discussed earlier. For starters, let's look at how residential properties are transferred. It's a relatively simple transaction, leaving the banks out of it, as the mortgage is a deal between the purchaser and the bank, it really is a two parties, simple transfer. The purchaser pays the seller for the parcel. It's easy to see that there was a transfer there.
But commercial properties are far more difficult. There are several scenarios where it becomes difficult to answer what seems like an easy question: Was the property transferred? The transfer triggers a reassesment, and usually higher revenue for that county. Let's consider a couple of those situations, but these are not the only tough questions on when to reassess:
1) Purchase of a Corporate (or other legal) Entity
Here, the question is what was sold? Did the acquiring company merely purchase stock? Or should the property be considered as having sold since there is a new owner? Take the sale of the Equity Office Group. I used to work in one of the Equity Office buildings in fact. In 2007, the Company was sold to the Blackstone Group, a private equity firm. Yet, Equity Office (EO) was a vast company, and sold for $39 Billion. So, was the purchase of EO a transfer of the properties in California? Did Blackstone simply purchase stock in EO, or did they purchase a bunch of properties? If so, what is the value of the properties? How do they attribute money for each of the buildings that EO owns?
This question is still open for debate. Blackstone made some of this a bit easier by selling off some of the properties, but a complete resolution on these kinds of cases is really tough for the affected assessors.
2) Partial Transfers
There are a few partial sales in residential property, but it is far more common in commercial property. Real estate investment trusts (REITs) allow several owners to own a building or a group of properties. What if one of the large participants in the REITs leave? You might have a new majority owner of the property, yet is there a transfer?
These cases end up in court frequently, and often the owners of teh property can vastly change without triggering a transfer and a reassessment of the property. Homeowners generally can't avoid these reassessments, and besides the fact that commercial properties sell less often, this slight of hand is why commercial properties pay so much less today in comparison to residential properties.
30 years ago in San Francisco, commercial property owners contributed the majority of property taxes, 59%, and residential property owners contributed 41%. Today, we see the reverse: commercial property owners contributed just 43% of property taxes in 2008 while residential property owners contributed 57%. (SF Chronicle 5/21/09)
That statistic should be somewhat shocking to voters who were around to remember the 1978 vote. Looking back at the information from that vote, you'll see the advertising and ballot argument focused on keeping poor granny in her house. Yet Prop 13 was always a project of the corporations and the landlords. Howard Jarvis was whiling away his time as the lobbyist for Los Angeles Apartment Owners Association, incidentally where the Yes on Prop 13 HQ was located, when he emerged from obscurity. The Apartment Owners funded Prop 13, and commercial property owners will be sure to protect it from attack.
If Prop 13 is to be reformed, it must come from homeowners and renters that are being slagged with higher taxes. It should come from those who use services, like our K-12 education system, higher education, and the state parks. It needs to come from a well-informed populace that sees Prop 13 for what it is: A Corporate Power Grab.
This discussion is not to say that the "loophole" is necessarily the biggest issue relating to split roll. It isn't, it is just one way that the corporations have found to use the system that Prop 13 put in place to avoid paying their fair share.
SF Assessor Phil Ting's "Close the Loophole" event last night was a pretty big success. Turnout was exceptional with an overflow crowd at the SF LGBT Center's Ceremonial Room. It's clear that a lot of people are very, very frustrated with Prop 13. If you missed it, and would like to get more involved, here is the Close The Loophole website and here is the Facebook Page.
Phil Ting spoke for a relatively short time, maybe 15 minutes or so. He briefly explained where his focus lay, the split roll. Basically, the split roll would pull commercial properties out of Prop 13, and change the system for assessing and taxing those properties. Because of the way commercial properties are transferred, in small percentages at a time or by selling a whole company, etc., they can be transferred without being reassessed. Thus, the "loophole" to which Phil Ting refers in his Close the Loophole campaign. All in all, a splitting of the rolls would in the current fiscal year bring in about $7.5 Billion for local governments. It would not resolve the budget crisis in one chunk, but that money spent wisely could have helped us mitigate the crisis.
The key to this meeting however, was building a working group to begin the process towards moving past talk and into action. Let us not hold any illusions, messing with Prop 13 will not be an easy task. Business organizations will spend millions of dollars to defeat a split roll initiative, with some political folks suggesting that the No campaign for a split roll campaign measure could raise over $100 million. It's tough to beat such a large and spendy No campaign, very hard indeed. The only way that happens is to a) have a substantial budget of our own and b) build a grassroots wave of support.
So, after Mr. Ting spoke, the group broke up into work groups to discuss important features of the campaign. I joined the fundraising group, and we went over ideas of whom to reach out to and how we could raise the kind of money that we would need to pass this measure. A coalition group had some good ideas of natural allies and an online organizing group worked on building support through the Politics 2.0 toolset. A policy group also went through ideas, both on the split roll and a further ideas that could be included in a package of reform.
After getting back together to share ideas from the work group, the group committed to reconvening in September. But, we'll need to have more groups like this across the state. So, let's work on getting similar events set up elsewhere. If you have access to a meeting space, and would like to host an event, let's get that going. Feel free to post something here, or shoot me an email. I'll do my best to help you organize an event.
We've mentioned Phil Ting's quest to split the property tax rolls a bunch of times, but I wanted to draw special attention to an event in San Francisco to organize for this vital structural reform. And if this is going to get done, there has to be a real grassroots movement to grab the 1,000 volt third rail of California politics.
And this is an achievable goal, despite whatever the conventional wisdom says. Table 6 in this Field Poll (PDF) from last year is particularly relevant. So, the good news, is that we have a great shot at fixing the split roll question no matter which way the issue is framed. But, you can clearly see that framing matters with this question.
When voters are asked whether they would prefer higher commercial taxes than residential taxes, 47% of voters say yes. However, when asked if they would prefer having lower residential property taxes than commercial property taxes, which describes the same situation, 61% approve. Either way, we start with a small lead, but it becomes much bigger when the right question is asked.
The event's going to be a quasi-focus group, quasi organizing event, quasi-brainstorming kind of session. So, bring your bright ideas, and let's get started right now on at least one reform.
Here are the details:
Date: Wednesday, July 1, 2009
Time: 6:30pm - 8:00pm
Location: SF LGBT Center
Street: 1800 Market St.
City/Town: San Francisco, CA
To follow up on Robert's post this morning, I wanted to go back to a few words from the Wizard of Omaha, Warren Buffet, from back at the time of the recall election in 2003. At the time Buffet was an Arnold "advisor", that is until he suggested that Prop 13 was a sad sack of a holy grail. If you recall, Buffet's talk on taxes caused quite the brouhaha.
First, to address the more general comments he made at the time, they weren't a general "raise taxes" argument so much as a fix the tax system argument. At the time, Buffet was famously quoted as saying he ends up paying a lower effective tax rate than his secretary after you count the sales tax and the other range of taxes we pay. This becomes even more troubling when you put this in the context of the tax commission's latest ideas to flat tax the state. Basically, the Tax Commission wants to further kneecap the middle class by introducing a flat tax at 6% rather than introducing a more progressive bracket system along with a fair property tax. The problem with that, besides the initially obvious lack of a progressive system, is that the rich generally have more deductions, even under state law. So, like Warren Buffet said, the secretaries of the world end up paying more than the invesment moguls
Even taking volatility as a serious threat to the state budget, a flat tax is neither the only solution nor even an obvious solution. While taxing lower income earners would grade some of the peaks of the valleys of our general fund revenue, it would also impose a far larger portion of the burdern upon those that can least afford it. I get that such a scheme is a wet dream of all the loyal Bushies, but it is a solution that is far from acceptance in California.
In most states, other taxes, like property taxes, are used to smooth the curve from income taxes. And Buffet concentrated his fire on Prop 13. In a response to a Wall Street Journal article, he used his own properties to outline some of the problems with Prop 13:
What I said in respect to property taxes was very specific. I gave him an example of three houses, two in Laguna Beach and one in Omaha. The first Laguna Beach house is a property that I bought in the early 1970s. It has a current market value of about $4 million and, because of the limitations embodied in Proposition 13, carried taxes of only $2,264 in 2003 vs. $2,241 in 2002. The second house, located just in back of the first, is one that I purchased in the mid-1990s. It has a market value of about $2 million and, simply because I bought it later than the first, carried taxes of $12,002 in 2003 vs. $11,877 in 2002. I pointed out to Joe that these figures mean that the tax rate on the second house -- same neighborhood, same owner, same ability to pay -- is roughly 10 times the rate on the first house.
My sympathies are clearly with the "non-billionaire" family purchasing a $300,000 house in Chico today that faces real estate taxes materially higher than those borne by this non-resident billionaire on his $4 million house in Laguna. This family, because of Proposition 13, has been selected to subsidize me. (WSJ 11/3/03)
In modern-day California, even with declining property values, the middle class is held down on the ladder. Those who purchased their property decades ago get a subsidy from those who purchase today, even with the newly reduced property values. A family just starting out is subsidizing those who are already established.
And we have plenty of polling data on Prop 13, like this Field Poll (PDF) from last year. Yet this is what really boggles my mind, that even newer homeowners, who are subsidizing older homeowners and thus paying more than they should be, still support this crap. Let's put succinctly, so that the 71% of voters who bought within the past 5 years and are "somewhat" or "not at all" familiar with Prop 13 see this: Prop 13 INFLATES your taxes.
Furthermore, there should be no question that the real losers from Prop 13 are renters. While renters would see some passthrough of taxes, they pay income taxes directly, dollar for dollar. In other words, they are hit disproportionately by the income tax. Yet, at least 41% of renters would vote in favor of Prop 13.
This is the result of third-rail politics, and the failure of liberals, progressives and generally reasonable people, from elected Democrats to grassroots activists to successfuly discuss, qualitatively and quantitatively, the havoc that Prop 13 has wrought on the state.
We have a lot of work to do with Prop 13, and efforts like Phil Ting's are a nice step in the right direction. However, even the Wizard of Omaha understands that we simply cannot afford to ignore the "third rail" of California politics anymore. It hurts the middle and working class. It hurts renters, and it devestates state services. Ready or not, it's time to play with 1000 volts.
The Bay Area Council has been promoting an effort to convene a constitutional convention, through legislation or through initiative. Their most recent draft of the language has been spreading around, and suffice it to say there are some problems:
The main group advocating for an overhaul of California's constitution is circulating draft initiative language that would bar a constitutional convention from changing the property tax portions of Proposition 13.
The 2,000 word draft document has been distributed to numerous stakeholders and experts by the Bay Area Council, a San Francisco-based business group that has been outspoken in calling for an overhaul of the state's governing document.
A spokesman for the group, John Grubb, said the document is still going through a revision process. But he does not expect the language about Prop. 13 and property taxes to change. (CapWeekly 6/22/09)
If we are to truly reform California, then let's cut the bullshit. There should be no sacred cows. We need to build a system of governance built truly from the ground up, or it becomes unclear whether the project is worth doing at all. If we are going to have poison pills from our current constitution built in from Day 1, what hope do we really have of building a workable system?
The BAC's reasoning is pretty traditional stuff really, they are worried of Howard Jarvis' ghost and a few "senior groups." If these supposed senior groups were really looking out for seniors, they would join the California Alliance for Retired Americans in calling for a fair and just budget that provides for services for the elderly, not a system that merely traffics in truism in how seniors are terrified of losing their homes.
The fact is Prop 13 was never about seniors losing their homes, it was merely a powerful political ploy to lower the taxes of corporations. And that is precisely what it has done. Howard Jarvis himself was before the Prop 13 extravaganza, just another apartment owners' group attack dog. Prop 13 was really pure genius on the apartment and commercial property owners' part. They get to use shell games and transfer their properties in whatever way they want, and never have to reassess their property. It's a pretty slick little system, and it is why most their is a growing movement to fix prop 13. In fact, San Francisco's assessor-recorder, Phil Ting, is pushing a Close the Loophole effort to split the commercial and residential property tax rolls.
But the Bay Area Council really can't be treated as some savior group. It's not some creature of the grassroots, it is merely an organization of large bay are companies. And that they want to preserve Prop 13, shouldn't really be all that shocking. But if progressives are going to work on this effort, we must work to ensure that all options really on the table. Cut the third rail fears and just work from the ground up. Otherwise, it might just be more wise to pursue other avenues to reform.
Listening to Talk of the Nation this AM. They started with a segment on the budget crisis. Unavoidably, Prop 13 became part of the discussion and one call in comment (from Prescott, AZ no less) referenced Calitics as his source of information.
I want to call attention to that which my co-blogger at California Dreaming, Alex Walker, has written concerning the manner in which both George Will and Paul Krugman have misconstrued the California Budget Crisis. Both managed to get it wrong.
With all due respect. Will and Krugman are both wrong. It says something about just how pernicious is this notion is that every political question that exists, has existed, or ever will exist anywhere in the universe boils down to a struggle between so-called conservative Republicans vs. so-called liberal Democrats.
Most Calitics readers are from the Progressive side of the Democrtic Party and thus have a position that is about the same as we do in the Green Party. Alex wrote:
Barack Obama, the popular elected new Democratic president says:
...those of us who manage the public's dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government...
Alas, the California Democratic Party does not know the meaning of these words.
I would soften this a bit and limit this criticism to the leadership of the California Democratic Party, i.e. Bass and Sternberg.
Yesterday's Constitutional Convention Summit was actually an autopsy. For five hours both panelists and the audience dissected the reasons for the death of the California Dream and all agreed, even if they did not explicitly say this (though many more did than I ever expected), that California's government was murdered by Prop 13 and its accomplices. A Legislature that in the late 1960s was rated as the nation's best has now become one of the most unpopular and ineffective institutions in American politics.
What the Summit revealed is that at the core of California's political crisis is that the people of this state have no way to hold anyone accountable for a system that has totally and deliberately failed. By completely eviscerating the method by which public services are financed, and by locking into place a conservative veto over state government, Prop 13 and the 2/3 rule in particular ensured that the Legislature would never be able to enact effective policy again. And that to produce solutions, voters would have to fill the Legislature with Democrats, something that isn't possible given our self-segregating electorate.
It would be very wrong to say that the supporters of a convention in that room were solely motivated by the wreckage of 1978. Many attendees wanted to focus on the need to increase popular engagement with government. Proportional representation and smaller legislative districts (i.e. more legislators) were common proposals. Steven Hill of New America Foundation in particular has had some good ideas on reforming our democracy - you can find some of them on their Political Reform Blog.
But more important was the spirit of popular engagement that suffused almost every panelist's comments. There was a recognition that if our state is to be fixed, and if a convention is the way it's going to be done, the people themselves really do have to be empowered. A convention, and their government, have to be made relevant to the lived experience of Californians. They have to trust that they can control a convention, and that its outcomes will make their lives better.
Because Governor Schwarzenegger is impotent at brokering a budget, the state will be out of money on February 1st - and will start issuing I.O.U.'s. That means no tax rebates, no financial aid and no other means of assistance. Now we are looking at a statewide special election to get out of this mess. If all we get is more Arnold gimmicks to delay the problem another year, it will be a tragically wasted opportunity. Because now, more than ever, the public is willing to consider tax reform to get us out of the right wing fiscal straitjacket. Beyond the Democrats' effort to scrap the archaic two-thirds budget rule, legislators must consider placing ballot measures to amend Prop 13 (by exempting commercial property) - and eliminate Prop 218's onerous requirement that local revenue measures get a two-thirds vote by the electorate. With the recession wreaking havoc on our fiscal health, the public has finally woken up to the horror of right-wing tax policy. For the first - and possibly only - time, voters might approve progressive ways to raise revenue.
(a worthy read, by the way), penned an 