Proposition 15: Time to Split the Roll?

Joel BellmanBy Joel Bellman      September 18, 2020

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Proposition 15: Time to Split the Roll?
Design concept by T.E. Zeri
Proposition 15 on the November ballot is called the “Schools and Communities First” initiative. Apart from its obvious curb appeal, the name does accurately reflect the intent of the measure: to substantially reverse one of the most unjust features of the original Proposition 13, the property tax reduction initiative passed in June 1978. Prop. 13 was originally pitched as relief and protection for beleaguered homeowners who were purportedly in danger of losing their homes in the real estate inflation of the 1970s—seniors on fixed incomes, young families just starting out, family farms, etc. Instead, a huge part of its property-tax cut went to commercial properties, including apartment building owners who simply pocketed their tax savings instead of passing them on to tenants in reduced rent. Over the past 40 years, the inequities and distortions in Prop. 13’s assessment scheme have grown enormously. The system is based on the 1975-76 assessed value, updated by only a modest 2% annual adjustment or a subsequent transfer of ownership, NOT on the traditional system of periodically reassessing properties’ current market value. In some areas of Los Angeles, for instance, depending on when it was purchased, a property can be taxed at between four and ten times (or more) the effective tax rate of another property of similar market value. This, despite the fact that both property owners are receiving exactly the same government services; one just happens to be paying five or ten times as much for them because it changed hands more recently. Moreover—stop me if you’ve heard this before—the property relief benefits skew heavily toward the wealthy. A 2016 study by the California Legislative Analyst’s Office (LAO), “Common Claims About Proposition 13,” found that, “higher–income Californians own more homes and own homes of higher value and, therefore, receive the majority of the total dollars of tax relief provided to homeowners by Proposition 13.” Not coincidentally, Prop. 13 has been especially punitive on younger people and their families. Many communities have replaced their lost property tax revenue with so-called “impact fees” on builders to pay for the costs associated with new development. Unlike other revenue options like parcel taxes, a levy based on square footage, or Mello-Roos assessments on developers to pay for related government infrastructure improvements, impact fees can be imposed without a public vote. Whatever they’re called, these property-tax substitutes are tacked on to the price of new housing construction, which makes all housing more expensive and, as the LAO report found, “homeownership among Californians 45 and younger has fallen by around a third since 1980, despite little change in the state’s overall homeownership rate.” Many thought that Prop. 13’s inherent flaws and inequities might be a violation of the Constitution’s equal-protection clause, but in 1992 the U.S. Supreme Court rejected a lawsuit by a homeowner paying five times her neighbor’s property tax rate, and upheld the measure in an 8-1 decision. Prop 13’s assessment scheme was “distasteful and unwise,” Justice Harry Blackmun wrote for the court, “appears to vest benefits in broad, powerful and entrenched segments of society,” and may “frustrate the ‘American dream’ of homeownership for many younger and poorer California families.” But “the will of the people,” said the Court—and so, for good reason, Prop. 13 has long been called the “third rail” of California politics: touch it, as a candidate or officeholder, and you’re instantly dead. Prop. 13 enshrined in the state constitution an unfair and arbitrary tax-assessment system, ruinous to local government and school financing, and destructive to the concept of “home rule”—where local voters, not the Sacramento legislature, make the major decisions that affect local government and local services. Like a perpetual Ponzi scheme, the ultimate financial risks and costs will always be borne by property taxpayers entering the system after those of us lucky enough to get in earlier. Because everyone eventually gets a little taste of Prop. 13’s tax-savings—paid for by somebody else—we all end up with a stake in maintaining the status quo, even if it means our kids may never own a home in California. And that’s why every previous reform effort has failed. Now comes Prop. 15, which wisely concedes that politically, we will probably never be able to address the inequities among homeowners. Prop. 15 returns to the original property-tax reform idea that was too little and too late to turn back the tide of the Prop. 13 “tax revolt”: a split roll, in which residential properties like homes and apartment buildings retain their Prop. 13 relief, but commercial properties would be reassessed on a three-year cycle to keep their assessed values current and congruent with their actual market value. In this way, at least the disparities can be eliminated on the commercial side of the property tax roll. It would mean a modest tax increase for business, but this is an expense they can easily bear. The LAO report notes that property taxes are only a small part of company profits, citing one study that put the number at 5%, so any increase that a business didn’t absorb could easily be passed along to customers with minimal impact. If the impact on individual businesses is negligible, Prop. 15 would raise significant new revenues statewide, which the Legislative Analyst estimates between $6.5 and $11.5 billion, earmarked 60% for local governments and 40% for K-12 schools and community colleges. Restoring some additional fiscal authority to local government to generate and allocate new revenue would mark a long-overdue restoration of the home-rule principle that Prop. 13 unintentionally overturned. Prop. 15 would phase in the commercial split roll assessments over several years to cushion the impact and includes breaks for small businesses. Because returning to cyclical reappraisal for businesses would entail more work and expense for the state’s 58 county assessors, some of the new revenue would be dedicated to offsetting those costs. After 42 years, are California voters finally ready to enact one of the most consequential governmental reforms of the past several decades? In less than seven weeks, we will have the answer and we’ll find out just how much juice the original Prop. 13 still has left.
Joel Bellman
      September 18, 2020

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