Rethinking Prop 13

Last October, we announced the TechEquity Collaborative’s Housing Policy Priorities. To bring this vision to bear, we have identified four policies that we believe will move the region’s tech-driven economy toward creating broad-based opportunity instead of inequality and displacement. One of those policies is the reform of Proposition 13, the state’s regressive property tax law that pegs the taxes land owners pay to the value of the property when it was purchased.

Proposition 13 applies to residential and commercial property alike, making it possible for large commercial landowners like Chevron and Disney to pay a disproportionately low tax rate. Since property taxes go to pay for public education and local services, Prop 13 plays a large role in shaping the set of public services that create resiliency and upward mobility in our population. Because it deals with land taxes, it also makes the cost of housing development more expensive and creates some weird disincentives for local governments to allow more housing development.

We have joined the coalition that is working to put commercial property tax reform — he Schools and Local Communities Funding Act of 2018 — on the November ballot.

Last month, we kicked off our campaign by bringing together a panel of experts to help us understand how Proposition 13 came to be known as California’s political third rail, what some of the unintended — and intended — consequences of this policy are 40 years later, and how we might rethink and reform this policy moving forward to make it work better for our state. Our Executive Director, Catherine Bracy facilitated the discussion.

Our Panelists included:

• Tonya Love, Field Representative, Office of CA Assembly District 18, Rob Bonta
• Jennifer Martinez, Director of Strategy, PICO
• Steven Bliss, Director of Strategic Communications, California Budget and Policy Center

Proposition 13 created one of the most sweeping tax reforms in California history, affecting the way we tax properties in two major ways: In most states currently, and in California prior to it’s passage, land was taxed based on its assessed market value. Prop 13 instead requires property taxes to be based on the purchase price of the property. This means that even as the value of a property grows the tax revenue captured does not. Under this system, most properties’ taxable value is significantly less than their market value. Second, Proposition 13 places a one percent cap on the total amount of property taxes that can be collected from all local governments serving their property. Prior to Prop 13 the average property tax rate in California was about 2.5%. This change cut property taxes by 53% overnight and reduced the California budget by 7 billion dollars the year after it passed.

Steven Bliss kicked off the conversation by giving us some historical background about the cultural and political context in which Prop 13 was introduced to California voters. In 1978, Jerry Brown was Governor, and sitting on a massive 5 billion dollar budget surplus. Meanwhile, inflation and home prices were soaring, leading to some homeowner’s tax bills doubling from one year to the next. Prop 13 was not a sneaky, fly-by-night, passed-by-just-a-hair measure. It was wildly popular, qualifying for the ballot with 1.2 million signatures and passing with a favorable voting margin of 2:1. Prop 13 was a “tax revolt.”

Prop 13 alleviated the growing discontent in homeowners over rapidly rising property taxes, but did so through a very blunt and severe tool, that has had lasting consequences for our state. Tonya Love talked about some of unintended consequences, and their impacts 40 years on. One of the most substantial impacts of Prop 13 is that it applies to both residential and commercial properties. Residential properties are triggered for reassessment when the property changes hands, refreshing the tax rates when a new owner takes possession. Commercial properties largely escape this type of reassessment, by using complex shell corporations to allow properties to change hands without ever triggering a reassessment. With such low tax rates, it doesn’t take much to hold on to a unproductive property. Therefore, commercial property owners have no incentive to develop or sell their land, leaving many properties in our state underutilized. Love gave the example of large shopping malls — usually situated on prime locations near freeways or transit hubs. These lands could be attractive locations for new housing developments that are much-needed in our state. With shopping malls not nearly as profitable as they used to be, caused by a decline in customers as Amazon Prime now reigns supreme, why do the owners of these mega-malls hang on? Because it’s not that expensive to keep paying meager 1978 tax rates.

Jennifer Martinez talked about the proposed reform, The Schools and Local Communities Funding Act of 2018, and the path forward for the measure. The measure is supported by a broad coalition of community, faith and labor groups, including TechEquity Collaborative, a member of the measure’s Steering Committee, and PICO where Martinez is the Director of Strategy. The proposed reform will need 800,000 signatures by the end of April to qualify for the ballot and will apply to commercial and industrial properties only, leaving small businesses, residential real estate, and agricultural lands untouched. The measure will raise between 6 and 10 billion per year in revenue for schools and local communities. But it’s success is not guaranteed. Business interests and anti-tax groups will spend generously to ensure the measure’s defeat. Martinez estimates the measure’s proponents will need to spend around 50 million to make the measure competitive with voters, possibly making it the most expensive ballot measure in California’s history.

It seems another tax revolt could be on the horizon in California, this time with the aim of, as Martinez put it, “reclaiming the California it could have been, and could be still” by restoring much-needed funds for schools and local services like housing and homelessness support.

Want to learn more about Prop 13 and how you can help reform it? Visit our Prop 13 Reform page.

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We are organizing the tech community to advocate for a tech-driven economy in the Bay Area that works for everyone. We believe the tech industry can and should generate widespread opportunity instead of inequality and displacement.