Benjamin Franklin’s adage about death and taxes being the only certainties in this world long has required a footnote in California, where Proposition 13 has been chiseled into the tax structure since 1978.
The ballot measure limited property taxes to 1% of assessed valuation, barred reassessments except when a property was sold, and capped increases at 2% a year. Those are simple formulas, but they’ve generated passionate debates over their impacts for the better part of four decades. Last week, the state’s respected Legislative Analyst’s Office weighed in with a worthy new look at the most common claims about Proposition 13 and how well they hold water.
The study by Carolyn Chu and Brian Uhler of the Legislative Analyst’s Office clarifies much about the law and strips away plenty of underbrush accrued in the debate since 1978. Perhaps most important, the authors underscore how much we still don’t know about the measure’s impact, largely because the state hasn’t compiled statistics needed for the discussion.
That’s a reminder of the most enduring fact about Proposition 13, which is that California was not prepared to deal with the consequences of its enactment — and still isn’t.
Proposition 13 blindsided policymakers, who had to scurry to bring existing laws and assessment practices into compliance. They had to funnel revenues back to cities and counties that stood to lose billions in property taxes. Municipal losses were backfilled from the state’s multibillion-dollar surplus, which itself had fueled much of the discontent with property tax rates. Since then, legislative and ballot-box tweaks to the law have become a recurrent feature of California politics, because its inadequacies keep surfacing.
Chu and Uhler validate some common notions about Proposition 13. One is that it’s been a particular boon to wealthier Californians. “Because higher-income households own more, higher-value homes and Proposition 13 tax relief is proportionate to home wealth,” they observe. “The majority of Proposition 13 tax relief (in dollar terms) goes to higher-income households.”
They calculate that two-thirds of its tax benefits go to those with incomes above $80,000, and most of that to homeowners earning more than $120,000. The benefits to renters, by comparison, are speculative. While landlords may pass some of their tax savings on to tenants, the extent to which that happens is unclear, they say.
The authors document how the limitation on reassessments leads to huge variations in the tax bills even among similar, neighboring properties and similar homeowners. Among Bay Area homeowners aged 45 to 55, with incomes of $80,000 to $90,000 and homes worth $575,000 to $625,000, tax payments in 2014 ranged from $1,350 to $7,500.
The governing factor, of course, is the length of time between changes of ownership; the longer the period, the greater the mismatch between the property’s market value and its tax bill. This effect was memorably identified by financier Warren Buffett during the 2003 California recall election, when he observed that he paid $14,400 in taxes on his $500,000 Omaha home, but less than $2,300 on his $4-million Laguna Beach manse — and that the bill that year had risen by $1,920 on the former and $23 on the latter. “In effect,” he said, “it makes no sense.”
The Legislative Analyst’s Office documented the consequences of the shift in taxing authority from localities to the state government. The state based its original calculation of how much tax revenue each locality deserved after the vote on its share of county property taxes prior to 1978. Freezing every locality at that level has hampered their ability to change as demographics and needs changed. Each city was “locked into its 1978 service level,” Chu observes. If it wishes to provide a higher relative level of services than it did 40 years ago, it has to find the revenue from sources other than property tax.
That has heightened the reliance of many communities on such alternatives as sales, utility and hotel taxes, over which local authorities have more control. These have increased six times faster than property taxes — yet in inflation-adjusted per-capita terms, they still haven’t made up for the revenue loss from the rollback of property taxes mandated by Proposition 13.
Sales and utility taxes are regressive, meaning they impose a relatively higher burden on lower-income residents. Additionally, as revenue sources “these options are diminishing,” says Dorothy Holzem of the California State Assn. of Counties. Taxpayers are showing more resistance to approving such taxes in cases where they have a vote. And sales tax revenues may be topping out, as more consumer spending shifts from taxable goods to services, which are largely exempt.
Among the questions on which the Legislative Analyst’s Office was able to provide only limited insight is whether Proposition 13 has shifted the weight of property taxation from commercial property to residential property, and whether it gives localities an incentive to favor retail developments over housing.
Chu and Uhler documented a shift in homeowners’ share of overall property taxes to 37% now from 32% in the mid-1980s. But they’re unwilling to attribute this mostly to Proposition 13, in part because growth in the number of residential properties has outstripped commercial and industrial. But the residential statistics dating back to the 1970s cover only owner-occupied homes, which may under-count the residential share.
The state also lacks data on whether ownership transfers of commercial property are being concealed, which could be limiting reassessments and cheating local governments out of billions in potential revenue. That suspicion has fueled persistent campaigns for a “split roll,” which would allow more frequent reassessments of commercial properties while leaving residential rules in place.
The issue is important because of evidence that businesses can hide ownership changes behind a corporate curtain. In 2006, the family of computer entrepreneur Michael Dell effectively acquired Santa Monica’s luxury Fairmont Miramar Hotel by dividing ownership among himself, his wife and partners. Because none of them acquired more than 50%, state courts ruled that the changeover didn’t trigger reassessment. Legislators tried to close that loophole in 2014, but as often happens with efforts to trim provisions of Proposition 13, their bill failed.
Transfers of less than 50% ownership stakes don’t have to be reported to the state Board of Equalization, so they’re effectively invisible to policymakers. Nothing would prevent the Legislature from requiring more extensive reporting of ownership transfers; it simply hasn’t done so.
Also murky is how a greater local reliance on sales taxes affects land-use decisions — that is, cities favoring retail developments, which typically generate more revenue than they cost in municipal services, over residential growth, where the balance is reversed.
Chu and Uhler concluded that cities that are more dependent on sales taxes are “at most, modestly more likely to prefer retail over other types of development” by rezoning for commercial use. But they also acknowledge that some municipalities may be responding to the revenue incentives of the post-13 world in other ways, such as using tax breaks, offers of cheap land and publicly-financed property improvements to lure retailers.
The Legislative Analyst’s Office report does support Ben Franklin’s adage in an important way. Proposition 13 didn’t necessarily relieve Californians of paying for the services they demand from local government; but it did produce a change in who pays the price. In many respects, the burden has been shifted down the income scale, so that poorer taxpayers are shouldering more of these costs.
Yet much about the impact of Proposition 13 remains unknown as the revolutionary change in public financing approaches its 40th birthday in 2018. The Legislative Analyst’s Office took a good step forward, but there’s still more to the journey.