Could a reassessment of Proposition 13 finally be in the wings?
Advocates of the long-needed change have their fingers crossed, now that a measure to revise Proposition 13 has qualified for the November 2020 ballot.
The initiative wouldn’t involve a wholesale review of the 1978 tax-cutting proposition; that’s still considered a politically impossible lift in a state where property tax breaks have become embedded in millions of homes and apartment buildings.
Instead, the measure takes aim at what long has been considered the Achilles’ heel of Proposition 13, namely its treatment of commercial and industrial properties. The idea is to create what’s known as a split roll, in which residences retain their imperviousness to reassessment but business properties don’t.
“My instincts tell me that the split roll is moving into more positive ground,” Los Angeles Assessor Jeffrey Prang told me, “and if next year there is a big Democratic turnout, that is likely to benefit the initiative.”
The proposal would require that commercial and industrial properties be assessed at full market value and reassessed at least once every three years. That’s a big change from the current law, which allows them to be reassessed only upon a change of ownership.
“That’s a ridiculous, outdated, irrational system which causes damage in many different ways,” says Lenny Goldberg, a veteran critic of Proposition 13 who helped craft the new initiative. “We have this huge hole in the heart of our tax system.”
He’s right. Thanks to Proposition 13, massively profitable commercial properties that haven’t changed hands in decades — Disneyland, say — are billed property taxes at 1970s-vintage assessed valuations while homes and businesses around them have much higher bases.
Changing that system could produce as much as an additional $12 billion in tax revenues in its initial years, according to an estimate last year by a team from USC, assuming that all commercial and industrial properties were reassessed. (The state Legislative Analyst estimated $6.5 billion to $10.5 billion in annual net revenue gains.) In absolute terms, Los Angeles County would be the big winner if that were the case — collecting additional revenue of $3.4 billion to $3.8 billion a year, according to USC. On a per-capita basis, however, L.A.’s take would be outstripped by San Francisco, Napa, Santa Clara and Inyo, thanks to their high commercial property values and relatively small populations.
But here’s the punchline: As much as counties would appreciate the additional tax revenues, their assessors almost uniformly hate the initiative. That’s because it would saddle them with a workload that many say would be simply impossible to manage without years of preparation — far more than the three-year transition period implied by the initiative.
“I cannot implement the measure within three years,” Prang says. “It’s physically not possible.” The California Assessors Assn. agrees. It estimates the cost of the transition running as much as $470 million a year for up to 10 years — and individual assessors say that may understate the costs and challenges of making the change. These may be so great, they warn, that for many years they could exceed the additional tax revenues the change brings in.
These issues underscore how Proposition 13 injected a unique complexity into California’s tax system that has become difficult, if not impossible, to unwind today, more than 40 years after its enactment. Before we get into the details, let’s refresh our memory of how Proposition 13 came about and what it did.
The initiative was an artifact of a tax revolt of that era, energized by a housing-price boom that had sharply pushed up the assessed valuations of homes and saddled their owners with correspondingly sharp property tax increases. The craggy face of the Proposition 13 campaign was Howard Jarvis, who projected the image of a rumpled everyman but in fact was a lobbyist for apartment-house owners.
Proposition 13 set property taxes at 1% of assessed valuations (which were rolled back to 1976 levels), prohibited reassessments except when a property was sold, and limited assessment increases to 2% a year.
The measure dramatically transformed the state’s tax structure, with the sales tax and volatile personal income tax assuming the weight that had been carried by the far more stable property tax. Budgeting and spending authority drained away from local governments and school districts and into Sacramento.
As the Legislative Analyst’s Office observed in a 40th anniversary retrospective in 2016, most of the proposition’s benefits went to wealthier Californians — two-thirds to homeowners earning more than $80,000, and most of that to those earning $120,000 and up.
More important in light of next year’s initiative, the burden of property taxation shifted decisively onto residential owners from commercial and industrial properties over the last four decades: In 1975, single-family residences accounted for 39.9% of assessed values in Los Angeles County, and commercial-industrial properties for 46.6%. By 2018, the ratio had more than reversed, with houses accounting for 57.6% and the commercial-industrial for 28.9%. (Income-producing apartment houses remained steady over time at about 13.5%.)
One reason for the shift is that determining a change in property ownership is a lot easier for houses than for business properties, which can bury their ownership terms within a maze of corporate fronts.
In 2006, for instance, the family of computer entrepreneur Michael Dell effectively acquired Santa Monica's luxury Fairmont Miramar Hotel by dividing ownership among himself, his wife and some partners. Because none of them acquired more than 50% of the total, state courts ruled that the changeover couldn’t trigger reassessment.
Just as brash was the elaborate dance choreographed around the San Francisco office complex One Market Plaza in 1986, when Equitable Life Assurance Co. sold an 81% interest in the property to an IBM pension plan, while formally retaining legal title.
This sale-but-not-a-sale was discovered by San Francisco assessors in 1992. The city was able to reassess the office tower, an appeals court remarked in 2006, “only after an extensive investigation, review of thousands of pages of documents, a federal lawsuit, a lengthy hearing before the Assessment Appeals Board (AAB), two lawsuits in the San Francisco Superior Court, and more.” By then the bill for taxes and fraud penalties came to $64 million.
After the Canadian real estate company Intrawest acquired the Mammoth Mountain ski resort in 1997, the Mono County assessor spent years fighting Intrawest’s claim that since it had left voting control on some issues in the sellers’ hands, no change in ownership had occurred — costing the county an estimated $20 million in property taxes over eight or nine years. The resort finally was reassessed in 2005, when it was sold again in a clean deal; the new assessment was $167 million more than the old.
Then there’s the notorious golf club exemption, which my colleague Alexandra Zavis covered in 2010. This was a boon for “equity-membership organizations” which were effectively owned by their members.
Then-Los Angeles Assessor Rick Auerbach questioned the assessments of clubs such as the Los Angeles, Brentwood and Bel-Air country clubs, arguing that over time their ownership effectively had changed hands through the buying and selling of memberships.
Auerbach brought his case to the state Board of Equalization, the authority in such matters. But the board’s legal department ruled that piecemeal membership changes didn’t count; a wholesale ownership change of more than 50% at one fell swoop would be necessary to trigger a reassessment.
Prang estimates that he would need to add 300 to 350 appraisers to his current cadre of 600 appraisers to manage regular appraisals of L.A. County’s 150,000 commercial and industrial properties (out of 2.5 million property tracts in the county). Each one would need a year of classroom training and another apprenticeship year in the field, plus perhaps three years more to gain the skills for commercial appraisals.
Meanwhile, assessment appeals from commercial property owners would skyrocket, and lawyers representing those owners would “raid my staff wholesale,” Prang says.
Assessors also are critical of some of the tax breaks still offered in the initiative, presumably added to mollify small businesses. Those with 50 employees of fewer would be exempt from the property tax on “equipment and fixtures”; assessors say that break makes no logical sense and would be impossible to implement because they have no means of determining a business owner’s workforce.
“I have a server farm here in Silicon Valley with $250 million of assessable equipment inside it, but with six people working there,” says Lawrence Stone, the Santa Clara County assessor. “Is it the intent to exclude a quarter-billion dollars of equipment because less than 50 people work there?” (A server farm encompasses racks of high-end computers managing heavy flows of data.)
Stone has proposed an alternative to the split-roll he calls a “split rate,” in which nonresidential properties would be taxed at 1.2% or 1.5% or more on their assessments rather than 1%. “It would be very simple and non-disruptive,” Stone told me. “The tax collector in every county would simply have to change the tax rate.”
Stone acknowledges that a split rate would leave the inequities of Proposition 13 in place. “What you want is to get additional revenue from Intel and Disneyland,” Stone says, “but it wouldn’t deal with the unfairness.”
That makes the split rate a non-starter for Goldberg and others seeking a more comprehensive change in the system.
“How long should we allow commercial properties to be assessed at 1975 values, costing local governments and schools billions of dollars?” Goldberg asks.
“I appreciate that people say the system is messed up, but they don’t know how to change it,” he says. The initiative, he says, vests the Legislature with authority to give assessors time and resources to manage the transition.