Editorial: California had the chance to start fixing its broken tax system. It balked

Proposition 15, the “split roll” measure on the Nov. 3 ballot, was always going to be a tough sell.

The measure would have raised taxes on commercial and industrial property as much as $11.5 billion a year by exempting those parcels from the tax breaks in Proposition 13, which was enacted in a 1978 taxpayer revolt. Since then, efforts to tinker with Proposition 13’s provisions have been met with such furious backlash that it has become known as the third rail of California politics.

The COVID-19 pandemic made it even more challenging for proponents of Proposition 15. How do you persuade voters to raise taxes on businesses when so many of those firms are struggling to survive?

In the end, the campaign just couldn’t pull it off, and the measure was declared officially dead on Tuesday. Even so, the fact that it lost by a slim margin — 3.6% as of Wednesday afternoon, though ballot counting continues — rather than a landslide gives us hope that the third rail may be losing some of its charge and that the kind of tax reform the state needs might be achievable in the near term.

Because California really needs it.

It’s not an overstatement to draw a straight line from Proposition 13 and related anti-tax measures to California’s crumbling roads, struggling schools and reduced social service programs. The measure capped property tax rates at 1% and limited annual increases in assessed values to 2%, which prevented tax bills from shooting up as property values escalated.

This formula starved local governments of revenue to pay for basic and essential services, while also shifting more of the tax burden from property to income and sales. It has also made for a wildly unfair system in which similar properties have vastly uneven tax burdens simply because they were purchased in different years, distorting the cost of buying a house and starting a business.

Yet despite this and decades of tax reform commissions and studies, there have been only temporary and piecemeal fixes like the short-lived proposal this year to raise taxes even further on the highest-income Californians.

We endorsed Proposition 15 in part because the tax break for commercial properties has been much abused over the years. But we also saw it as a first step in a process that would be crucial for a healthy state: tearing the state’s tax system down to the studs and rebuilding it into something fairer and more sustainable.

We don’t want to return to a California of the 1970s when property taxes were skyrocketing and threatening to drive older and poorer Californians from their homes. Rather, we envision something new and more appropriate to the 21st century that provides stable revenue to local governments and schools but doesn’t place too much, or too little, of the burden on anyone.

It can still happen, but only if it becomes a priority for the governor and Legislature. Shortly after Gov. Gavin Newsom took office in 2019, he floated the idea of heading off Proposition 15 by brokering a deal for a sweeping structural change to the tax system. Nothing came of it, but it’s still a good idea. The split roll proposal is bound to return and it might go over better supported by a holistic package of reforms.

That process needs to start now and should encompass the entire system, including personal income, sales, business and property taxes. No idea to modernize the way in which state taxes are levied or credits applied ought to be off the table. It’s a tall order — we know — but it’s essential to putting the state on sound fiscal footing.

If Proposition 15 was too ambitious a first step, here’s a more modest one: closing the loophole that allows businesses to game the system and avoid being taxed on the full value of the properties they buy. Bills to do so have been unable to gain any traction in Sacramento in recent years, despite the stories of deep-pocketed buyers of commercial property coming up with schemes to prevent newly purchased buildings from being reassessed.

Proposition 15 would have stopped this practice, and its defeat now puts the onus on state lawmakers. It’s irresponsible to allow this practice to continue and deprive local governments of needed tax revenue.