Notes from the Prop 13 Informational Hearing

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Proposition 13, the iconic property tax measure passed in 1978 has received a lot of attention recently, no doubt because the new make-up of the legislature allows a two-thirds majority to put changes to Prop 13 on the ballot.

Eight bills have been introduced to lower the vote requirement to pass local, special taxes and two measures have been offered to change the way commercial property is assessed. Assembly Revenue and Taxation Committee chairman, Raul Bocanegra, called an informational meeting yesterday to gather facts and ideas for legislators when they consider these bills. Boncanegra said the legislature should focus on whether the bills would help create jobs. The other side of that coin is: Can the bills cost jobs? A fair question since two studies over the last couple of years have predicted thousands of jobs are at risk if a split roll property tax increases taxes on commercial property.

As to the requirement for a two-thirds vote to raise local taxes for a specific purpose, Michael Coleman, a chief policy advisor for the League of Cities, speaking for himself and not the league, said if a majority vote were allowed for special purpose taxes, legislative bodies would lose flexibility. Measures for favored agencies like police or schools would find their way on the ballot. Once the tax is passed, local government officials could not move the money around where it needs to be.  (An argument I have made often on this page.)

Coleman noted that even with a two-thirds vote requirement about 50% of the local special taxes pass. The pass rate is even higher with a lower vote requirement, of course, with 80% of the school bonds requiring a 55% vote passing, and about 66% of the majority vote measures passing.

Pepperdine University Professor of Public Policy, Michael Shires, noted that the two-thirds vote assures consensus from the community on tax issues, especially in low turnout elections. Shires also pointed out that property taxes are a stable tax under the Prop 13 system. Given the volatility of the sales tax during the recent recession, he suggested matters for local government would be much worse if property taxes dipped and surged with the economy, which would probably occur under a split roll tying commercial property taxes to yearly changes of a property’s value.

The question of Proposition 13’s effect on the business environment was raised by a number of speakers at the hearing.

John Kabateck, California Executive Director of the National Federation of Independent Business, said his members were overwhelmed with taxes and regulations and they feared a split roll would diminish their businesses even more. Professor Shires said that minority and women owned small businesses would be heavily affected by a property tax increase.

Assemblyman Richard Pan wondered if states with a better business climate had property tax rules different from Prop 13’s, suggesting that Prop 13 rules might be a cause of the poor business climate. Assemblyman Kevin Mullin asked if Prop 13 prevented business from moving to the state because the taxes on a recently purchased facility under the Prop 13 system would be higher than businesses that had been in their property for a while.

Rob Cord, a board member of the California Business Properties Association, responded that Proposition 13’s one-percent tax rate is a lure for out of state businesses because they face higher rates in most states. He specifically pointed to New York. He said the tax rate there is three percent.

Proposition 13’s method of taxation and the security it provides taxpayers is a sales tool for those attempting to convince businesses to move to California – unfortunately one of the few tools, given the state’s business climate. In most property tax systems, the assessments of the property are subjective. Businesses all the time are battling with government assessors on the value of property. As the law does for homeowners, Prop 13 provides businesses certainty once the tax assessment is set.

The echo of Henry George, a famous California economic thinker from the 19th century, was heard at the hearing. George proposed a tax on land as the best tax for government.

Lenny Goldberg, president of the California Tax Reform Association, which has long supported a split roll property tax, argued that taxes on land (as opposed to the structures built on the land) should be reassessed on a regular basis while doing away with taxes on business equipment. A similar approach for a land tax was supported by UCLA Law School Vice Dean, Kirk Stark.

However, when challenged on how agricultural property would be treated under such a system, potentially putting farm ownership in jeopardy, Goldberg said more details would have to be worked out on how agricultural property would be assessed. A land tax could lead to many different classifications of property opening the door for lobbyists to argue for favors for their landowner interests in the legislature.

Goldberg said changes in the property tax system should be ready for the 2016 election because the Proposition 30 taxes would be expiring around then.

As I stated here previously, the split roll idea would come along to replace the Prop 30 taxes and appear on a ballot in a non-gubernatorial election year. I wrote: “A number of interests in the state do not want to see the revenue stream end … they could go after businesses. The spending interests behind such a move will make the argument that big corporations would pay the tax, although it would clearly fall heavily on small and minority business owners.”

Testimony closed on the hearing when representatives from California’s assessors’ association made a couple of strong points about Prop 13 and the split roll. Assessors do not have the staffs to reassess commercial property on an on-going basis and no assessor is in favor of a split roll.

Perhaps more telling in any effort to upset the current system—since Proposition 13 passed, the state population has increased 53%, inflation has increased 125% and property tax revenue has increased 500%. The Prop 13 system seems to be providing local governments revenue at a healthy clip.

No one at the hearing discussed how well that money is spent.

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