Friday on the Sacramento Bee editorial page, former editor Peter Schrag argued (once again) for changes to Proposition 13’s property tax system with the goal to raise more revenue. Schrag says changing the property tax system to reassess business property more often would improve the economy. On numerous occasions on this site, I have taken the opposite view that by increasing the tax burden on business property the economy would be damaged. Today I want to focus on a particular argument that Scharg makes on taxing a property’s value.

Relying on plans created by Lenny Goldberg, president of the California Tax Reform Association and a long time advocate of gutting Proposition 13, Schrag says that business property taxes should be levied on the value of business property. He notes that when the value of the land increases because of new construction the value of all neighboring land also increases. The tax collector should capture the increased property value with higher taxes, he says.

This tax on increased value or increased wealth is what led to the Proposition 13 tax revolt in the first place. By reverting to a property tax system based on the tax assessor’s subjective opinion of the property’s value the tax is not based on the taxpayer’s ability to pay.

Of course, that is the goal of such a tax system. If the taxpayer cannot afford the tax on the value of land then they must vacate the land for someone who can afford it. Schrag makes that point in a roundabout way when he states, “by imposing no cost on keeping valuable land off the market, it discourages the best use of that land and promotes speculation and sprawl. It taxes innovation and enterprise and rewards inertia.”

Allowing the tax assessor to determine the “best use of the land” is a formula for disaster and takes decision-making away from the landowner from determining how best to use the property.

An example of this situation I have used before deals with some residential property prior to the Proposition 13 tax revolt. It came from the Newhall Signal newspaper, which reported that an elderly couple who lived in a small home near an apartment house saw their property valued at it “highest and best use” as land that could house an apartment. They received a property tax bill nearly equivalent to their entire yearly income.

Small businesses could feel a similar pinch if the property tax system were changed to capture  wealth increases “on paper” with assessments of highest and best use.

As described in Schrag’s piece, in turn for regular reassessments on land, businesses would no longer have to pay personal property tax on equipment. However, there will be a net lose for businesses in such a system. The goal of this property tax system change is clear — to raise billions of dollars in additional tax revenue – so the bottom line for all business must be an increase in the total tax burden.

While Schrag argues that changing Proposition 13 to capture the value of land is aimed exclusively at commercial property, one wonders how quickly the idea of capturing that “wealth” tax on a property owner would be suggested for all property, including residential property?