Could Proposition 13 reform help ease the state’s housing crisis?

Apr 11, 2018

 

If you’ve heard of Proposition 13, you probably know that it cut property taxes back in 1978, which reduced funding for public schools and other services. It also has a lot to do with the state’s shortage of housing and, many argue, the fact that rents are so darn high.

Repeal efforts have failed for years, but the affordability crisis may mean that the time for change has finally arrived — in the form of a new ballot initiative.

The initiative is a compromise of sorts. It wouldn’t touch homeowners, it would just change the way California taxes commercial properties — which reformers claim Proposition 13 was never meant to protect.

 

The law that changed California

 

If you weren’t in California back in 1978, you missed what many called a tax revolt — specifically a property tax revolt. At that time, property taxes had spiked with inflation. Some people struggled to pay them, and worried about being taxed out of their homes.

Meanwhile, the state was actually sitting on a surplus. It was taxing money that it wasn’t spending. To Howard Jarvis, the man behind the populist uprising, the government needed to be reigned in; the last thing it should be doing is making it hard for people to own property.

“The most important thing in this country,” Jarvis argued, “is not the school system, nor the police department nor the fire department. The right to have property in this country, the right to have a home in this country, that’s important.”

Jarvis responded to what many saw as a cultural takeover by hippies and nanny-state politicians. Jarvis had a demand: a cap on property taxes. A way for people to keep hold of their homes. That’s what Prop 13 is.  

Before Proposition 13, California re-assessed property every few years to figure out its market value, and taxed owners based on that updated price.

Those taxes could double from one year to the next, and then dip with the market.

Jarvis argued that property taxes shouldn’t be allowed to spike unexpectedly; when we make an investment in a home, we should be able to plan with the assurance that our taxes will always be based on that original price.

Lots of people liked the idea, and it passed with 57 percent of the vote.

Yet critics of the initiative said it was overbroad. It didn’t just benefit homeowners — it kept property taxes from rising for all property owners, including big businesses.

State Senator Scott Wiener says that back in 1978, California could have created protections from spiking property taxes without going as far as Proposition 13 did.

Howard Jarvis and his coalition, says Weiner, “took advantage of the situation and instead of crafting a measure to address the actual problem ... used it as an opportunity to try to take a wrecking ball to California's budget and to public services in California.”

Today all property is protected by the initiative — meaning, it is taxed not at its current market price, but at the original purchase amount, even if you bought the property 35 years ago and the value has since tripled. It doesn’t matter if it’s your second home or third home, or a Chevron oil refinery.

“Disneyland gets full Prop. 13 protection, the same as a single family home,” says Wiener.

 

How does Proposition 13 effect California today?

Since the law went into effect, property-tax revenue has shrunk relative to the cost of living, population growth and inflation. Today, California spends less on public-school students; the state was ranked 14th in per pupil spending back in 1978; now it’s 41st.

Cities have also cut spending on libraries, utilities, administration and other services.

All this despite the fact that we have some of the the highest sales, gas and parcel taxes of any state.

Most notably, we have a higher income tax than other states, because we're not getting as much property tax.

“That’s very volatile,” says Senator Wiener, “and that's why we have a boom/bust budget.”

In a sense, the law subsidizes property owners at the expense of the state budget.

But it does more than that. It also shapes the way our cities grow — or don’t — leading to land-use patterns that have contributed to the housing crisis.

Ben Grieff is with a coalition campaigning to reform Proposition 13. He argues that our low property taxes have allowed landowners to sit on undeveloped lots that could be used for housing.

In California it can actually be very profitable for owners to keep a piece of land vacant and then just flip it and sell when property values go up. It could take years, but with low taxes, it can be worth it.

“Because [longtime property owners] don't have to pay fair market value in property taxes, they have no incentive to develop the land or to sell it,” says Grieff. “So, they’re sitting there watching the land appreciate, but they’re not paying property taxes that reflect that.”

Proposition 13 also compounds the housing shortage in another way. It’s pushed cities to build less housing in favor of more office and retail, especially big box stores.

Why? They need the sales tax revenue those businesses generate.

“When you develop housing you get less revenue and more service obligations,” says Wiener. “So, local communities tend to be biased towards commercial development because of Prop. 13. And it's not a criticism, they are desperate for money to fund services.”

These conditions conspire to make housing hard to build, and therefore scarce, and therefore incredibly expensive.

So, advocates argue, getting rid  of Prop. 13 wouldn’t just increase local budgets.

It would also encourage more housing development.

 

The "Split Roll" campaign

The reform is called a “split roll” because it would split commercial properties from residential ones. The change, if it makes the ballot and is approved by voters in 2020, would keep Proposition 13 protections for residential properties as well as small businesses.

But for big businesses, property taxes would go back to the way they were before 1978 — based on the property’s current market price, and reassessed every three years.

According to California’s nonpartisan legislative analyst, this change could generate as much as $11 billion once it’s put into full effect.

Back in 1978, nearly half of the state’s property taxes came from corporations. But today — largely due to Proposition 13 — they pay only 28 percent.

But, the campaign to reform Proposition 13 faces a very well-organized and well-funded opposition.

Jon Coupal from the Howard Jarvis Taxpayers Association says “split roll” will be bad for business, in a state that he claims already burdens businesses.

“Many businesses have left California,” says Coupal. “We can start with Campbell's Soup, Waste Connections, Tesla’ battery factory … has left California. Prop. 13 and the certainty it provides to businesses are one of the few remaining things keeping some businesses here. So it just doesn't make good tax policy.”

This aversion to taxes is the kind of reaction I got when I chatted up the owner of Marwa Halal Market on 30th and telegraph, to see how he’d feel about potential property tax hikes.

“That's going to be hard. Rent is very expensive right now; as a small business, rent is very expensive,” says the owner Tamur Quadra.

Marwa Halal has been around for almost 15 years. People shop here for imported candies, dried foods, homemade flatbread and baklava, stews and butchered meats.

The “split roll” proposal wouldn’t raise taxes on mom and pops — which the measure defines as owners with less than $2 million in property.

But, like a lot of small business owners, Quadra doesn’t own his building.

He rents.

And he worries if his landlord’s taxes go up, they could raise his rent — which he can’t afford.

But, proponents say this fear is unfounded; they argue that landlords already charge the highest rent they can — and a tax increase for some won’t change the overall market rate.

“This reform is not meant to be in any way burdensome to small mom-and-pop establishments,” says Grieff.

He says that right now, tax breaks for a few aren’t trickling down to lower commercial rents, or consumer prices, or higher wages, or anything the rest of us can benefit from.

 

Level playing field?

He met me out on the street, so we could see how all this tax-law rubber meets the road.

We run through some of the numbers behind the buildings we’re looking at on Telegraph and Grand avenues in Oakland.

Remember, because of Proposition 13, if you bought your building a long time ago, you pay a lot less in taxes.

“We have two gas stations right across the street from each other,” says Grieff. “One is being taxed at $42 a square foot, the other is taxed at $74 dollars a square foot.”

Yet it’s the gas station that’s paying in taxes nearly half what the other is paying that’s charging $0.50 more for gas.

“This is a perfect example of how the property tax savings do not translate down to lower prices for the consumer,” says Grieff.

Across the street there are two parking lots, and you see the same wildly different tax rates. One lot was bought in 2016 and pays $545 per square foot. The other, was bought in 1975 and pays $21 per square foot.

“Two exact same slabs of concrete being taxed at vastly different rates,” says Grieff.

Looking south at the downtown Oakland skyline, the same is true for the high rises.

The Clorox building and the Tribune tower are taxed at close to current market rate, while the Bank of America building pays less than a fifth of what they do.

The main benefits of Proposition 13 are felt by a few big property owners.

In fact, three-quarters of the tax revenue a “split roll” reform would capture would come from only eight percent of property owners.

“It's a small number of large commercial property owners that aren't paying their fair share, many of whom are not even based here in California,” says Grieff.

In Grieff’s fantasy of a split-roll future, Oakland looks different.

Higher property taxes would force landowners to build our cities taller and denser. The public services we all share might run a little better.

But, split roll would also change the rules on scores of businesses that made investment decisions based on old regulations.

And most of all, it would require that Californians vote to raise taxes on themselves — a pretty hard thing to pull off.

Tamur Quadra from Marwa Halal Market doesn’t see the benefit of giving more money to the government.

“They have the money to pay for everything,” says Quadra. “The money is there but this is just icing on top of the cake.”

The split roll campaign has a couple of years to change that perception.

They’re gathering signatures to qualify for the ballot now — but recently decided to wait until the 2020 election to the put the issue before voters.

They may need that extra time to sell Californians on this ambitious idea.