The Fairness of Prop 13

When most people debate the relative fairness of Proposition 13, they think of cases like Nancy Collett's.Collett and her husband bought their home in the College Park housing tract of Costa Mesa in Orange County in 1974 for around $30,000. They had a comfortable income for a young family - she worked at UC Irvine and her husband Matthew worked for the city. They bought the most house that they could afford at the time - a fixer-upper in an older housing tract built in 1957.

Over time, the neighborhood changed. More young families moved in. They built additions and spruced up the little one-story, three bedroom-two bath homes that run in endless iterations up and down the street, each with an identical pointed eave over the front garage.

And of course, prices went up, up, up. In 2006, at the height of the housing boom, a couple bought a house next door for more than 15 times what the Colletts paid for their home - the same one-story three bedroom-two bath with the pointed eave over the garage.

Because the Colletts have owned their home since 1974 - before Proposition 13 locked in property values at their 1975 levels - they pay almost $5,000 less every year in property taxes than their neighbors that moved in 2006.

That’s what economists like Steven Sheffrin call “horizontal,” or side-by-side inequity. It’s the most commonly cited example of “unfairness” in the current property tax system, but Sheffrin warns not to get too fixated on these short-term disparities.

“These extreme examples make great newspaper stories but they really aren’t the whole picture,” said Sheffrin. To sensibly judge the fairness of Proposition 13 it has to be compared to alternative property tax systems, like the one in place before Proposition 13.

By those measures Proposition 13 has been mostly fair to homeowners, he argues, though inequities have crept up in the commercial property market and the resulting tax structure has become increasingly vulnerable to ups and downs in the economy, resulting in the yearly deep budget deficits we have seen over the last several years.

But looking strictly at homeowners, Sheffrin said Proposition 13 has worked pretty well for two main reasons: one, the short-term inequities of neighbors paying different property tax bills even out over time as taxpayers move around and, two, it gives taxpayers certainty, the key to fair taxation.

According to research Sheffrin did for the Public Policy Institute of California, the number of people like the Colletts who have stayed in the same house for 30 years is fairly insignificant and steadily decreasing every year.

“Over a lifetime these inequities balance out,” he said. “As long as there is mobility among homeowners then everyone benefits from the protections of Proposition 13.”

The area where these inequities have not balanced out as much is commercial property. Sheffrin found that legacy corporations with large property holdings have been reassessed much less frequently - either because they have not changed hands or because they have changed hands through a convoluted transaction with multiple parties such that no one party buys more than 50 percent of the property - the trigger for reassessment.

These inequities are the focus for a movement to reform the property tax system by taxing commercial property closer to its market value - an approach called “the split roll.”

One unlikely proponent of this approach is Jennifer Bestor - a fifth-generation Republican with a Stanford MBA and a past career as a controller in the high tech corporate world who moonlights as the local PTA treasurer. Bestor has a shrewd eye for good business and lately she’s turned that eye on Proposition 13.

“This is not fiscal conservatism," she says. "I remember the ballot arguments for Prop 13. Nowhere in there did it say that we want to benefit corporations and wealthy landlords who can pass the benefits on to their children.”

But Bestor believes that is exactly what it has done, and she’s got an arsenal of research to back it up.

Bestor became curious about the property tax system when she showed up to the first meeting of the Parent Teacher Organization at her son’s school in the affluent city of Menlo Park last year and was shocked to discover the depth of the cuts in funding to education.

She decided to put her skills as a corporate researcher to use to root out the waste and inequality in the property tax system, combing through tax rolls from the county assessor and historic microfiche records from the county museum. She charted data sets and recorded changes of ownership, rents and consumer prices for all of the commercial properties within her school district.

“The picture that emerged was this is an uneven playing field,“ said Bestor.

She saw an environment where there were clear winners and losers from Proposition 13. There was a shift in the property tax burden from a more equal share between residential and commercial property owners, to a marked decrease in the burden on commercial property. She also saw an environment where a small group of legacy commercial property landlords were reaping the benefits of low property tax bills, without passing any savings on to consumers or reinvesting in the community.

“We’ve created an even more business unfriendly climate by the way we’ve structured property tax,” said Bestor, who believes the current system is squashing new investment because it makes it too difficult to compete.

But Jon Coupal, the president of the Howard Jarvis Taxpayers Association claims she’s got it all wrong. “The idea that Prop 13 is bad for new investment is a red herring put forth by those who don’t really understand business,” he argued.

“CEO’s love Prop 13. It’s one of the only things California has going for it because it offers certainty.”

“Yes certainty,” countered Bestor. “The certainty that they will pay two to three times more than their competitors.”

She cited an example of gas stations on the same street in Menlo Park with widely differing tax bills but very similar consumer prices:

“The nondescript little gas station on El Camino near my house pays $30,148 a year in property tax for the privilege of selling me less expensive gasoline than the two Shell stations ($14,214; $17,214), the Union 76 ($15,920), and the Chevron ($20,388) down the street. Those big-name stations have service bays to increase revenue and are on major intersections. But the ‘new guy’ in town … is the one who's paying $10,000 a year more for police, fire, road repair, education, parks and courts.”

She went on to compare two local markets - the Menlo Park Trader Joe’s, which leases the land from a family trust with an address in Cape Cod who pay a measly $11,200 in property taxes while the landlord of a Trader Joe’s just miles away in San Carlos pays almost five times as much.

"Unless this family in Cape Cod is cutting secret checks to Trader Joe’s they are really not seeing any benefit in the lower property tax rate, and neither is the consumer. The prices at both Trader Joe’s are the same.”

No one is more excited by Bestor’s research than Lenny Goldberg, a Sacramento consumer lobbyist and executive director of the California Tax Reform Association, which has made a mission out of promoting a split-roll reform of Proposition 13.

“All we need is an army of Jennifer Bestors in every city and county of California - doing that research and finding the inequalities in their community,” said Goldberg.

In his 30-year lobbying crusade to change Proposition 13, Goldberg has watched a sad dance of one-step-forward, two-steps-back as efforts at reform in the legislature have been trampled and tripped up time and again by the two-thirds majority requirement that law put in place. But Goldberg is hopeful he can rally support to pass a split roll ballot initiative in the future, or at least call public attention to the need to reform the loopholes in the current law.

State legislators have made six attempts since 1991 to reform parts of Proposition 13, but Republicans have almost unanimously opposed such legislation, keeping the required two-thirds majority vote to pass the accompanying tax increase out of reach.

Like Bestor, Goldberg has armed himself with research, documenting a statewide shift of the property tax burden away from commercial property by examining the tax rolls for each of the 58 counties in California.

This trend is especially dramatic in counties that both support large industries and have had thriving residential real estate markets recently like Los Angeles and Santa Clara counties. In Los Angels County the share of residential property taxes has shifted from 39 percent of the total in 1975 to 56 percent today. In Santa Clara County, the home to Silicon Valley, the share has gone from 50 percent to almost 70 percent.

But Jon Coupal with the Howard Jarvis Taxpayers Association, which sponsored the original initiative, finds the data meaningless. “Lets imagine that you were able to drive all of the commercial property out of California - which is more of a possibility if we split the rolls - then by definition all property tax revenue would be residential.“

A better measure, said Coupal, is the ratio of disparity between how much a property is worth at market value and what it's taxable value is under Prop 13, which he said is smaller for commercial property than residential.

Coupal referred to the findings of a study sponsored by the California Business Property Association which found that commercial and industrial properties were on average assessed at 60 percent of their market value, 10 percent higher than residential properties on average.

However, the research done by Sheffrin and colleague Terri Sexton for the Public Policy Institute of California and found that disparity ratios for modified commercial properties, which were usually large legacy corporate properties were significantly higher than either residential or non-modified commercial properties, usually mom and pop type businesses.

“I noticed that these large complicated properties don’t turn over as much and really benefit from Proposition 13 protections more than homeowners,” said Sheffrin. “The benefits of Prop 13 should be for homeowners not for commercial properties.”