The great tax revolt of 1978 was spurred by homeowners who were frustrated, even angry, that their property tax bills were escalating even as the state was swimming in surpluses.
Proposition 13, which rolled back assessments and capped future increases, passed with 65 percent of the vote. Polls have consistently shown that despite the inequities it creates — neighbors in nearly identical homes can have dramatically different property tax bills — few Californians would be willing to trade the certainty of the Prop. 13 formula for the more volatile old way that left the tax burden to the whims of the housing market (for assessments) and elected officials (for setting rates).
But the landmark initiative had unanticipated side effects. Perhaps its greatest paradox was that an initiative with such visceral appeal to homeowners actually increased their share of the overall property tax burden. In 1978, residential property accounted for 55 percent of assessed value statewide, compared with 43 percent for commercial, industrial and agricultural holdings. Today, the residential share has reached 72 percent.
One of the driving forces behind this shift is that commercial landowners have become so savvy at structuring deals to avoid the type of reassessment that homes undergo when property changes hands.
Two state senators introduced legislation (SCA5) this week that would assess commercial and industrial properties at their market value after a phase-in period. It would not affect residential or agricultural land.
“This is just simple fairness,” said Sen. Loni Hancock, D-Berkeley, who co-authored SCA5 with Sen. Holly Mitchell, D-Los Angeles. Any change to Prop. 13 — long regarded as the “third rail of California politics” — is a daunting order. This proposed constitutional amendment would require two-thirds approval in each house of the Legislature before it could be presented to voters in November 2016. There is no doubt that the business lobby would put up fierce opposition. If it stalls in the state Capitol, an alternative course would be through an initiative.
Hancock is well aware of the challenge. She said she hoped introduction of SCA5, and the hearings that will follow, will raise awareness of the way owners of offices, factories, malls and other commercial buildings are eluding reassessments. She also wants Californians to know that the change could generate $9 billion a year for schools and local governments.
It’s time for Californians to recognize and confront the unintended consequences of a populist tax revolt.
About Prop. 13
Origin: A 1978 statewide initiative propelled by concerns that rising tax bills were threatening to price longtime residents out of their homes. It passed with 65 percent of the vote in a high-turnout primary.
What it did: It immediately rolled back existing assessments to 1975 levels, limited the property tax rate to 1 percent of assessed value of a home at the time of purchase, and held annual increases to 2 percent until a property is sold.
Unintended consequences: Passage of Prop. 13 dramatically shifted fiscal control from local governments to the state; local governments with fewer resources tended to favor retail projects that could produce sales taxes over residential construction; commercial property owners quickly discovered how to game the system to avoid reassessments when property changed hands.