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Fixing Prop 13 … The 3rd Rail of California Politics

GUEST WORDS-Who ate the California Dream? Why is the state that once led the nation in education now at the bottom? Why is the state that pioneered infrastructure miracles at war over building a bullet train or shoring up the levees in the Sacramento/San Joaquin River Delta? Why has our state been a fiscal shambles for most of the past dozen years? What brought our Golden State to its knees? 

Some might conjecture about the focus on prison construction that dominated a couple of decades of state budgets or the Great Recession’s deficit years. Some people blame public sector unions and their members’ retirement funds. But to really understand what happened to California, you have to go back further, to 1978 and the passage of Proposition 13. 

Oops, we just touched the “third rail” of state politics, so let me offer this caveat. The residential property tax limits installed by the passage of Prop. 13 certainly allowed many people now my age to continue living in their homes, even as the value of their property and the properties surrounding them escalated. 

It also had devastating effects — some predictable, some not. The damage to education was a predicted consequence. Even as it was adopted, Prop. 13′s opponents argued that it would destroy one of the nation’s best and most comprehensive educational systems. And it did. Per pupil spending on public schools in California fell from first place to last. 

And no wonder: We spend a full one per cent less of our gross domestic product on education than the rest of the nation — that’s 30 per cent less than the national average. Of course, student achievement sank with expenditures – we now rank 48th — and we are 50th in student/teacher ratios. 

Prop. 13′s opponents also predicted decreased expenditures on infrastructure. Again, it happened. After the measure passed, cities and counties across the state cut budgets for road repairs, sidewalk maintenance and tree trimming. Pot holes became a universal citizen complaint. And that’s the part we can see. To make ends meet, local governments scaled back schedules for sewer maintenance and water pipe replacement. 

Furthermore, they shifted as much of the cost for fire prevention, building inspection and development review to those who wanted to build something. Infrastructure has suffered. Deferred maintenance is now in the billions of dollars. 

There were unpredicted consequences as well. In the biggest surprise, city tax revenue shifted from property levies to sales taxes. This meant that the most stable source of income for cities went from property tax (in which the most expensive properties paid the most) to the sales tax, in which the poor pay a larger share of their income than the affluent. A relatively progressive tax was supplanted by a more regressive one. Clearly an unfair change in the tax burden. 

Because cities have become dependent upon sales taxes, planning decisions are today driven by the need for retail sales. Instead of designing for livability or according to planning principles, cities make choices based on capturing as much sales tax as possible and producing as much revenue as they can. It’s why local governments often bend over backwards to accommodate new hotels – they generate lots of sales tax dollars when visitors buy goods and pay for meals. 

So can anything be done to change this situation and still preserve homeowner protections? In a word, yes. Currently the law requires a majority change of ownership to trigger a re-evaluation that could, in turn, increase tax assessments. When a homeowner sells, that’s a 100-percent change in ownership. 

But corporations found a loophole: they structure the sale so no one person or entity owns a majority – thus dodging reassessment and keeping their property tax artificially low. The 2006 purchase of Santa Monica’s Fairmont Miramar Hotel has become a notorious example. Computer mogul Michael Dell bought the Miramar through a Prop. 13 loophole that allowed him to save $1 million in annual property taxes by technically splitting its ownership five ways. All legal, but definitely in the billionaire’s interest. Closing this loophole would help ameliorate Prop. 13′s damage. 

A second proposal would divide residential property from commercial for purposes of tax assessment. Because residential property sells more frequently than businesses, over the 36 years of Prop. 13, the property tax burden has shifted from business to housing. 


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Before 1978 business-owned property paid 60 percent of property tax revenues, homeowners just 40 percent. Now the ratio is reversed. Separating residential property from business property for periodic re-evaluation would shift that burden back to commercial real estate. 

Splitting the tax rolls will require a vote of the people, and it will be more controversial as business fights to keep its windfall. But changing the law in a way that continues to protect homeowners yet increases tax revenues from other property as values escalate will solve the greatest disparity created by Prop. 13 – and it will go a long way toward providing the revenue needed for infrastructure, education and fiscal stability. Maybe it could restore the California Dream.

 

(Rev. Jim Conn is the founding minister of the Church in Ocean Park and served on the Santa Monica City Council and as that city's mayor. He helped found Clergy and Laity United for Economic Justice, Los Angeles. He posts at CapitalandMain.com … where this piece originally appeared. Read more articles by Rev. Jim Conn)  -cw

 

 

 

CityWatch

Vol 12 Issue 56

Pub: Jul 11, 2014