Revising Prop 13 Can Increase California’s Revenue by 6-10 Billion Dollars
In 1978 California Proposition 13 capped property taxes in the state at 1% of the assessed value of the property. Property tax revenue dropped 60% and the State attempted to make up the difference—and still tries.
Here’s how that has removed a sense of balance and equity from our property tax system:
What would be the cheaper vacation? A 500-square-foot room at the Disneyland Hotel or a room of the same size in the average California home—if the rate you paid was based on the property taxes for each?
For every $25 you spent at one location, the other would cost you $200.
If you guessed that $25 is the amount that goes with a Disneyland stay—you’d be right. Staying home costs 8 times that. That’s because Disneyland bought its Anaheim property in 1938 and the value of the property will not be reassessed until it’s sold—and maybe not then if no one person or entity buys more than 50% of it.
The Dell family (the same family that make computers) is a good example of how to get around it. They bought the Fairmont Miramar in Santa Monica and made sure no one person was the majority owner. The wife owns 49%. The husband owns 42.5%. An LLC was formed that owns 8.5%. When the State wanted to reassess the value, the Dells went to court and won. Without a new reassessment they avoided a million dollars a year in taxes.
The average CA home is assessed .40 cents per square foot in property taxes. Disneyland in Anaheim pays 5 cents per square foot. Their annual income? $42,278,000. The average annual household income in CA is $61,635. In 2016 Disney’s net income was $9.3B.
There are other ways to be reassessed, such as a remodel, but even then a rate increase is capped at 2% of the increased value per year. The current benefit for businesses such as Disneyland is they don’t move or sell, and the value of the property is never reassessed.
The proposed changes to Prop 13 seek to change legal inequities such as these. If it gets on the ballot and is approved, Disneyland’s property taxes would increase by $1.3M—about 0.000139% of their net income—while a homeowner’s tax would stay the same. Overall, California could receive between $6B and $10B in additional tax revenue.
That’s important because property taxes are the main way we pay for schools, and basic services such as fire and police protection, community services such as libraries, health clinics and trauma centers, public transportation, roads, bridges and parks. All of those services are funded by property taxes and in case you haven’t noticed—services have been cut all over California due to limited funding for years.
Roughly 40% of property tax revenue goes to K-12 schools and community colleges and 60% goes to the community services mentioned.
Schools are a good example of how this has affected California. In 1978 when Prop 13 passed, CA schools were ranked #7 nationally. The website 247wallst.com gave California a D+ grade in 2015 with per-pupil spending at the sixth lowest in the nation.
Making up the difference in funding lost by Prop 13 is an ongoing problem for the State. Most of us have noticed many cities, counties, and special districts have had to raise fees or find new income sources and services to tax. The other option is to pass statewide school bonds; such as Proposition 51 in 2016. Even if such bonds are passed, however, are they the best method?
Bonds have to attract investors. Because investors need to make a profit, bonds are not structured simply to fund schools or community services the most economical way. They have to pay investors back. The cost to pay back Prop 51 bonds to investors was $17.6 billion. The amount that went to schools was $9 billion. Interest paid to investors was about $8.6 billion.
It was the first bond measure related to education to be passed in California since 2006. Compare that to $6B–$10B a year with 40% going to education—well, there’s no comparison.
At best, the bond system of financing answers the question, “how do we make our tax dollars go half as far as they could?”
Who is affected—and how—by these proposed changes?
Changes for those who own homes—none.
Changes for those who rent homes—none.
For those who own apartments—none.
For those who rent apartments—none.
For those who own agricultural properties—none.
For small businesses—the personal property tax for fixtures and equipment will be eliminated. There will be exemptions for small businesses.
The properties listed above will be reassessed when sold with the value based on the assessment, not the sales price.
For other commercial and industrial businesses, properties would be reevaluated every three years and current market value would determine the value for tax purposes. The tax rate remains at 1%.
How many of us are affected? Who pays? A USC study calculated that 77% of the new revenues would come from just 8% of the properties—and all are properties valued at over $5 million.
On the one hand, closing the loopholes commercial and industrial businesses enjoy appears to be a dramatic one. Increasing state revenue by $6B–10B a year certainly is, but not that many businesses will be affected.
The changes in Prop 13 are aimed at bigger business, who simply aren’t paying their share of our infrastructure. Should you and I pay 8 times as much for a fire engine as Disney does? The changes propose to balance that.
Is this another bad-for-business move that California might implement, one that drives more businesses away? Disneyland isn’t leaving Anaheim—or California. Too many people close by. Nice weather. You know if you live here. Moving to Bisbee, AZ to avoid taxes isn’t happening. The oil refineries in Long Beach and all over the state will remain where they are.
One very big reason for that is that California’s one-percent property tax rate is cheaper than any other state. Moving makes no sense. Be prepared to hear that very argument, however.
Overall, proponents of the initiative say it will be good for business and level the playing field. Because they were sold decades apart for much different prices, for instance, one parking lot near the LA Staples Center pays $214 per square foot in property taxes. Another, close by, pays $11.44 per square foot.
In other words, newer businesses, startups, and potentially even new innovative industries and business are penalized. Older businesses are given a competitive advantage. This shows how the present tax system lacks equity.
Appropriately, the coalition in support of getting the proposal on the ballot is called Make It Fair. The California Schools and Communities Funding Act is the name of the proposed constitutional amendment. We should hear a lot more about it, especially if enough people sign a petition this month—in April—to get it on the ballot in November.
To find out more see: schoolsandcommunitiesfirst.org More about the bill and contact information for different areas are listed there. Or email email@example.com.
Members of Make it Fair include the League of Women Voters of California and community organizing nonprofits California Calls and PICO California. They need to collect 585,407 signatures to make the November ballot.
School Bus Photo Credit – Cpl. Shannon E. McMillan.