Massive transition of property taxes from commercial to residential
by Brian Leubitz
First, as something of a preface, let’s just posit that Prop 13 has been an overall disaster for the state. After all, this is a progressive blog. If you want details of how that is the case, well, just use that google box to the left. We have plenty of information about that. You could argue that it did put a reasonable check on property taxes, but it also tossed the baby right out with the bathwater by making the property tax system ripe for the gaming.
And that’s what has happened. As Peter Schrag outlined today, corporations now use Prop 13 as one of the great California tax loopholes, if not the King of all loopholes:
It’s been just a third of a century since the passage of Proposition 13 in June, 1978. In that time few of its offspring have caused more damage than the great loopholes allowing corporations to evade hundreds of millions in local property taxes that they’d owe in any fair and economically rational revenue system.
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In Santa Clara County, the booming Silicon Valley center of high tech, where the proportions were roughly even in 1978, residential property owners now pay about 65 percent of property taxes; commercial property pays 35 percent. In Los Angeles County, where residential property owners carried just over half the burden in 1975, they now pay nearly 70 percent of all property taxes. In Contra Costa County, it’s gone from 48-52 in 1970 to 73-27.
To be clear, you can point to the dramatic outperformance of residential real estate as compared to commercial real estate for part of that. However, there is a lot more than that going on here. Since 1978, the house that you are living in has probably had several owners. Sure, some people stay in a house for 50 years, but for most people, you don’t stay in a home forever. According to the super scientific opinion of one realtor, housing needs change every 5 to 7 years for most families. Meanwhile, commercial property will stay in the same hands for far longer.
Of course, there is that tricky question of ownership. As in, who owns that building if, as Schrag points out, typically more than 50% of the ownership of a publicly traded corporation turns over every three years. If that happened in residential real estate, you would trigger a new appraisal. That is not true with a corporation. So, if a skyscraper has been held by one big corporation since 1978, its appraisal is stuck at a figure tied to its 1978 valuation which likely has very little to do with its current value.
We need to fix this issue, and unfortunately, it will likely take action at the ballot. Asm. Tom Ammiano has been focused on this issue during his three years in office, and he hopes to bring it back in January. But a fix seems just as far now as it did years ago. If we are to really repair our state finances, we have to look at the totality of the system, not just dwell on small chunks. We can’t cut our way out, our pension reform our way out, or even raise revenue enough to solve the problem.
Arnold Schwarzenegger was found of rhetorically putting everything on the table. But with his recent pension reform proposals, Gov. Brown is doing far more in terms of action than Arnold was ever willing to discuss. If we are to really discuss pension reform, we need to also discuss how we fix the other, more badly wounded, systems of state government.
You would hope this would be a REAL Populist issue on the Ballot
Unfortunately, it would take a 2/3rds majority to modify Prop 13
Reassessing commercial properties would be perfectly equitable….. but would 2/3rds of the voters agree ?
I think Hioward Jarvis was a real estate Slum Lord, owning multiple apartment buildings
Why should commercial properties be taxed the same as private properties ?
Right and Wrong don’t always translate in the ballot box
How about an Oil Severence tax ?
It hasn’t hurt Texas or Alaska
To be clear, you can point to the dramatic outperformance of residential real estate as compared to commercial real estate for part of that. – Brian
This is the much bigger issue. The housing bubble, which those lovely big government agencies Fannie and Freddie gleefully inflated, has caused this imbalance more than anything. However as properties continue to be revalued over the coming years that ratio will drop. Commercial real estate, even that which is corporate owned, is not far off from it’s proper valuations even taking some of the issues with Prop 13 into account.
Commercial properties, even if revalued under current metrics, would not increase that exponentially. Most commercial properties are reassessed when major additions/renovations are done which is very common. Even if the same corporation has owned a mall since 1980, it’s unlikely there paying the 1980 assessment (plus the percentage increases that Prop 13 allows). Properties are developed and re-developed at a rather high rate. There is know windfall of tax revenue to be gained.
Beyond that it’s a political loser. You are never going to get a 2/3rds vote to change Prop 13. This is analogous to the Republicans thinking they could privatize Social Security. Reality and history strongly suggest it is a fool’s errand.
Looking at the above comments, I could have sworn that while prop 13 makes it a 2/3 vote to raise taxes it could still be gotten rid of with a simple majority vote. Is there something I missed?
California has a spending problem, not a taxing problem.
The beast that is California’s government has as much as money as it did pre-prop . 13. Sure, the source of revenue has changed, but that’s besides the point.
If you want to shift the source of revenue in a revenue-neutral manner that would be acceptable, but not to give more money to feed the leviathan.
Prop-13 was challenged in court several times in several ways. It was finally upheld by the U.S. Supreme Court in 1992. I don’t know if the inequity of a simple majority imposing its will on future super-majorities was ever questioned in court. Prop-13 itself did not achieve the 2/3 threshold, passing in 1978 with only 64.8% of the vote.
I think voters would warm to the idea of revising Section 4. People in this state do vote for local taxes for specific expenditures… and the Jarvis Jihad is screaming too loudly. But it’s heartbreaking to see a $90/year, term-limited, classroom-spending-only school parcel tax go down with 65% support.
Prop 13 did have a purpose; before it was passed, every homeowner was taxed based on the sale price of their house as determined by an assessor whose interests were in ranking it as high as possible. If you lived in a modest old house and the most recent thing to sell in your neighborhood was an upscale property, your taxes soared. And if you were forced out and had to sell your property for the real market value, which was much less, tough luck, no refund. You were essentially taxed based on the highest recent sale in a wide radius, regardless of what was relevant. Fashion came into play too; my parents bought a house in a then-unfashionable beach town precisely because it was what a pipefitter could afford – out away from the prosperous communities. What that community became a hip town and prices soared, they were faced with taxes as though they had moved to a rich neighborhood. They hadn’t, a rich neighborhood had come to them. They were faced with being thrown out of a place they had lived in for decades because of a demographic change that did not boost their income by a dime.
Commercial property does earn income that increases with property value and should be taxed at market rate, and I am all for enacting laws to make that happen. Retirees or people on moderate incomes should not be penalized for demographic shifts they could not foresee, be uprooted from neighborhoods they have helped build because someone with more money than sense moves in down the street. I will work to gather signatures and enact a law that taxes commercial property, but I will fight a law that throws more homeowners out due to capricious and unpredictable taxes.
I can think of two specific industries that own a lot of property, but do not neccesarily have a lot of income.
Industrial parks and auto dealers with large lots.
Furthermore, the price/rent ratio has been out of whack in California for a while in the sense that increases in the market value have not lead to corresponding increases in rental income.
Repeat after me. California does not have a taxing problem, it has a spending problem.
The GOP is again banging the drum for funding government via regressive measures such as a flat tax on income or sales taxes. These are just gimmicks. We need to reframe the debate and introduce and then push the idea of an all property tax, or a wealth tax which would include not just real estate, but all gross assets, not just net assets, ie. investments, cars, jewelry etc. It would not only be a great counterpoint to the the sales tax BS but it could be an effective way of funding government that the middle class could broadly support. It could be developed as an adjunct to the property tax and if necessary, leave 13 intact.