The Facts
Here is what has happened because of Proposition 13:
- Current property tax laws are disproportionately burdening homeowners.
- Commercial property owners are not paying their fair share of property taxes.
- Local public services are being consistently deprived of tax revenue adequate to provide the level of services you want and need.
HOW PROPOSITION 13 CAME ABOUT: In the early 1970s, property values in California were spiraling due to a changing market and an increasing population needing homes. These increasing values led to spiraling property taxes. High property taxes were hard on many residential property owners, especially retired persons and others on fixed incomes. In 1978, with legislative inaction, and some people actually fearing the loss of their homes, two conservative businessmen, Jarvis and Gann, drafted an initiative that was put on the ballot as Proposition 13. The voters passed it.
WHAT PROPOSITION 13 DID: Proposition 13 and certain legislation enacted in its wake fundamentally changed California’s property tax system:
- It eliminated annual reassessment of property at market value. Instead, it set 1975 as the “base year” on which all property assessments be based, and specified that the assessed value could increase no more than 2% a year, until the property was sold. These provisions apply to both residential and commercial property owners.
- Legislation was then passed specifying that property can only be reassessed when ownership changes by 50% or more. Commercial property owners have benefited from rules that allow them to avoid triggering the 50% “change in ownership” provision. This provision applies to a situation in which one party takes control of more than 51% of the ownership interest in a property. (Sections 61-64 et. seq. of the Revenue and Taxation Code.) Thus, wealthy individual majority shareholders of another company can purchase shares of an existing company and actually takeover the existing company without triggering a change of ownership would as long as none of them owns more than 51% of that company. In 2001, 12 shareholders of the E. and J Gallo Company acquired the shares of 20 shareholders of the Martini Winery, with the name changing and the deed changing, but since no shareholder bought over 50%, no reassessment took place.
Proposition 13 and the legislative changes that followed drastically reduced the property tax on all property, both residential and commercial. In the process they caused a huge drop in tax revenue for local government.
LIFE AFTER PROPOSITION 13: Profound changes resulted after Proposition 13 passed:
- As indicated, revenues declined for all levels of local government. Localities suffered a loss of approximately $6 billion of property tax revenues in the first year.
- Local services including hospitals, police, firefighters, community colleges, universities, and public transit suffered from unavoidable cutbacks.
- School funding began to drop until by 2005, California ranked 46th in the U.S. in per pupil spending.
THE PROBLEM: The most serious problem is that Proposition 13 applies the same rules to both commercial and residential property. However, because commercial property changes ownership less frequently than residential property, its taxes stay low compared to residential property. Additionally, legal loopholes allow commercial owners to avoid transfer of ownership, thereby avoiding reassessment and tax increases.
Since residential property changes ownership more frequently than commercial property, residents are now carrying 25% more of the tax burden than they did when Proposition 13 was enacted.
The loss of revenue has resulted in cutbacks of local services such as libraries, police, fire fighters, public transit, and schools.
This bias in the tax system also distorts land development and contributes to sprawl.
THE SOLUTION: Placement of an initiative on the statewide ballot which if passed by the voters will establish a “split-roll” property tax system in which non-residential commercial property will be assessed periodically at market value independent of change of ownership. There will be no change in the method for taxing houses, condominiums, and apartment buildings. An estimated addition $6 to $8 billion of tax revenue for local public services will be raised each year.
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