In the 40-plus years since Proposition 13 was passed in California to reform the state’s property tax structure, there seems to have been no end to the attempts to reverse it, alter it or simply work around it.
Despite the decades long attempt to totally scrap it, Prop 13 has withstood all onslaughts as California voters have stood firm in keeping the 1978 measure on the books as it was originally written. Those who have tried and failed to reverse the electorate’s decision are now taking a different tactic: pitting the average homeowner against businesses in an attempt to alter the law to gain more revenue for the state.
Under Prop 13, all real estate was assessed at 1976 levels and then taxed at 1% of that appraised value – plus an increase of not more than 2% annually. The only major reassessment under Prop 13 comes when there is a transfer of ownership – the market value (sales price), for tax purposes, then becomes the assessed value. Over the years, critics have pointed out that the property tax system has become unfair because those who have kept their properties long term are paying a much lower tax rate than recent purchasers. Proposition 13 was enacted for that very purpose. During the 1970’s rapid appreciation in property values caused the tax burden to become so onerous for long-time owners that they could no longer afford their property taxes. Prop 13 established a degree of predictability for owners who knew that if they sold and bought another property, the tax could increase dramatically; but if they held on and did not change ownership, the 2% annual cap would help keep property taxes in check.
Despite the many attempts to alter or repeal this law, it has become evident that the average homeowner – including many long time owners – are not going to readily vote themselves a massive increase in property taxes that few can afford. The current effort to derail Prop 13 will not only to split the tax roll, but will split the voters into economic classes. This new initiative has qualified for the 2020 ballot in California.
Although homeowners will retain their current status under Prop 13, commercial and industrial property owners will have their properties reassessed at full market value at least once every three years. Proponents of the measure hope to raise an additional $12 billion annually in commercial property taxes during the first several years, according to some estimates.
“How long should we allow commercial properties to be assessed at 1975 values, costing local governments and schools billions of dollars?” said Lenny Goldberg, a veteran critic of Proposition 13 who helped craft the new initiative. “That’s a ridiculous, outdated, irrational system which causes damage in many different ways. We have this huge hole in the heart of our tax system.”
What seems more irrational is the idea that you should tax any business whatever amount you think you can. Businesses have owners and shareholders, and are in the business of making money so they can stay in business. Additional costs like this will be passed on to customers. Most commercial leases pass on costs like property taxes as an expense to tenants, and they will in turn pass the costs down to customers. This raises costs for everyone.
California has earned a reputation in the past few years as a state that is expensive, over-regulated and anti-business. An increase in property taxes like this will drive even more businesses out of state, taking jobs with them. Toyota’s North American headquarters, located in Torrance since 1957, left Southern California for Texas a few years ago, and its thousands of jobs went with it. The list of companies leaving or planning to leave California continues to grow.
As a practical matter, changing the tax system is something that this state is ill-equipped to handle in an efficient manner. The California Assessors Association has estimated that the cost of implementing a new property taxation system could cost the state $470 million a year for 10 years, and that for many years the costs of the change-over could exceed the projected additional revenue, resulting in a net loss for the state. In Los Angeles County, for instance, the assessor’s office has said that the department couldn’t implement the change in three years’ time.
Then there is the basic question of how these additional tax revenues, should they materialize, will be used. In November 2017, California instituted a controversial hike in the state’s gasoline tax of 12 cents per gallon, which has brought in $3 billion in new revenues to improve and repair our roads and infrastructure. So far, the state has spent only $121 million of this revenue on bridge and culvert projects. And what do we have to show for it? According to a federal report, the number of California bridges that are in “poor” condition has increased from 1,204 to 1,812 during this time and the number of bridges in “good” condition has decreased from 16,788 to 14,779. An additional 5.6 cents will be added to the gas tax this summer.
It might be time for Californians – especially those charged with running this state – to start implementing more efficiencies and living within the current budget, rather than treating property owners and businesses, who are making California’s economy a robust national leader, as some kind of endless piggy bank.
Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call (949) 457-4922.