WASHINGTON - A coalition in California is pushing to amend the Golden State's Proposition 13 property tax limits, which for decades have centralized budgeting power in Sacramento, to collect more from commercial properties.
The group behind the effort is called Make It Fair, a union-led coalition that includes teachers and firefighters seeking to allow local governments to extract more property tax revenue from commercial property owners.
The 1978 state constitutional amendment known as Prop. 13 limits California's property tax collections by setting a base property tax rate of 1% of a property's assessed value, and capping increases in assessed value to no more than 2% annually unless that property changes hands, at which point it is reassessed at the sale price. (The tax rate for most properties is higher than 1% because voters can approve additional levies, typically for local bond measures.)
Removing those assessment limits for commercial property such as office complexes could raise $9 billion a year, Make It Fair estimated, citing recent research from the University of Southern California.
California's approach to property taxes stands in contrast to the practice in most of the U.S.
A 2013 study by the Urban Institute/Brookings Institution's Tax Policy Center noted that "most other states set the property tax base at either the fair market value or some fraction of fair market value."
The effect of Prop. 13 has been to drastically reduce the capability of local governments to raise revenues and shifted much budgetary responsibility - especially for public schools, to the state, experts said.
"It's sort of ironic that the effect of Prop. 13 has been to enlarge the role of state government," said Gabriel Petek, Standard & Poor's primary California analyst.
Prop. 13 originated the same way Make It Fair is likely to proceed if it wants to change it: the California ballot initiative process.
It takes 807,615 signatures to put a constitutional amendment on the statewide ballot for voter approval.
Prop. 13, riding a wave of anti-tax sentiment stirred by taxpayer advocate Howard Jarvis and stoked by property tax bills that rose sharply in the preceding years amid soaring home prices, won more than 64% of the vote. The measure slashed property tax rates by nearly 60%, according to the League of California Cities.
Supporters of Prop. 13 from the 1970s until today have said that the measure protects taxpayers from runaway tax increases.
Californians to Stop Higher Property Taxes, a group dedicated to protecting Prop. 13, includes a number of business and housing groups such as the California Chamber of Commerce and the California Association of Realtors.
Former California Treasurer Bill Lockyer, now a lawyer at Brown Rudnick in Orange County, declined to take sides in the debate but acknowledged that the passage of Prop. 13 provided relief to homeowners who faced rapid tax increases as their neighborhoods boomed.
"The good result was that a lot of people were able to stay in a home that would have otherwise become unaffordable," Lockyer said.
Make It Fair argues that Prop. 13's assessment caps are abused by corporations and other wealthy commercial property owners, who find ways around having their properties reassessed, allowing them to pay low taxes on property that may be extremely valuable.
Under legislation associated with Prop. 13, if more than 50% of ownership is transferred to one new owner, the property is then re-assessed, the Make it Fair coalition says on its website. In many cases, the coalition says, commercial property owners break up the ownership of a piece of property across several sub-corporations so that no one sub-corporation owns more than 50%, which allows new owners to pay taxes based on the old assessed value.
Lockyer said he was aware that such tax-dodging did take place at times.
"There have been property transfers that were structured in a way as to avoid reassessment," Lockyer said. "That strikes me as abusive."
Petek said the most enduring legacy of Prop 13 is on public K-12 education funding.
"It's primarily a story about schools," he said.
A different provision of the California Constitution requires a minimum funding level for public schools, which the California general fund has to backfill if school districts don't meet it through their property tax collections, Petek said.
Unlike cities and counties, the state government derives most of its revenues from income and sales taxes. Prop. 13 thus restricts the flexibility of the governor and state legislature to manage California's finances, Petek said, because that required education spending represents the single biggest expense for the state general fund every year.
Lockyer said that after Prop. 13 shifted the school funding responsibility to Sacramento, with that came an inevitable tendency for the state to start taking a more active role in the operational policies of the school system.
Petek called Prop. 13 a political "third rail," meaning that most politicians consider it too controversial to touch.
While the "split roll" idea of treating commercial and residential property differently, as the Make It Fair group is pursuing, might be appealing to those who want to raise more revenue at the local level without making housing less affordable, Petek said some would undoubtedly view the move as a "slippery slope" to other tax hikes.
"They'll fight any encroachment on it," Petek said.
Karen Krop and Stephen Walsh, analysts at Fitch Ratings, said Prop. 13 is hugely influential on how they view California and said they are skeptical that the effort to uncap the commercial property tax limits would meet with success.
"Prop. 13 is the answer to pretty much every question about public finance in California," Walsh said.
The two analysts noted that there have been more than a dozen attempts to alter Prop. 13 in this way over the years, but said if it the latest effort beats the odds and is enacted, they would probably consider it a positive development for local governments who could see their revenues go way up.
"It would affect the locals more than the state," Krop said.
Sources said the petition signature process is the only realistic way for Prop 13 to change.
The California legislature can also propose a constitutional amendment, but that would require a two-thirds vote of both chambers before it could get to a statewide ballot.