Jun092015

Does Proposition 13 reform have a chance?

Voters warm to the idea of reforming Proposition 13, but large financial interests would vigorously oppose any attempts to curtail their subsidy.

prop.-13s-howard-jarvisAs we discussed yesterday, California is limited in its ability to tax real estate by Proposition 13. Proposition 13 limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases. Ostensibly put in place to prevent government profligacy during periods of rising real estate values, it’s devolved into a tax-shifting mechanism that greatly benefits owners of commercial real estate.

Proposition 13 tends to limit move-up trading because it requires owners to increase their property tax bill, sometimes dramatically. There are basis transfers and ways around this problem for certain people who qualify, but there is a documented tendency among California home owners to stay in their homes because they end up trapped there by the tax savings. This Wikipedia article has a good discussion of the impact of Proposition 13.

California’s Ballot Initiative System

Realistically, the only way to reform Proposition 13 is by ballot initiative. It’s very unlikely legislators would have the courage to reform the law, assuming they saw reason to do so. According to Wikipedia:

Laws already adopted by the state legislature may be vetoed by means of a referendum. To qualify a referendum for inclusion on the ballot, a referendum petition must have been signed by at least five per cent of the number of voters in the previous gubernatorial election. This is also known as a “petition referendum” or “people’s veto”.

People could vote to amend Proposition 13, but it would be an uphill battle. One of my fellow bloggers (his site is on my blogroll) makes his living as a political consultant who specializes in ballot initiatives. I talked with him about the process and his work, and one thing he told me always stuck in my mind: it’s very difficult to pass a ballot initiative if moneyed interests are on the “no.”

Any attempt to reform Proposition 13 would have big-money opponents. Who would you guess? Homeowners wanting to preserve a good deal? Nope. The big money on the “no” would be commercial properties owners and their various organizations — and they will spend whatever it takes to convince homeowners to vote with them to kill any reforms.

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Support dwindles for changing Proposition 13

A recent poll found slim support for changing the measure to exempt commercial properties from the landmark tax limitations.

By Phil Willon, June 3, 2015

Support has dwindled for removing commercial properties from tax limits imposed by Proposition 13, the landmark property tax initiative approved by voters in 1978, according to a new poll by the Public Policy Institute of California. …

The so-called split-roll proposal to change Proposition 13 would require the regular reassessment of commercial properties while keeping tax protections for residences in place. Fifty percent of likely California voters said they favor the split roll, while 44% said they opposed the idea, the poll found. In January 2012, 60% of voters supported such a change.

The reality is that Proposition 13 benefits owners of commercial properties at the expense of everyone else. Because property taxes are held at 1970s levels on commercial properties, the net operating income is higher than it otherwise would be. This in turn prompts buyers to pay more to own the property and inflates its value. Proposition 13 is a hidden tax subsidy that increases the income and wealth of commercial property owners.

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“This would face a difficult hurdle,’’ said Mark Baldassare, president of the Public Policy Institute. “Most people believe that, overall, Proposition 13 is a good thing.”

Baldassare said tinkering with Proposition 13 drew greater support when the state was in dire financial straits and needed more tax revenue. Now that California’s economy is on the rebound, with state tax revenues higher than anticipated, support has dwindled.

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The poll results also showed a pronounced partisan divide. Among Democrats, 59% were in support of a split roll, while 34% were opposed. Among Republicans, 36% were in support and 56% opposed. Independent voters were evenly split.

Before California voters approved Proposition 13 in June 1978, assessments were based on a property’s “fair market value,” and the skyrocketing housing market was triggering mammoth property-tax increases for many residents.

Proposition 13 limited annual property taxes to 1% of the appraised property value and prohibited counties from increasing a property assessment more than 2% a year. Under the measure, property can be reassessed only after a change in ownership. Under a companion measure approved by voters in November 1978, Proposition 8, properties can also be reassessed when property values fall.

mad_ripoffWhen Proposition 13 was passed, one of the main selling points was to prevent property taxes from rising so people on fixed incomes wouldn’t be forced to sell because they couldn’t afford their property tax bills. However, Proposition 13 was modified by Proposition 8 to allow property taxes to rise after a price crash so state and local governments wouldn’t be locked in to low tax revenues from reassessments during the crash.

Whether by accident or by design, Proposition 8 negates one of the primary selling points of proposition 13, and as lenders work to reflate the housing bubble, California homeowners, including those vulnerable residents on fixed incomes — fixed incomes greatly reduced by the federal reserve’s zero interest rate policy — the most vulnerable residents may be forced to sell — or worse yet, face foreclosure as they must chose between paying taxes and paying their mortgages.

The only thing that’s certain is that homeowners will face higher property tax bills. Will that force seniors to sell or into foreclosure? Back in the 1970s, this fear was enough to prompt the passage of Proposition 13. The lobbyists and campaign managers who want to preserve the benefits for commercial property owners will undoubtedly lie to scare the hell out of seniors to keep the special benefit that hurts everyone except commercial property owners.

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