Prop. 13 Faces Biggest Challenge Yet With Prop. 15. Is This the Tax Reform California Needs?

If Proposition 15 prevails at the ballot next month, that’s anyone’s guess.

Nonetheless, the measure to reform how property is taxed and money is distributed is the closest anyone’s gotten to touching the “third rail” of California politics—despite nearly 40 years of attempts.

1978’s Proposition 13 froze property tax assessments at purchase, allowing for small annual tax increases and ensuring that people—particularly those on fixed incomes—wouldn’t be taxed out of their homes as property values soared.

That made the law untouchable.

Prop. 13, however, also generously applied the tax break to non-residential properties, from towering office buildings to golf courses. Prop. 15 would change that by mandating that commercial properties be assessed every three years and taxed at their current fair market value. The proposition, known as “Schools and Communities First,” would not change how single-family houses, condos and apartment buildings are assessed.

Some critics, including Prop. 13 reform proponents, believe Prop. 15 contains a poison pill for the Bay Area: it would export Silicon Valley money out of the region. Progressive voters who may be inclined to support Prop. 15 because they believe in property tax reform may not know that’s what they are voting for, said Jennifer Bestor, volunteer research director for the nonprofit Educate Our State.

“If you understand property tax allocation—and this [measure] came out of L.A., and those folks do—the way that it all falls out is actually they [Los Angeles] end up also being the biggest taker from the statewide school pot,” Bestor, who was speaking on behalf of herself and not Educate Our State, said. “This whole thing is meant to extract money up here and ship it down there.”

Advocates for Prop. 15, known as Schools and Community First, say it’s not that simple.

While money will move between counties if the measure is approved, the distribution is meant to send money to the neediest schools and equalize education across California, which ranks 41st nationwide when it comes to K-12 per-student spending after adjusting for the cost of living, according to the California Budget and Policy Center.

“The state, especially Silicon Valley, has created incredible wealth, and every single school in the state will benefit,” Alex Stack, communications director for the Schools and Community First campaign said in an interview. “We are fine with ESL learners and foster kids and low-income students getting a bit more resources.”

Stack says that with Prop. 15, each school will be guaranteed at least $100 more per child annually than they are guaranteed today, marking a win for schools across the state.

Bestor says that after crunching the numbers, she’s not convinced that parents and school districts in the Bay Area will deem the proposition a win.

“When people feel like they're spending so much on the schools ... and then it doesn't get there, it ruins our civic faith in our schools,” she said.

The proposition promises to bring between $6.5 billion and $11.5 billion to schools, community colleges and local governments in coming years as properties are reassessed.

A “slim majority” of residents in the state lean toward a yes vote on Prop. 15, according to a mid-September Public Policy Institute of California poll.

Of the money that would be raised by Prop. 15, about $1.2 billion of it would come from Santa Clara County, the state’s second-biggest revenue generator next to Los Angeles County, according to a study by the University of Southern California.

As has long been the case for property taxes, 40 percent would go to schools across the state, and 60 percent would fund other local government expenditures, like infrastructure, fire safety and homelessness initiatives.

Santa Clara, San Mateo and San Francisco counties, with their concentrations of tech titans, would retain a large chunk of their property taxes but also contribute hundreds of millions of dollars to other counties. Santa Clara County, for instance, would keep about $679 million of the approximately $1.2 billion Prop. 15 would generate locally, according to proponents of the measure.

While several Prop. 15 advocates said they didn’t know about the outflow of funds—suggesting that Bestor’s concern about uninformed voters may not be unfounded—each maintained that they supported the measure, irrespective of the spending plan.

Walter Wilson, a principal at the Minority Business Consortium, supports the measure but said in a recent interview that he didn’t know money raised in Santa Clara County wouldn’t all stay in Silicon Valley.

Even so, he said opponents have not shown that the measure will negatively impact businesses or communities, and he wants large companies to pitch in more. “The whole idea is that this is not the time to raise taxes on taxpayers, but this is the time to raise corporate taxes on corporations that have been getting away, for … 40 years, with billions of dollars in taxes that should have gone back to our communities and schools,” he said.

MOVING MONEY: Jennifer Bestor, volunteer research director for the nonprofit Educate Our State, says Prop. 15 would hit Bay Area companies the hardest, but benefit Southern California schools the most.

Big Bucks

Indeed, the promise of new funding for those institutions comes as a pandemic-induced recession creates deficits for cities across the state and as schools try to embrace distanced learning with shrinking budgets.

Even the measure’s critics acknowledge that’s likely to make the proposition look even more appealing.

“I think there’s going to be some real pressure on local governments that are seeing their property tax and their sales tax not come in this fiscal year and be dramatically reduced to push for that [measure] as a backfill,” former Assemblywoman Catharine Baker, a special counsel at San Jose law firm Hoge Fenton who doesn’t personally support Prop. 15, said during a real estate panel in April.

Advocates estimate that about 90 percent of the money generated by Prop. 15 would be paid by 10 percent of the state’s largest companies, including Chevron and Disney. In the Bay Area, some of Silicon Valley’s large technology companies would likely find themselves with a bigger tax bill than they’re used to under Prop. 15.

Santa Clara-based Intel, for instance, has owned its Santa Clara campus for decades, meaning its tax rate is only marginally higher than where it was initially set, despite the gains in land value throughout the region. But that’s not the only commercial property owner benefitting from Prop. 13, according to the 2019 Santa Clara County tax roll.

About 24 percent of office, retail and industrial buildings in Santa Clara County were purchased before 1989, but they make up 15 percent of the total assessed value on those types of properties. Meanwhile, the 44 percent of commercial properties purchased after 2008 make up 61 percent of the assessed value for such properties across the county.

The measure also takes great pains to consider small businesses, proponents say. Prop. 15 includes an exemption for landowners with a property portfolio across the state valued at less than $3 million. It also cuts the personal property tax, or the assessment for all of the stuff inside a building, for companies that own equipment worth less than $500,000.

If the majority of a property is leased to small businesses, that building won’t be reassessed until 2025, allowing a grace period before those leases would be impacted by rising costs. “The phase-in is very important because we're not talking about small businesses that will be affected at the time when they could least afford it,” Stack said.

The Legacy of Prop. 13

Previous efforts to amend Proposition 13 have failed to gain momentum in large part because, as in national politics today, the two sides of the argument don’t seem to agree on the basic facts.

On one end of the spectrum, advocates say Proposition 13 is broken, arguing that it creates severe inequity across the state for all property owners, exacerbates the housing crisis and contributes to the under-funding of local school systems.

From that position, the only option is to analyze the best fix—and fast.

But on the other side of the issue are those who say that Proposition 13 is not only not broken, but doing exactly what it is supposed to do: create consistency for government budget planning, allow all property owners to make investments with certainty and encourage businesses to stay in California.

In other words, if it isn’t broken, don’t fix it.

“It’s good for everybody to know what your taxes are going to be when you buy property,” said Susan Shelley, vice president of communications for the Howard Jarvis Taxpayers Association. “It’s true that people who bought many years ago have a lower tax assessment than their neighbors may, but everybody who buys has the certainty that they will not be taxed unexpectedly out of their property.”

When it comes to Prop. 15 as a means to change the current property tax law, critics of the ballot measure say it is flawed because even if major corporations do pay most of the Prop. 15 tab, no one in the state—including residents—will escape the ripple effects of increased taxes for property owners.

For instance, many small business owners are renters with leases that are written in a way that would pass through new property tax costs, through a structure known as a “triple net” lease. That means even if the landlord is a large property owner, its renters could be the ones to pay for the increased taxes. Higher rent may mean costlier goods at local shops—or worse, according to Edwin Lombard, president and CEO of the California Black Chamber of Commerce.

“You just took their very narrow margins that they are operating on already and you made those even smaller,” he said in a recent Hoge Fenton-hosted panel. “In many cases, these businesses are not going to be able to exist, and will be forced to close their doors.”

Opponents also say the pandemic and resulting economic fallout is a big reason residents should be wary of a measure that increases business taxes.

But Wilson of the Minority Business Consortium is quick to push back. He doesn’t believe property tax increases for some landowners will trickle down to small businesses. Instead, the market will find equilibrium as small businesses look for lease deals, he said.

STATE’S SIDE: Gov. Gavin Newsom backed Prop. 15 last month, saying it represents ‘California’s progressive fiscal values.’

Feasibility Study

Another unlikely opponent of the measure is Santa Clara County Assessor Larry Stone, who has never been on the popular side of the debate over Proposition 13, though he’s been enforcing the law for the past 26 years.

When Prop. 13 passed in the ’70s, the then-Sunnyvale councilman staunchly opposed it, and he kept his 42-year-old “No on 13” button as a political souvenir. But residents anxious about rising property values were unconvinced.

Prop. 13 taxes property at 1 percent of its value and provides for a 2 percent increase in property value annually. Stone acknowledges that it serves its intended purpose: it stopped Californians from being taxed out of their homes. But he says its flaws are all too apparent four decades later.

“On the residential side, that was very legitimate,” Stone says. “The way they treated it by installing a 1 percent tax rate universally, forever, has created just this tremendous disparity today. … You could not create a more unfair property tax system than we have in California.”

Stone has advocated openly for Prop. 13 reform—a brave or foolhardy move, depending on who one asks—as the law quickly became the proverbial “third rail” of California politics. For most politicians, touching Prop. 13 has been considered career suicide.

But in the midst of the 2020 chaos—a contentious presidential election year, a growing housing crisis, a devastating pandemic dragging down a previously booming economy and an unprecedented West Coast wildfire season that has covered communities in ash—this is the year in which Californians seem most willing to consider a change—even to laws that were once untouchable.

Some politicians who may not have dared to confront the issue before are also throwing their weight behind the idea but, ironically, not the one most thought would jump on board with such a reform: Larry Stone. The longtime Prop. 13 opponent says the measure would not be hard, but “impossible” to implement.

“They're trying to fix, with this one convoluted ballot measure, 42 years of inequity,” he said. “You can’t do it, and do it fairly.”

Forging Ahead

STONE’S THROW: Santa Clara County Assessor Larrry Stone has emerged as an unlikely opponent to Prop. 15. (Photo by Greg Ramar)

The arguments for and against Proposition 15 are nuanced, and rely on a bit of guesswork about what will happen if the measure is passed.

But all of those arguments are moot for Stone and the California Assessors Association (CAA), which in June came out against the measure. The association commissioned a study that estimates the proposition would cost more than $1 billion to implement before any revenue rolls in and says the law would be extraordinarily challenging to put to work.

Stone and the CAA question whether counties can staff up fast enough to do the assessments that would be required by law and tackle an inevitable influx of appeals that would follow. They also note how challenging it would be to track property values and employee counts across the state as required, and say that some counties—particularly rural ones—may lose tax revenue as a result of the measure.

Even so, if voters want Prop. 15, they’ll do their best, the association said.

“The assessors of California are committed to fair and impartial implementation of the Constitution and the laws of the State of California, and, as always, assessors will faithfully implement the will of the people,” the letter states.

Advocates for the measure say they’ve taken into account those concerns by redoing the ballot language to lengthen the time frame for assessors to reassess properties. They maintain implementing the law will be possible and profitable.

“That’s why we refiled [the measure], and we made sure to do that for a longer period of time and not require that [it] even has to be fully implemented until 2026,” Stack said. “I could get into the details of this stuff, but at the end of the day, this is how the rest of the country does it.”

Not every assessor feels as passionately as Stone. Stephen Vagnini, Monterey County’s assessor, acknowledges the challenges of the bill, but says his office is prepared either way. “There’s obviously some flaws in the language, which makes it very difficult and … the big challenge that everyone says is,‘Well we don’t have enough commercial appraisers to do the work,’” he said. “But if the voters tell us to do it, we have to do it, and personally, I don’t take positions on initiatives.”

Vagnini said he knows assessors who are preparing under the assumption that the proposition will pass while others have barely given it a thought because they are sure it will fail. In Alameda County, Assessor Phong La is among the more optimistic, saying that while the measure would present a big challenge, if “given enough time and enough resources—and those are the big if’s—then I can implement it.”

In less than a month, after the Nov. 3 votes are tallied, those assessors will know whether or not the state will reforge that political third rail into something different, a new form advocates might call elegant—and critics call fragile.

Initiative supporters include Working Partnerships USA, the Chan Zuckerberg Initiative, SOMOS Mayfair, California Teachers Association, SIREN and the League of Women Voters. Opponents of Prop. 15 include the California Business Roundtable, California Taxpayers Association, California Chamber of Commerce and the primary driver for the initial 1978 property tax law, the Howard Jarvis Taxpayers Association.

Irrespective of positions, one of the most daunting questions for both sides of the issue regards the unprecedented momentum to reform Prop. 13 today.

Some Prop. 15 opponents say the measure should be shelved so the conversation can continue later, when small businesses aren’t already struggling and buckling under the weight of a pandemic.

But those who think Prop. 13 needs reform—including Stone—say losing momentum during a critical year when voters are expected to turn out, is a devastating prospect.

“The sad thing is that if this goes down and this fails, politically it’s going to be a while before something more realistic can happen,” Stone said. “That's the problem with Proposition 13, is that they put it in the California Constitution, so every time you try to change something, you’ve got to go to the ballot.”

Janice Bitters is managing editor for Metro Silicon Valley. Email tips to [email protected]. Follow her on Twitter at @janicebitters.

14 Comments

  1. Yes, the answer to all of our ailments is to just raise taxes!

    What a novel concept. Are you not aware that the middle class is fleeing the state in droves?

    Schools and Communities First is another lie. How much money are we shoveling into education that is failing our students? If we give them a few billion more, will test scores increase?

  2. Oh my gosh, has anyone ever heard of “slippery slope?!” It starts with non-residential and then migrates towards residential.

  3. You know business don’t pay taxes, right? I mean they write the check but business’ get all their money from the people who pay for their products or services. So the public pays for these tax increases indirectly, which is why politicians love this kind of tax, because the public “thinks” the business is paying it. They don’t realize they are actually paying for it. When they go to buy their next G.I. Joe with the Kin Fu Grip it will cost them more. Same with their food, their clothes, cars, repairs, rent, etc… on down the line.

    Just say NO to new taxes

  4. How about raising the homeowners exemption from $70 to something meaningful? The exemption has not changed.

  5. Janice: You probably don’t remember me, but we had some skirmishes online about some of your articles when you were at sjspotlight (me complaining your articles there slanted left, you refuting). I must acknowledge that your move to sjinside has allowed your strong journalism skills tore-emerge: this prop 15 story is smart, well-written, balanced, and fun to read. Your move to sjinside is great for your portfolio and local readers. Good hire, sjinside, good move, janice.

  6. LOL!
    The death nail for GOOGLE, FACEBOOK, and TWITTER types or the end of Silicon Valley?
    Driving the money giants out of California and off to greener pastures in other states or foreign country’s. Well I’m sure the homeless, deranged, BLM’s, ATIFA, Pot Farmer’s and illegals will step up to the plate and shell out ton’s of new tax money. Someone in this state should hire AOC to explain tax and spend economics to the idiots running Sacramento. LOL !

  7. Prop 13 drove me out of the state. I wanted to upscale a bit on my home a few years back but ultimately decided I just couldn’t countenance paying 3,4,5 times what my neighbor would be paying for a similar house. So, I moved out of state and I’m happy.

    Never understood the argument that people could be “taxed” out of home that are rapidly appreciating in valuation. If your home is increasing in valuation, you are gaining equity and can extract value to pay more taxes to cover for it–even if you’re a relatively low income senior (the poster child for prop 13 I know). They system now is crazy, I know a couple of ’70s HS classmates that inherited parents homes are are paying about $2K annually on $2M homes and have sent their children to local schools and use city services.

  8. XBR976,
    Prop 13 didn’t drive you out of the state, it kept you here till the grass became greener else where in other state’s that don’t over spend. You get a lot more bang for your tax dollar buck when your not supporting millions of non citizens in sanctuary cites. When your state actually runs on a balanced and sustainable budget. When your members of government employee unions pay into their own pension programs as much as the private sector does, and is not dependent on taxpayer to bail out politicians that over promise free money to everyone if you will just vote for them.

  9. XBR976,
    AND by the way don’t vote for those same stupid policy’s in your new state or you’ll be looking at moving again!

  10. Costs roll downhill. You, I mean dumbass, poor silicon valley rubes, will pay this tax. The education system in California is auto-sadistic, you keep torturing yourselves.

    When will you learn?

    Do you want to?

    When will you grow tired of this?

  11. For progressives, tax money is just mythological unicorn dust.

    Simply opining that taxes ought to be raised and the rich ought to pay their fair share is, in progressive minds, the same as a having an actual treasure chest full of gold doubloons.

    Not that long ago, Democrat Party contenders for the presidential nomination squabbled over which one of them more fervently supported “Medicare for All”, notwithstanding the fact the cost would be many times larger than the U.S. economy.

    If Bernie Sander’s fantasy kingdom has a thousand workers, and they are producing food, and he assigns three thousand workers to provide “free health care”, who’s going to produce the food? Sounds like another “Ukrainian famine”.

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