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California’s Property-Tax Holy War

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from the magazine

California’s Property-Tax Holy War

The battle to weaken Proposition 13 will determine the Golden State’s future. Summer 2020
California
Politics and law
Economy, finance, and budgets

California’s Proposition 13, the successful 1978 initiative that limited property-tax increases, has long been considered the third rail of the state’s politics. Former governor Jerry Brown, coasting to victory in the 2014 gubernatorial election, called the constitutional amendment “a sacred doctrine that should never be questioned.” But now a coalition of public-sector unions, school districts, progressive advocacy groups, and Democratic politicians are betting that they can overturn at least half of Prop. 13, in the process enacting a huge tax increase on state businesses during a steep recession. Theirs promises to be a hard-fought battle, pitting rich unions against well-financed business groups—a contest that will prove decisive for California’s future. If the union-led effort succeeds, it will show that the state has made a pivotal, if not permanent, move to the left, and the rest of Prop. 13 will likely be the progressive movement’s next target.

Prop. 13 limited the amount that commercial and residential properties could be taxed in California to 1 percent of value. Crucially, the constitutional amendment also restricted reassessments of value to when a property changes hands, or when construction enhances the value of a home or commercial property. Several trends encouraged public support for the proposition, including the rapid growth of California government, skyrocketing local taxes, and a series of state supreme court decisions that redistributed property taxes in some wealthy districts to poorer areas. Watching property assessments soar during the inflationary 1970s, older homeowners strongly supported the initiative.

Though Prop. 13 has been a boon for some owners, especially those who have retained their properties for a long time, it hasn’t restrained the overall growth of taxes in the Golden State, which ranks 11th in total tax burden on individuals, in part because of its steeply progressive income tax—the highest rate in the nation. The Tax Foundation also rates California as the third-worst business climate among states because of its combined tax burden—including its corporate, sales, and personal income taxes. When you consider the state’s heavy-handed regulations, too, the business outlook already looks glum. According to a survey by Chief Executive, CEOs rate California the nation’s worst business environment.

Yet businesses are the target of this new ballot initiative, too, which would create so-called split rolls in California, with commercial properties getting assessed based on market value, while residences would continue to be protected from increases until owners sell them. Advocates note that businesses tend to hold on to their properties longer than most homeowners, giving some a huge tax break because they’re paying taxes based on sometimes decades-old assessments. Supporters also frame this in terms of fairness. At one rally, they carried signs that read, “Taxing the Wealthy Keeps the Economy Healthy.” The problem: the current initiative isn’t about reforming the state’s taxes by raising some money in exchange for tax relief elsewhere. Instead, the new initiative would amount to an estimated $12 billion tax hike on businesses that own properties.

Supporters conceived of the initiative before the Covid-19 lockdowns, but they’re not backing off, though nearly 5 million Californians filed for unemployment claims in the first two months of the crisis. Passing the initiative “was critical a few months ago,” Oakland mayor Libby Schaaf said. “Now, it is a matter of life and death for many California families.”

Business groups, already worried about outmigration of firms from California to less expensive places, say that the state would lose one of its last selling points in retaining firms. “From the point of view of attracting and retaining businesses and jobs, the power of Prop. 13 was in allowing California to tell a business [that] . . . [w]ith California, you’re safe” from reassessments, former state director of finance Tom Campbell wrote earlier this year. If the initiative passes, some of the biggest losers would be tourist businesses like Disneyland, which have already seen revenues plummet because of the shutdowns. Meantime, taxpayer groups worry that the latest assault on Prop. 13 indicates that homeowners are the next target. “If the business community loses its Prop. 13 protection,” says Jon Coupal, president of the Howard Jarvis Taxpayers Association, a leading supporter of Prop. 13, “we’re next on the menu.”

The battle promises to be costly. Advocates of the initiative have already raised nearly $20 million, led by a $6 million contribution by the California Teachers Association and $3.5 million from the SEIU’s state council. So far, opponents of the repeal effort have mustered $3 million in donations, including $1.5 million from Howard Jarvis Taxpayers. Polls taken before the crisis showed the repeal initiative enjoying about an eight-point advantage, but the margin narrowed as the economy crashed. The real sense of how the initiative will perform won’t become clear until more fund-raising dollars pour into electioneering.

If Prop. 13 is sacred doctrine in California, this November’s election amounts to nothing less than a crusade—for both sides.

Photo: Thomas-De-Wever/iStock

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