.
.
.
In the late 1970’s an attempt was made to rein in the uncontrolled taxation of real estate property in California. This effort became known as Prop 13. The idea was simple. All real estate would be taxed at a base year rate, and there was an annual limit on how much the tax could increase each year. This allowed people to properly plan and manage their real estate taxes and ended a process where people would be surprised by massive increases in property tax from reassessment.
And all was good.
But there was also a series of decisions that were made that would trigger a reassessment of real estate property. If a property was sold, then the sale would establish a new base rate for the property for future taxation. And if the property was altered (for instance more square footage was added to the property) this too could trigger a reassessment for the property.
And all was good.
Well, not really.
See, there are different types of real estate. There is the real estate of a single-family residence or the home or condo where one lives, and then there is the real estate that is income-producing. Income-producing real estate is generally commercial in nature. A hotel, a strip mall, a multi-family apartment complex, a warehouse, an office building, a restaurant.
When was the last time that you saw someone add a 21st story to a 20 story office tower? Add another 20,000 square foot to an existing 50,000 square foot warehouse? Tear down the walls of an existing grocery store to add 15,000 square feet?
On the other hand we all know one person who owns a home on a street where they or one of their neighbors made modifications to their home and triggered a reassessment of their real estate.
So we have defined two separate classes of real estate. One will almost never be affected by reassessment and the other will.
These two classes have something else in common. In most cases that single family home is in an individual’s name. And that commercial property? In most cases the ownership resides in a corporate entity. When a person sells his home, it’s generally sold as a transaction between two individuals (sometimes listed a a man and wife selling a real property to another man and wife, but in most cases between individuals.)
But different story with those commercial properties. In fact a change of real ownership can occur, with the listed real property owner not changing. For example, CompanyA, LLC owns a 20-story office building and, instead of selling the real property, all the stock in CompanyA, LLC is sold from CorporationZ to CorporationX. So CompanyA, LLC stills effectively owns the real estate, as the real estate actually was sold or transferred from one owner to another.
When there’s a change of ownership in that single family residence, that triggers a reassessment of the property’s valuation and taxation, but the change in ownership of the real estate between the two corporate entities through the change in ownership of the LLC does not.
Why is this all important? Because these two specific loopholes have changed the tax burden in every county in California. Individuals who own their primary residence have, year after year, been paying a larger share of the property taxes received by the State of California, while at the same time the amount of property tax received has been declining as these commercial properties are not being reassessed.
Within tax policy circles this actually has a name, it’s called a split-roll. And one of the key things that a split-roll does is shift the tax burden over time away from one side of the split and to the other side of the split.
Now let’s look at two properties. The first is a single-family residence and the second is a four-story office building. Both properties were built prior to Prop 13. In the almost 35 years that Prop 13 has been in effect there have been no additional feet added to the four-story office building, and the LLC that has owned it, although having been sold three times, still owns the real estate. In all those years, the property has not be reassessed. The single-family residence on the other hand has been sold three times in that same time period, and at least two of the owners have made additions to the property. So that property has been through at least five reassessments.
Now anyone can tell you that this is clearly “not fair.” And that’s the primary cause in the tax-burden shift that’s pushing a greater burden of property taxes from commercial property owners to those that own their homes. In simple terms it’s costing the State and the Counties billions of lost revenue, an at the same time rewarding those commercial property owners and punishing folks who live in their homes. Something tells me that was not what the people that voted for Prop 13 were intending to do to themselves.
Now, let’s look at some other things that are happening at the same time. Since the income is going down for the State and the Counties because these commercial properties are not being reassessed the State and the Counties, in fact all of government, has had two choices. It’s either had to find creative ways to increase revenue, or find ways to cut what they spend. So parks that were generally free to access in the late 1970’s and 1980’s now have entrance fees. The fees for licenses and registrations have risen. The cost for attending college or university has risen. In other words, rather than sharing the pain for these items of common good there has been a shift of the burden to those that use these common services. And when the costs could not be covered by new fees for service, the services have been cut. A high school arts program here and a music program there, and suddenly California went from having the best public schools in the nation to being much further down the list.
But this is a shared pain for us, we all suffer equally, right? Not quite. Let’s look at an example of two commercial buildings side-by-side in downtown LA. The first is a 10-story office building built pre-Prop 13 and the second is a 10-story office building erected in 2010. As you’d expect, the older building has a much lower property tax based on the early assessment and the capped increases of Prop 13. So, one would assume that the rent per square foot charged in these two buildings would reflect the fact that the renters in the older building are paying a much lower rate. But that’s the problem with assumptions. Both building are well within the going rate for square footage in that area – the older building may have a slightly lower rate, but it’s well within the same range.
If that’s the case, then the owner of the first building, with substantially lower overhead costs brought about by the fact that his property taxes are set so low by the Prop 13-protected assessment, is clearly making a much greater profit margin due to his lower overhead costs and comparable rental rates. In other words, not only is the older building’s owner not feeling the pinch, he’s getting maximum benefits from exploiting the loopholes that have kept his assessments low.
*********
In under 1300 words so far I have explained a clear and present problem that has been created by a poorly written law that has caused massive amounts of pain for Californians in general, but has been a financial windfall for a small handful of people. These two loopholes not only protect a small class of people, but help enrich them while passing along the pain of the loopholes to a much larger class of people.
Why does all of this matter? Because there’s a group of politicians who every election cycle sign pledges in which they promise to NOT fix the loopholes and to continue to hurt the many for the benefit of the few. These people will say that they are “signing pledges to not raise taxes,” but the pledge also means that they will not fix the loopholes in Prop 13 and correct a bad law that is hurting many in the state to the benefit of a very few.
When you started reading this you were thinking that Prop 13 is good, and in fact it does have some very good components. But these politicians’ pledges mean that they will NOT fix the loopholes. And these loopholes need to be fixed or we’ll find that more services will be cut, and more fees will be passed along to the majority so that this special minority can continue to make massive amount of profits at the expense of the majority.
The key to fixing this clear and present danger to California is to demand that our elected officials NOT sign these pledges to not fix the Prop 13 loopholes. The key way to ensure that these loopholes get closed is to demand to know from any person running for public office if they will work to close these loopholes the day that they get elected. The key is to demand accountability from those that seek our vote, and to vote only for those that will fix a broken system that has loopholes that benefit a small minority at the expense of the majority.
So listen carefully and when you hear a politician say that they have signed a pledge to “not raise taxes,” remember that means they have signed a pledge to do everything in their power to keep these special interest loopholes in Prop 13. Remember that, even though they may claim that they are working for the benefit of you and the rest of California, they’re really working for the direct benefit of those that will continue to push more of the tax burden on you, and protect the growing profits of the this special class of people. The signing of the pledge is a special message to those benefiting from the loopholes in the law today that these politicians will continue to do all in their power to make sure the playing field is stacked in their favor.
And if you’re running against one of these “tax-pledging” politicians, take the time to explain to the voters why these people are working against the interests of a majority of Californian’s and why you will focus on fixing these loopholes in Prop-13. People understand when it’s explained to them how these loopholes are hurting the majority just so a small handful can benefit by having the deck stacked in their favor.
“Bren’s purchase of Irvine Co. stock was the same as purchasing the real estate and triggered a mandatory reassessment under provisions of Proposition 13, the property tax-limiting initiative approved by California voters in 1978.”
Corporations and (big) land owners Do Not get a free ride on transfers.
Why are the author and the others voicing the same message lying?
Not totally accurate. In fact, it can even be worse. When Chase took over WAMU they gained a number of branches, many of those properties were owned by WAMU. they were not reassessed. In fact in an M&A the property changes hands without a reassessment. In simple terms, the deck is stacked.
Good to see you here, JM. Your analysis is spot on. I thought about deleting the naked Grover Norquist image out of concern for our readers, but when I got to the editing page my computer emitted an earsplitting “ZUUUUUUULLLLL” so I have decided to leave it.
You leave out what I think is the largest problem that demands split roll reform: long-term leases of commercial property. A holding company (potentially even a shell corporation) can remain the nominal owner of a building, for assessment purposes, theoretically forever. Meanwhile, the same building can be leased out for up through 99 years at a time to different occupants — which in effect is like moving to new building — never triggering an assessment.
Your analysis of the Prop 13 taxation of real estate, is a very complicated matter, Did you mention the convoluted tie in to California schools?
School funding had been a shared responsibility with the State and City governments at one time.
Once Proposition 13 was passed, educational finance was re-addressed, with school districts receiving a smaller portion of the property tax and direct payments from the state.
School districts were always heavily dependent on state aid, however, with Prop 13 it eliminated the ability of school districts to raise property tax rates for their schools. As I understand it, school finance is now almost entirely centralized at the state level. School districts are now no longer the beneficiary of these increased property tax rates, am I correct?
My belief is that with a ballot measure we can correct some of this and formulate a better or at the very least equitable allocation of funds?
If a low-income area would theoretically be less able to raise funds for public schools from property taxes if Prop 13 is overturned, how does that benefit those school districts? It seems to me the equity you supposedly seek is found in the Prop you’d like to overturn!
Overturn no, improved maybe.
More information is necessary and there is corroboration that Northern CA seems to reap more benefit than Southern CA, w/Southern CA money.
“As I understand it, school finance is now almost entirely centralized at the state level.”
A notable exception being capital project debt and debt service, as I’m reminded twice yearly with the slew of property tax bond-payment add-ons,( incurred at the local ballot box.)
don’t touch prop 13. even if not sold, properties can be reassessed each year up to 2% higher, even more % if you had previous drop in assessment as long as the average is not more than 2% a year. seems fair to keep the monies out of the governments hands and in the hands of people that create jobs and boost the economy in other ways.
But you seem to miss the point that:
1) it’s not keeping the government out of our pockets. What the government did is start charging all sorts of new fees to make up for the lost revenue.
2) when the government couldn’t make up for the lost revenue it then cut services.
3) over the years there has been a burden shift from commercial properties to homeowner properties. This shift is only possible when you watch the outcome over time. If this had been equitable then there would have been no shift. The burden shift over time shows that the inequities exist. The reason they exist is the loopholes. Closing the loopholes will not have any effect on what was sold to the California voter (that taxes were forcing grandma and grandpa to sell their homes).
As for “boosting the economy”, which this did not touch on, the greatest periods of economic boost came from, I know you will be shocked by this, government intervention in the economy. In the late 1950’s the government spent a great deal of money creating working class jobs with a program done by DDE called the Interstate Highway. In the 1960’s the government had another jobs program, this time R&D, it was called NASA. See, government spending on working class jobs, either through infrastructure improvements or R&D programs, is what creates jobs. If giving BILLIONS of dollars in tax breaks created jobs, Bush and Company would have had a massive boost to the economy with their tax cuts for the wealthy.
Not to get into an economics debate here, but he only thing that trickles down is piss. The Chicago School models are wrong. Some of us are getting tired of getting pissed on.
bush and company? oh, I see where you are coming from. no wonder your article seemed so biased.
We know you’re a Republican, but we did not know you agreed with all of Bush II’s policies. I thought your Party was trying to distance itself from that disastrous presidency. Not so much?
Let’s try to stick to the actual issues. The Parties are in flux, and some Republicans SHOULD be talking about closing these loopholes (maybe they are?)
You really want to go off on the economic tangent, dontchya…
I could have said Reagan and company as it was the massive tax breaks the Reagan gave the wealthy before then making a series of smaller tax increases on the working class to offset those initial breaks that were the first foray into the Chicago School model. I could have then laid the blame for the economic meltdown at the feet of Clinton and his triangulation strategy where he eliminated Glass-Steagall and then finally return to the double down on the failed economic model as was done by Bush. Would that have made you happy? It’s not about politics as in Democrat v. Republican. It’s about a belief in a economic model developed by Milton Friedman and the Chicago School. Either you believe in that model, which the US has been under since 1980, or you believe in a more Keynesian model, like the one used by FDR, Truman and Dwight D Eisenhower. I tend to stand with Krugman and Stiglitz, believing that the Keynesian model proved it was successful, and we now have proof the Friedman was wrong.If you want to fix the US economy the most effective thing that can be done, and it could be done tomorrow, is to revert to the 1956-58 tax code and adjust all the financial numbers for inflation.
Now that we have gone off on the tangent, if you would like to address the three bullet points, I will be more than happy to have a discussion on those items, but since I don’t think either you nor I is about to become part of the team of economic advisers to the President of the United States, discussing how to fix the nations economic situation isn’t going to be of any real value. We can, on the other hand, elect people who do not sign the “no new taxes” pledge, because fixing Prop 13 will actually do something positive for our state.
” all the stock in CompanyA, LLC is sold from CorporationZ to CorporationX. So CompanyA, LLC stills effectively owns the real estate, as the real estate actually was sold or transferred from one owner to another.”
In this fake example, the property would be re assed to current FMV.
It would be nice if a real checkable example is shown. I wonder why a real life example is never shown by the anti property 13? I think it is because there are none.
Greg D, a 99 year lease, without ever having re assessable improvements done to the property. I find that hard to believe.
http://cdm15024.contentdm.oclc.org/cdm/ref/collection/p178601ccp2/id/3336
Enjoy the read.
From the linked document;
After Proposition 13’s passage, the Legislature determined that a change in ownership of a legal entity would be considered a change in ownership of the entity’s real estate – thereby triggering a reassessment of that
property – in two situations. First, a change in ownership takes place if the original owners of the legal entity cumulatively sell more than 50 percent of the entity’s ownership shares. Second, a change in ownership occurs if any single individual or another legal entity acquires more than 50 percent ownership control of the entity.
It seems to me that the argument that many of these changes happen without notice and therefore taxes are not collected may be factually correct, but that lack of notice is tax evasion and that’s a crime already.
Carl, are you suggesting that we need more government regulation and government interference? Colour me shocked.
That is a good read, and it is authoritative too.
It does not state prop 13 needs replacement, in says there is some Tax Evasion involved.
The state and counties should have an enforcement division to deal with that tax evasion.
My gma’s house is Prop. 13… and it is totally awesome… well for my family. She probably would have had to move but for it. But on the other hand, tax policy by popular vote seems really dumb.
Why does tax policy by popular vote seem dumb?
It seems to me that if we all had a vote on how much money was taken from our labors we might get a less expensive and more efficient form of government than we currently get. It’s never easy to live within a budget but almost all of us do, in the real world, outside of politicians that is, who simply raise the taxes to fit their agendas.
I’m not a big fan of Prop 13 because it screws those of us who weren’t in on the scam at the time, didn’t own property that is eligible for protection, but it is the law. I would certainly like to see some greater control from the electeds in spending prior to giving them more money to throw at ideas that many, sometimes a majority, think is wrong.
Anything that slows the creep of power from politicians back to the citizens is a good thing in my mind, there’s been too much creeping going on in the other direction for way too long
Carl, once you do that you open the can of worms that is “who pays for the public good?” I can remember people saying that they didn’t want to waste their tax dollars on some silly adventure to put some handful of guys on the moon. Recently I had a chance to talk with one of them, who is now almost 80 years old. He was talking about his health and talked about the two stents in his chest, the micro-surgery that he recently had, etc. I pointed out that every technology that he was talking about, all those wonderful things that are saving his life, that they all got their start in R&D with the funding that went to NASA. That the program he wanted closed in the 1960’s and 1970’s is the same program that invested in the R&D that saved his life and extends his life today.
What seems like a boondoggle and government waste at one point to some, is investment in the public good and the future to others. Letting people vote on their long term interests is NOT good because people only vote on their short term interests.
Grandma’s house being Prop 13 is a wonderful thing. In fact it’s what the people voted for. Whet they didn’t vote for were the two loopholes that allow corporations to not pay their fair share on their commercial property.
Thanks for this great post, JM. I’m an organizer at a non-profit called Evolve that’s working to reform Prop 13, and we’ve been getting school boards and city councils to pass resolutions in support of closing the corporate tax loophole. We’re up to 77, check out the list here- http://www.evolve-ca.org/resolutions
Feel free to email me if you’d be interested in working together! Any connections you might have to liberal-minded elected officials in SoCal would be extremely valuable.
Best, Kelly
Hi folks…Prop 13 is very convoluted, but as others have stated above, if the ultimate ownership or control changes beyond certain limits (generally 50%), then the property gets reassessed. If someone changes ownership that triggers the reassessment without reporting it, then tax is tax evasion and hopefully they get caught. Now there are even questions on income tax returns asking if there have been ownership changes in an attempt to be a bit more proactive with reassessments.
In all but large corporations, a buyer will generally always buy the asset (i.e. the building/property) and not the underlying LLC or entity that owns the property. Often because of unknown liabilities and fresh start with regards to those liabilities. I don’t think I have really ever seen a sale the LLC or entity that owns the property when then intent is to buy the property (as opposed to buying the stock of a company that the property is incidental to the operations). I think that there are exemptions for large public entities owning property whose ownership is transferring all the time…think about Disneyland for example. Maybe there should not be those exemptions. Just the same as there are other exemptions, but in general you can’t skirt the rules by just buying the LLC/entity that owns the property.
Another action that is actually catching a lot people by surprise is the residential base year. In the past, a new buyer will complain that they are paying more in tax than their neighbors who have lived there for a longer period of time. Now, we are also seeing a lot of the opposite too…those who bought in 2004/2005/2006/2007 prior to the fall of residential with high base years and now they will see their property taxes go higher than their neighbors who bought during the low years. I guess turn about is fair play…
There is already a process in place that permits people to challenge their current tax bill as being too darn high compared to comps. The County will send you your tax bill, if you check the comps in your area and find that you are paying way too much you can appeal the bill. In that appeal, if you show the recent comps, you can get your tax bill reduced (YMMV, but I did just that in the 90’s when I bought at top of market, then every year when the market went down brought in comps to have my bill lowered to the appropriate amount based on comps).).
JM…maybe I was using the incorrect terminology but the problem does not lie with the current valuation but instead the base year. The process you explain is the current valuation appeal process but not the base year + 2% per year issue I am referring to.
The assessed value can increase by 2% per year from the initial base year purchase price…essentially the lower of the 2% per year increase or the current FMV. If you buy a house for $300K and it goes down to $200K in year 3, any year after it could go up well beyond the $300K (i.e. $324K in Y4). Whereas lets say neighbor buys a similiar house in Year 3 for $200K, that house will never catch up to my house. In Y3 (year 2 for that owner), the max value would be $204K whereas my house could go up to $324K. Essentially, the 2004/2005/2006/2007 purchasers will be pay more compared to the 2010/2011 buyers. The 2% increase is based upon the initial purchase price plus 2% not the current value plus 2%…
In your example, today your property taxes could very well be higher today than your neighbor who you used as a comp for the lower value…because 2% per year from your higher base year (initial purchase price) compared to your neighbors 2% per year increase off of a lower purchase price.
There’s nothing to be done about that. Typically there is an advantage in buying early, but really it’s the advantage of buying low(er). One can only imagine how byzantine – no, completely impracticable – any mechanism meant address this sort of thing would be. In the meantime everyone benefits from unchecked increases, and if you’re intent on having the lowest tax bill on your block, just buy and hold. Eventually every other house will transact and you’re a winner.
Eh, obviously I meant everyone benefits by being protected from unchecked increases.
Actually, it would not be all that hard to administer…take last year’s assessment and add 2% to it…if the FMV is lower, then you use the current FMV for the assessed value. Repeat. The first year would just use the purchase price as is done now. It is actually quite simple. Right now it is much more difficult albeit only fractionally so because you have to track from purchase date not just prior year, although with computers it is negligible.
The real problem is when you have someone who bought at higher values and we see a jump of 15% in value (or 10%, or 8%, etc…)…everyone thinks that property taxes can only jump 2% per year which is a fallacy. They can go up to your original purchase price plus 2% compounded for each year of ownership…very different math.
A solution in search of a problem. If you’re savvy enough to secure a temporary reduction in your property tax you also surely understand its temporary nature, and that any larger-than-two-percent tax increases can only occur until your property has returned to its original purchase value. Pinning property tax rates to fair market value rather than purchase price opens the door to endless and constant interpretation and argument, whereas pinning it to purchase price does not.
Sorry, my “solution” was only in response to your comment that it was impractical…my interpretation was that it was impractical to administer, which likely was not what you meant in retrospect.
It has nothing to due with being savvy to secure a temporary reduction…even without going through the steps to secure the reduction, our properties are assessed at FMV (capped by P13 limits)… Most of us, I presume, get our property tax notice, cringe when we open it, breath in relief that it was what we were expecting, and then pay it. The breath that I am worried about is the one where taxes go up a bunch and people were not expecting it…which can often be the case in times of quick rises after depressed prices. Obviously, it is still our responsibility to know the rules and be prepared for it so no whining on my side…
Right now, we pin to FMV and still have the issues you point out…it is just that FMV is one piece of the puzzle with purch price plus 2%/yr being the other. The county still has to determine FMV for each property and the owner still has the option to fight the FMV.
So you’re worried about buying a house, the market going down and arranging a property tax rate reduction, then the market going up again and being asked to pay, at most, the very amount you expected to pay when you bought the place?
As we’ve already discussed, the only circumstance your bill could go up >2% is if the value of your house is thought to have rebounded. If under those circumstances I opened my bill and it’s much (again, >2%) more than last year, I wouldn’t groan, I’d do a little dance.
you don’t have to arrange for a property tax reduction…it is supposed to be automatic.
I’m not sure it’s correct that it’s “supposed” to be that way, but I can say that in practice it virtually never is, and requires an assessment appeal.
boutwell makes a good point. I bought my house in 1992 for 320K. By 1998 the same type/size of house in my tract was selling for 240K. They have a lower base than me even though they purchased later. Oh, I got reassessed when prices fell and my property taxes went down. BUT, when real estate took off again my taxes increased 25% in a couple years because the State can recoup up to the compounded allowed 2% per year from my base. Those that purchased at the lower price only could go up 2%, not 25%. it is all timing. all in all, I knew the math and as a senior can only stay in my home because of prop 13. otherwise, I would most likely be forced to sell to pay for a bullet train.
*No cheap date…no matter what you do. The timing was perfect however, it was the Jimmy Carter years that we should write out of history anyway. But Prop. 13 came around right when a bunch of our grandfathers and mothers were being taxed into the Dark Ages by a California School System run by Wilson Riles. The only way to stop the outrage, because so many people were on fixed income and could not afford the rising taxes – was for the CA Legislature to actually do something. A rare moment. This is before politicially correct, when the young realized they would have to sell their parents property and wind up having them live with them. Not a very popular concept in the disco age! Donna Summer said it best: “She works hard for the money!”. Prop. 13 Saved the property with a grandfathered 2% until the old folks died and left the kids with solid rising property values. This is when Ronald Reagan had to come up with the “Reverse Mortgage Option” for those who did not have any kids or the kids were deemed worthless. According to the “Greatest Generation” – all kids were worthless. At the same time, a Sacramento Grammar School Yard had a major shooting by some idiot and killed a bunch of kids with an AK-47 assault rifle. That is when Prop. 8 came to the game which would have banned all handguns in the state. The pro-gun forces rallied and we beat back that idiocy! For the time being anyway. Prop. 13 then became polluted with those dreadful add-ons….which included the 2% upgrade every year and the reassessments whenever the artificial increase in property values was allowed to stick – via our lovely Real Estate Agents, the Banks and Government. More is always better….as you know – when you go to the pump to purchase that $1.82 a gallon of gas for $4.47 today! Dead White Male just goes to show, that even a broken clock can be right 2 times a day!
Howard Jarvis himself was a multi-millionaire multi-unit apartment owner. He pretended Prop 13 was primarily designed to save the houses of poor old widows, but Prop 13 also offered gigantic tax savings to millionaire landlords and giant corporate landowners like Chevron.
I used to see Howard Jarvis happily using the municipal Rancho Park Golf Course in West Los Angeles, though he could have easily afforded membership in a private country club. Ironic, the tax savings his version of Prop 13 offered millionaire landlords (such as himself) and giant corporations have pinched the funding for parks all over the state of California.
I talked to him personally a number of times. He was an old, racist, Mormon who knew perfectly well that the underfunding of public schools he was orchestrating would harm the public education of California kids who were increasingly non-white. The aging householders aided by Prop 13 had already sent their own, white, kids to public school and the UC system. They weren’t interested in paying taxes for schools and recreation for the non-white children of immigrants.
Still, I’ll grant that the tax protection was a good thing for individual houseowners who might otherwise lose their homes to reassessments and increased property taxes. The sad thing is that the protection of houseowners with modest incomes provided cover for the giant taxes cuts afforded millionaire landlords and giant corporate landowners.
Think about this: those houseowners originally protected by Prop 13 in 1979 are surely 65 years old or much older now. In fact, the majority have surely died of old age by now. However, the corporations protected by Prop 13 “live” on forever. Of course Prop 13 is a Trojan Horse for the very wealthy. Anyone who denies that two very different kinds of landowners (one deserving protection, the other obscenely wealthy) are protected by Prop 13 is lying.