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Staff Blog

Restoring Fairness

Jeffrey Pu

The Jarvis-Gann “tax revolt” was actually a tax coup for big corporations.

Prop 13 was passed to protect homeowners, but the reality is that homeowners are paying more property taxes every year, while commercial properties are paying less.

Under Prop 13, reassessment of property was limited to “changes of ownership.” Because commercial properties almost never change hands, their property taxes rarely go up. At the same time, many purchases of commercial property dodge a reassessment due to the definition of “ownership” in Prop 13. By dividing a purchase to keep their share under 50%, corporations can easily avoid a controlling ownership. When Michael Dell purchased the $200 million Fairmont Miramar in L.A., he exploited this loophole to save a cool $1 million a year in property taxes.

The result of this cumbersome and exploitive system is plain. There is a widening tax gap between commercial and residential property. 

Based on available data from California's 23 largest counties ,  representing over 90% of the state's population. Source: California Tax Reform Association

Based on available data from California's 23 largest counties ,representing over 90% of the state's population. Source: California Tax Reform Association

In 1978, the year that Prop 13 passed, homeowners paid 59.8% of property taxes, and commercial properties 40.2%. By 2008, commercial property had decreased to just 29.3%, while residential property bore 70.7%. In 3 decades, the differential between commercial and residential property increased from just 19.6%, to 41.4%.

Most states tax commercial properties at a higher rate than residential properties. In New York City, for example, residential property is assessed at 6% of value, while commercial property is assessed at 45%. California’s commercial property tax rate is extraordinarily low compared to most of the country. In fact, California is 40th out of 50 states in its effective taxation of commercial properties.

The inequity of Prop 13 is not just that it overburdens homeowners. It also kills innovation in the marketplace. According to a recent article in the Sacramento Bee, Prop 13 “is dangerously anti-competitive. Identical properties sitting side by side pay vastly different property taxes depending on their purchase dates.” For the savvy startup entrepreneur with small pockets, that cost-benefit calculation could easily land them in Seattle or Houston.

Our property tax system isn’t good for homeowners, and it isn’t good for small business. As Justice John Paul Stevens said, Prop 13 established “a privilege of a medieval character.” Reforming Prop 13 would not only restore funding to California’s struggling schools and social services, it would restore tax fairness to a state that has been struggling to overcome corporate greed for the last 35 years.