Proposition 13 in 1978 curbed property tax increases. Now voters may strip protection for commercial buildings, helping hard-hit local budgets.
OAKLAND, Calif. — In 1978, a Los Angeles businessman named Howard Jarvis led an insurgent campaign to pass Proposition 13, a ballot measure that limited California property taxes and inspired a nationwide tax revolt. The law has been considered sacrosanct ever since, something California governors and legislators challenge at their peril.
Now, as a pandemic tears through local budgets, a well-financed campaign backed by teachers’ unions has mounted a serious challenge to a major portion of the law: its application to commercial property.
If voters approve the effort next week, they would give labor and progressive groups a striking victory in raising the low tax rates that longtime property owners enjoy. If it fails, the campaign will have spent tens of millions of dollars only to affirm that Proposition 13 is untouchable.
The new initiative, Proposition 15, would amend the state’s Constitution so that properties like offices and industrial parks would no longer be protected by Proposition 13. By creating a “split roll” system, in which residential property would continue to be shielded from tax increases but commercial property would not, backers hope to capitalize on Democratic energy to raise taxes on large corporations without alarming homeowners.
“We can’t afford to continue to give large corporations a tax break they don’t need when we desperately need to invest in infrastructure, first responders, public health and public education,” said Catherine Bracy, executive director of the TechEquity Collaborative, a nonprofit group that mobilizes tech workers on issues of economic inclusion.
Proposition 15 would raise $6.5 billion to $11.5 billion a year for public schools, community colleges and city and county governments, according to a nonpartisan state agency. The Yes campaign, called Schools and Communities First, is backed by a number of public employees unions and the Chan Zuckerberg Initiative, the philanthropic organization founded by Mark Zuckerberg, the Facebook chief executive, and his wife, Priscilla Chan.
The measure’s opponents, including a number of business associations and large property owners like the Blackstone Group, argue that the tax increase would hurt small businesses. They have also tried to frame the measure as one that, if successful, will soon reach for residential properties.
“They want to do this because they believe now is an opportunity to break up Proposition 13,” said Rex Hime, chief executive of the California Business Properties Association, a trade group for owners of offices, industrial parks and shopping centers. “They’re coming after homeowner protections next.”
The two sides have raised more than $60 million each for their campaigns. Support is also evenly split: A recent poll by the Public Policy Institute of California showed that Proposition 15 has split the electorate, garnering the support of 49 percent of likely voters, with 45 percent opposed and 6 percent undecided. It has won a number of prominent endorsements, including those of Gov. Gavin Newsom; Joseph R. Biden Jr., the Democratic presidential nominee; and his running mate, Senator Kamala Harris of California.
Proposition 13’s lock on California politics began with the bouts of hyperinflation that shredded household budgets through much of the 1970s. In addition to the rising cost of food, electricity and other staples, the value of housing — and by extension, property taxes — also soared. In California, residential property values rose 250 percent from 1970 to 1980, while household income remained flat.
As tax payments consumed a larger share of homeowners’ budgets, Mr. Jarvis, a retired businessman turned anti-tax gadfly, mounted a 1978 citizens’ initiative, eventually called Proposition 13, that would cut California property taxes and limit future tax increases to no more than 2 percent a year, unless the property was sold. It passed with just under two-thirds of the vote and has since endured various legal challenges. In 1992, the U.S. Supreme Court upheld the legality of Proposition 13 but called it “distasteful and unwise.”
Mr. Jarvis, who died in 1986, framed his campaign as a way to make the tax system more equal, but Proposition 13’s legacy has been the opposite. Because property values are reassessed for tax purposes only after a building is sold, the law has created a wildly disparate system in which new buyers pay vastly higher taxes than longtime owners.
It is not uncommon for neighbors to pay double or triple the taxes of a similar home on the same block. A recent analysis of property taxes across the Bay Area is rife with eye-popping comparisons, like a $9 million home in an exclusive neighborhood of San Francisco that has lower property taxes than a $331,000 home near an oil refinery across the bay in Richmond.
When Proposition 13 passed, commercial property taxes were almost an afterthought. But since skyscrapers and shopping malls do not change hands as often as homes do, the law has shifted the property tax burden from corporations to homeowners. In 1975, a little under half the property taxes in Los Angeles County were paid by commercial properties. By 2017, commercial properties accounted for just over one-quarter of the property tax roll.
“It boggles the mind how ingrained this thing is in our culture, given how regressive it is,” said Christopher Thornberg, founding partner of Beacon Economics, a consulting firm in Los Angeles.
When backers started collecting signatures to qualify Proposition 15 for the ballot last year, the measure was framed as a way to make the state’s tax collections broader and more equitable by raising rates on commercial property holders. Now, as the state, like the nation, begins a difficult recovery from the coronavirus recession, it has become as much about backstopping essential services when budgets are under stress.
In addition to keeping homeowners under the 1978 limits, the new measure would not affect apartment buildings and agricultural land. It would be phased in over several years, and it has exemptions for business owners with $3 million or less in holdings in California. Because of the exemptions, various studies have shown that Proposition 15’s tax increases would sidestep most small businesses and instead fall on corporations that control huge parcels of real estate, like Walt Disney’s studio lot in Burbank, or 555 California, a San Francisco office tower owned by a partnership that includes Vornado Realty Trust and President Trump.
But with the economy still hampered by Covid-19, and many stores and restaurants on the brink of extinction, the opposition message has resonated with people like Barbara Stelzriede. Ms. Stelzriede is the general manager of George & Walt’s, a sports bar in the Rockridge neighborhood of Oakland, and a fourth-generation member of the family that has owned the bar’s building and surrounding property since 1945.
On a recent afternoon, in addition to neon beer lights and a 21-and-over sign, the bar’s window was emblazoned with a bright yellow sign that had “Vote NO on 15. It will put small corporations out of business!!!” in Ms. Stelzriede’s handwriting. Sitting on a bar stool, among a mess of hammers, drills and extension cords that were being used to install a plexiglass barrier around the bar and plastic curtains around the tables, she discussed her anxiety about the bar’s pending reopening, what business would be like afterward, fears that the Proposition 15 money wouldn’t go to schools as proponents have advertised, and suspicion that the measure would open the door to higher taxes on apartment buildings and houses.
“There couldn’t be a worse time in the world right now for them to be doing this,” she said.
Some of her neighbors disagree. Last week, someone taped the window with a passionate response to Ms. Stelzriede’s sign. “MILLIONS upon MILLIONS of school kids suffered for more than 40 YEARS,” the letter said. “Disneyland + other MEGA CORPORATIONS are still assessed at their same property values from decades ago. PROP 15 = FAIR + JUST! It’s TIME.”
But it’s not just businesses that own their buildings that are worried. Across the state, landlords construct commercial leases so that tenants are responsible for a portion of the property taxes (doing this increases the value of the building in the event the property is sold and the taxes are reassessed).
“Virtually no landlords give Proposition 13 protection,” said Gerald Porter, founding principal of Cresa, a commercial real estate company in Los Angeles.
Clauses like that have Laurie Thomas, the owner of two small restaurants — Rose’s Café and Terzo, both in San Francisco — worried that she and other restaurant owners will be hit by higher taxes if Proposition 15 passes. Today, as part of her lease, Ms. Thomas is responsible for about $6,000 a year in property taxes at one of her locations. She estimates that would jump to about $40,000 if the building was assessed at market value. “Our lease clearly says that I am on the hook for 50 percent of the property taxes — it’s a direct pass-through,” she said.
Mr. Thornberg, the economist, doubts that this can happen on a large scale. Much more than property taxes, he said, lease rates reflect market fundamentals like size, location and a building’s particular amenities.
In a recent study for the Silicon Valley Foundation, Mr. Thornberg’s firm tried to gauge the impact of Proposition 15 on leases by analyzing commercial rents in similar buildings with different tax bills. “The owners of these buildings who are paying well below market tax rates are not passing the savings to their tenants,” he said. “In other words, they are charging what the market will bear and are unlikely to be able to pass along additional costs.”
An earlier version of this article misstated an exemption in the property-tax overhaul proposed in Proposition 15. It would apply to business owners with $3 million or less in holdings in California, not to buildings valued at less than $3 million.
Conor Dougherty is an economics reporter and the author of GOLDEN GATES: Fighting for Housing in America. His work focuses on the West Coast, real estate and wage stagnation among U.S. workers. He previously worked at The Wall Street Journal, the San Diego Union-Tribune and The Los Angeles Business Journal. @ConorDougherty