A Surprising Suggestion for the Prop 13 Quagmire [GuestOpinion]
May 22, 2017 | By Cathy Reisenwitz
I am walking to the Noe Valley Whole Foods when I’m accosted by a large man who wants to talk about better funding for California public schools. I explain to him that I’m pro-choice, on everything. I'm expecting that to be the end of it, but instead he tries to sell me on raising property taxes on corporations only. He shows me a handout demonstrating that they're not paying their fair share. I’m intrigued.
He’s raising awareness for Evolve, an organization led by former school board chairmen who want increase funding for California public schools by raising property taxes on businesses.
In Evolve’s crosshairs is California Proposition 13.
Prop 13 is a perfect example of the law of unintended consequences in action. New laws, taxes, and regulations will always cause negative impacts that are impossible to predict ahead of time. It also illustrates Subsection 1 of the Law of Unintended Consequences which I call the “Rational Expectation of Corporate S***headdery.”
What is Prop 13?
In 1978, California voters approved and the legislature enacted Proposition 13 (aka the People's Initiative to Limit Property Taxation).
In most states, the market value is reassessed every 1-5 years, and your tax bill changes accordingly. Prop 13 caps your property tax bill at one percent (1%) of the full cash value of the property when you bought it until you sell or make improvements. So instead of your property tax going up as the value of your property increases, it only goes up with inflation, not to exceed 2%.
Prop 13 was one of the opening shots in the "taxpayer revolt" that culminated in electing Ronald Reagan president. That year, 1980, 30 anti-tax ballot measures went forward and states passed thirteen of them. The kind of people who like to warn against the dangers of bigger government love to invoke the law of unintended consequences. But what Prop 13 proves is that the principle applies just as much to efforts to shrink government.
Prop 13 is a straightforward example of a middle-class entitlement, like the home mortgage interest tax deduction. It’s also corporatist as hell.
We like to think of government handouts as being paid for by the rich. And it’s true that the rich pay a disproportionate amount in taxes. The rich are taxed at a much greater rate than the poor and middle-class. But the rich also have the means, and incentive, to avoid ever actually paying the taxes they owe.
Which means, in practice, that all entitlements are actually funded by the poor and middle-class people that they’re supposed to help.
Prop 13 is a perfect example, from start to finish.
Not paying their fair share.
According to Evolve, individual and small-business real estate changes hands more often than property corporations own. “How often does an oil refinery move, or Disneyland?” the man outside Whole Foods asked me. Prop 13 means property taxes are only reassessed when the land is sold, so corporations end up paying property taxes like it's 1978 while homeowners and small businesses pay taxes like it's 2017.
Evolve wants to reform Prop 13 so homeowners’ property taxes stay where they are now, but businesses pay more. This would eliminate the property tax advantage that established businesses who have held their property for a long time have over new players, in turn making the California business climate more dynamic and competitive.
Proposals like what Evolve wants are called “Split Roll” - one property tax assessment for homeowners, another for businesses.
According to their website, Evolve’s plan to reform Prop 13 would bring in $9 billion per year in additional revenues. Economists from USC’s Environmental and Regional Equity program hired by Make It Fair estimate a split-roll tax would generate an annual $8.2 billion to $10.2 billion in additional revenues.
Businesses don’t want reform.
Unsurprisingly, the California business community has not rallied around the idea of paying billions more in property taxes each year.
“Our position has always been that if you’re going to have a tax increase, it should be broad-based and universally applicable,” California Chamber of Commerce policy advocate Jennifer Barrera told the Nation. “A split-roll tax treats residential property differently from commercial property, so it’s discriminatory.”
To help small business owners, Evolve recommends eliminating the business personal property tax.
There is disagreement both on the extent to which homeowners subsidize businesses’ property taxes in California and the extent to which small businesses subsidize corporations. Which leaves me wondering: if small businesses are really getting screwed relative to corporations, and plans like Evolve’s could ameliorate that, then why haven’t any groups representing California small business owners shown support for Evolve’s plan?
To that same question, why haven’t California voters shown support for Split Roll? In 1992 they soundly rejected Prop 167, which contained a limited version of the proposal. The Howard Jarvis Taxpayers Association estimates Prop 167 would have increased property taxes for California businesses by $1-2 billion.
One reason may be fear of change and more unintended consequences.
The same afternoon I met the Evolve folks outside Whole Foods, I got an email newsletter from the SF YIMBY Party. On a lark I hit “reply” and asked what their position was on Prop 13. Laura Foote Clark, Executive Director of YIMBY Action replied.
Clark expressed ambivalence about Split Roll. “We are conflicted about that proposal because it risks incentivizing municipalities to build only commercial and not residential, to increase their tax revenue,” Clark wrote.
That certainly makes sense. If I'm a municipality I certainly want more of the property whose tax bill goes up every year and less of the kind whose bill only goes up when it changes hands.
The futility of reform.
In theory, Split Roll could force corporations to pay closer to their fair share. The problem is that no matter how many carve-outs you try to provide to “small” businesses, corporations will always figure out a way to avoid paying.
Here’s an example. A few years ago Michael Dell of Dell Computers wanted to buy prime beachfront property in Santa Monica. He ran his plans by his tax lawyers who told him: Hold up. If you split up the purchase so no one owns more than half of the property you can avoid a reassessment and subsequent property tax hike.
Dell took their advice. His lawyers drafted a contract where the old Miramar Hotel was split between a Dell-owned company (42.5 percent), an entity run by Dell’s wife (49 percent), and a third Dell-owned company (7.5 percent). He saved $1 million per year in property taxes.
Former state Assemblymember Tom Ammiano proposed a new law in 2014 that would have forced a new property tax reassessment when land changes hands regardless of how or whether it’s split up between buyers. The Democrat lawmaker had many Republicans and the Howard Jarvis Taxpayers Association on his side, but fellow Democrats killed the bill because it didn’t go far enough.
So now Evolve wants to go further by saying all businesses have to pay property taxes on the current value of their land regardless of whether or not they sell it.
The problem with that solution is that corporations aren’t avoiding paying closer to their fair share by not selling. Or by splitting it up before selling. Or, rather, these underhanded maneuvers are just a few, probably minor way corporations are successfully avoiding paying closer to their fair share.
The people who run corporations are avoiding paying taxes by doing what Dell did. They're hiring Harvard-educated lawyers and accountants to spend 10 hour days finding loopholes in the tax code. Concurrently, the Harvard-educated lawyers and accountants who want to live in D.C. instead of New York spend 10 hour days lobbying legislative assistants to write new loopholes in the same tax code.
Think I’m cynical? In 2013, a bill regulating derivatives trading passed the House before it was discovered that Citibank literally wrote 70 out of its 85 lines. I mean, I am cynical. But I'm also right.
Three questions for reformers.
I have three questions for those who think closing that reforming Prop 13 will force corporations to pay their taxes:
The first is, “What is the likelihood we can ever find and close all the loopholes corporations will find to exploit?”
The second is, “Does the average small business have tax lawyers (plural) on retainer who are as good at finding loopholes as Michael Dell’s are?”
The third is, “Who do you think wrote the part of the legislation that exempts reassessment for properties that are sold to multiple parties?”
That it’s corporatist as all hell isn’t even close to the biggest problem with Prop 13. Soon I’ll publish another installment on the most f*cked-up unintended consequence of Prop 13: That it’s exacerbated the housing crisis and intergenerational poverty in California.
I don't hate the idea of reform. The folks at Evolve are well-intended and their ideas have merit. It would be wonderful if something like what they want do would do what they wanted it to do without any unintended consequences.
But the simple fact is that the only way California voters have a snowball’s chance in hell of getting corporations to pay their fair share in taxes is to streamline the tax code. Otherwise we’re playing regulation whack-a-mole, where corporate lawyers, accountants, and lobbyists keep creating and exploiting loopholes and we humble, non Harvard-educated taxpayers keep finding them and trying to close them. But we’re on benzos and they’re on coke.
California’s small businesses simply cannot afford to play “avoid the taxes.” And our grassroots organizing, while laudable, can’t compete with corporations either.
It’s not even that these people in suits are selfish assholes and the grassroots organizers are selfless saints. The truth is more complicated.
If the suits don’t pay the lawyers, accountants, and lobbyists their competitors will get ahead, stock prices will dip, and their boards will replace them with suits who are willing and able to pay the game. If Michael Dell doesn’t act like Michael Dell then he doesn’t get to stay Michael Dell. And behind every campaign to better fund public education is a public sector union doing everything it can to fight real reform.
The truth is also far more banal.
If Evolve gets its way, California business owners will be faced with a $8.2 - $10.2 billion bigger property tax bill every year. If we raise taxes but don’t do anything to simplify the tax code, tweaking the tax code and finding loopholes will just become more valuable to those who can influence what gets tweaked and how. And that ain’t small businesses. And no amount of carve-outs will make up for that.
Corporations won’t pay, but cities will still get their money. Since 1978, California cities and counties have increased government revenues 36 percent. Cities have jacked up parcel taxes, special assessment districts, business licenses, franchise taxes, real property transfer tax, and transient lodging taxes by more than 450% to make up for the decrease in property tax revenue. Development fees alone are nearly three times higher than the national average, nearly $32,000 for a typical $200,000 three-bedroom home. And yet, despite Prop 13, Californians still pay 4.8 percent of their income in property taxes, the tenth highest ratio in the country.
The only way to make the tax code fairer is to make it simpler. Only by making the playing field cleaner and clearer can we make it anything close to more even. Otherwise we’re looking at billions more in taxes that I’m having trouble believing will be paid by people like Michael Dell.