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The article was updated on Jan. 18 to note that the California Teachers Association, while a member of the Make It Fair coalition, has not yet taken a position on the initiative.

Forty years after Californians revolted against rising property taxes to pass Proposition 13, advocates of tax reform believe the timing is finally right to do surgery on it.

They’ve filed a draft initiative with the state ­— the step before starting to collect signatures for the November ballot — proposing a “split roll” system that would increase taxes on commercial and industrial properties to produce more money for schools, counties and local governments, while leaving intact Prop. 13’s tax protections for homeowners and residential properties.

Under the approach, tax rates would remain uniform, but commercial and industrial properties would be reassessed every three years at market value, while residential properties would continue to be reassessed only when they sold. There would be exemptions for small business owners.

Proponents of  the California Schools and Local Communities Funding Act of 2018, say the change initially would generate $11.4 billion, of which about $4.5 billion would go to K-12 schools and community colleges. That would increase state education funding by about 6 percent.

Supporters include community groups in the “Make It Fair” coalition, including California Calls, an alliance of 31 community-based organizations, the Courage Campaign and the League of Women Voters. No financial backers have yet come forward — perhaps a signal they have not committed yet — but leaders express confidence they soon will. **

Among those on the initiative’s steering committee is the Advancement Project, a Los Angeles nonprofit championing early education and K-12 policies for low-income children. Its co-founders, Molly Munger and her husband, Stephen English, spent $47 million in 2012 on an initiative that would have raised $10 billion per year for early childhood education and K-12 schools. It lost to a competing initiative, Proposition 30, backed by Gov. Jerry Brown.

Supporters will need all the financial help they can get. Robert Lapsley, president of the California Business Roundtable, a nonpartisan organization whose members are senior executives at the state’s major companies, promises a “fight to the death” over this or any initiative that raises property taxes on the business community. “This already is a high-tax state, and Prop. 13 offers one of the few protections that businesses and Californians have in terms of tax predictability. We take this one seriously,” he said.

Why now for a “split roll”

Prop. 13 reformers have been looking for an opportunity to propose a split roll and are moving ahead to capitalize on Californians’ dislike of President Donald Trump in general and the Republican Congress’ tax cut in particular. With elements that target high-wealth, predominately Democratic states like New York and California, the tax cut caps individual taxpayers’ deductions for state and local property taxes at $10,000, which will raise taxes for some upper middle-class taxpayers, while leaving intact deductions for businesses. A last-minute addition in Congress threw in a significant tax perk for real estate developers.

“Timing is everything in politics,” said Lenny Goldberg, policy director of the advocacy nonprofit California Tax Reform Association, which has eyed the split-roll idea for years and done research for the initiative. “We’re catching a wave.”

“With the assault on California by the federal tax plans, people feel now is the time to fund schools, community colleges and other vital services,” said Mac Zilber, a spokesman for the community groups backing the initiative.

But Jon Coupal, president of the Howard Jarvis Taxpayers Association, dismissed the advocates’ logic. “They’re looking for any excuse. There’s federal tax reform, so we have to raise taxes. That may ring the bell of the Bernie (Sanders) crowd, but it won’t fly.” The anti-tax group was founded by Jarvis, Prop. 13’s author.

Proponents submitted a draft to the California attorney general last month and have until Jan. 20 to make final changes. They’ll be able to start gathering signatures in late February, after an analysis by the Legislative Analyst’s Office and a ballot summary is written by the attorney general.

Prop. 13’s impact

Passed in June 1978, during Gov. Jerry Brown’s first term in office, Prop. 13 emerged at a time when fast-rising property values resulted in fast-rising property tax bills. Prop. 13 rolled back property assessments by 57 percent, limited tax rates to 1 percent of assessed value and limited annual property tax increases to 2 percent.

Its impact on K-12 schools and community colleges, which found themselves suddenly strapped for money, was to shift funding for — and control over —­ education from local districts to Sacramento. Critics cite Prop. 13 as a key factor in the decline in education funding in California from among the top-funded states in the ’70s, to, depending on the metric, the bottom third in per-student spending.

Brown didn’t appear interested in leading a charge for a split-roll change when asked about it during his press conference on the state budget last week (see minute 22:30). “If they want to find ways of lowering the threshold for more taxes, people can certainly do that but it takes a ballot measure. It’s a little late for that now,” he said.

Under the plan, counties, cities and other government entities, like hospital districts, would distribute money under existing arrangements. Money raised for K-12 schools and community colleges would be pooled, so that low-property-wealth rural districts would get an equitable share, as required by previous court rulings in the Serrano cases. In its draft form, K-12 money would be distributed based on the Local Control Funding Formula, which directs money to districts based on their enrollment of low-income, foster and homeless children and English learners.

Proponents say passage would generate more money for schools and what the initiative calls “chronically underfunded” local governments. It would also make a “loophole-ridden” property tax system fairer.

In almost every county, residential owners have borne a bigger portion of the counties’ property taxes, while commercial and industrial properties’ share has declined over time, according to a Legislative Analyst Office’s 2016 study. There are also inequities among commercial and industrial properties. Some companies continue to pay low taxes on buildings they’ve owned for decades, while competitors with newer properties pay based on the higher assessed values. “Even the largest beneficiaries cannot defend the system,” Goldberg said.

Goldberg said about 80 percent of the new revenue would come from owners of only 8 percent of properties worth $5 million or more. Most of those who’d pay higher property taxes would be wealthy American and foreign real estate investors and companies whose properties haven’t changed hands in decades, he said.

The League of Women Voters of California opposed Prop. 13 in 1978 “as bad fiscal policy, and we’ve been listening to proposals for modifying and reforming it,” said the organization’s president, Helen Hutchison. “The inequities that have grown as Prop. 13 has aged make the initiative viable now.”

In annual polls conducted by the Public Policy Institute of California, a majority of voters — between 50 and 60 percent — said they would support a split-roll property tax. The organization last surveyed the issue in 2015 and plans to include a question about it in a poll it will conduct this month. Goldberg said the campaign’s internal poll shows the same results. But Lapsley said their internal polls show the opposite once voters are told about the overall impact of the tax, particularly on small businesses.

The issue, said Goldberg, is the size of the margin of support the campaign will need going in to withstand the business community’s onslaught.

Hutchison said their own financial support combined with grassroots organizing will be the difference. “We definitely will be outspent but will have a strong enough campaign to win,” she said.

** Correction: An earlier version said that the California Teachers Association endorsed the proposed initiative. CTA is a member of the Make it Fair Coalition but has not yet taken a position on this initiative. 

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  1. el 1 month ago1 month ago

    Some companies continue to pay low taxes on buildings they’ve owned for decades, while competitors with newer properties pay based on the higher assessed values. One of the more serious impacts of this is how it disadvantages and impacts new business owners and ventures, and this inequity gets worse with every passing year. Even if you didn't want to pass this to increase revenue to the State, fixing this issue - so that someone buying a … Read More

    Some companies continue to pay low taxes on buildings they’ve owned for decades, while competitors with newer properties pay based on the higher assessed values.

    One of the more serious impacts of this is how it disadvantages and impacts new business owners and ventures, and this inequity gets worse with every passing year. Even if you didn’t want to pass this to increase revenue to the State, fixing this issue – so that someone buying a property and starting a new restaurant isn’t paying 10x the property taxes of the restaurant across the street – really needs to happen.

    Homeowners on the whole will eventually die or move, but if the property is owned by a corporation, it might never be reassessed.

  2. Abe Froman 1 month ago1 month ago

    Brilliant!

    Instead of using the monies to even out a tax system that relies heavily on income taxes from about 300,000 people, the masterminds behind this proposal want to use it to guarantee a flow of cash into new or expanded programs, programs that will be cash starved the next time the real estate market crashes. And at a time when the state is projecting a $10+billion surplus. This is exactly why Prop 13 was an issue in the first place.

  3. jskdn 1 month ago1 month ago

    It appears that, for the distribution of the new split roll revenue, the initiative would replicate the existing allocation formulas used for the 1% rate, set by 13, property tax revenue between school and other local government entities, formulas first originating from the post-Prop 13 passage implementing legislation. These allocations vary widely by jurisdiction in the share going to schools reflecting the varied local property tax structures that were being used prior to Prop 13. … Read More

    It appears that, for the distribution of the new split roll revenue, the initiative would replicate the existing allocation formulas used for the 1% rate, set by 13, property tax revenue between school and other local government entities, formulas first originating from the post-Prop 13 passage implementing legislation. These allocations vary widely by jurisdiction in the share going to schools reflecting the varied local property tax structures that were being used prior to Prop 13. If that’s right, local governments already benefiting from those formulas would see another windfall relative to localities where schools get a large share.

  4. Mike McMahon 1 month ago1 month ago

    I hope the backers of Make It Fair are not overstating the fiscal impact of increasing property taxes has on school funding. Ever since the Prop 13, the primary sources for school funding have come from the State. Property taxes collected only lowers the state's contribution to fund schools, unless you are a basic aid school district. So if there is an increase in property taxes, it appears it would free up state monies and … Read More

    I hope the backers of Make It Fair are not overstating the fiscal impact of increasing property taxes has on school funding. Ever since the Prop 13, the primary sources for school funding have come from the State. Property taxes collected only lowers the state’s contribution to fund schools, unless you are a basic aid school district. So if there is an increase in property taxes, it appears it would free up state monies and not necessarily increase school funding. I wonder if Prop 98 would have to be changed.

    Replies

    • John Fensterwald 1 month ago1 month ago

      As written, the portion of revenues for schools would supplement Prop. 98 and would be distributed based on districts’ LCFF funding. It would not be used to offset the property tax portion of districts’ school funding. I raised that issue, Mike.

  5. Paul 1 month ago1 month ago

    John, do you know whether this particular split-roll proposal (there have been so many over the years!) distinguishes business property used for residential purposes (apartment buildings) from business property used for other purposes (offices, shopping malls, etc.)?

    Quite apart from the tragic effect of Proposition 13 on school funding, property tax is highly regressive. It would be unfortunate if California’s renters had to foot the bill through higher rents.

    Replies

    • John Fensterwald 1 month ago1 month ago

      As drafted, rental residential properties would be exempt, along with homeowners, Paul.

    • John Fensterwald 1 month ago1 month ago

      As drafted, residential rental properties would be exempt, along with homeowners, Paul.

  6. jskdn 1 month ago1 month ago

    “Make It Fair”: these groups care not a whit about fairness. What they care about is getting more money from government for themselves. “Make More Mine” is a more accurate name. The premise that commercial properties as a whole have been given a windfall, despite what John wrote, doesn’t seem to be supported by the LAO analysis. Read it yourself. What is clear is that the overwhelming issue of unfairness is between owners of similar … Read More

    “Make It Fair”: these groups care not a whit about fairness. What they care about is getting more money from government for themselves. “Make More Mine” is a more accurate name.
    The premise that commercial properties as a whole have been given a windfall, despite what John wrote, doesn’t seem to be supported by the LAO analysis. Read it yourself. What is clear is that the overwhelming issue of unfairness is between owners of similar market-valued properties who are paying different, sometimes massively different, amounts of taxes due to Prop 13’s assessment provisions. That’s what needs to be changed if people actually cared about fairness. Unfortunately it’s just not the greedy for more government crowd that doesn’t care about fairness, neither do lots of people on the other side.
    If people wanted to “make it fair,” then we would change Prop 13 so that all properties would be assessed at their market value. People mistakenly think that has to result in a huge tax increase for government. But ad valorem property taxes are a function of two factors: assessed valuation times the tax rate. You can double the assessed valuation and half the tax rate and it produces the same amount of money for government. You can reform Prop 13 by using market assessments for calculating what owners pay while keeping Prop 13’s existing property valuation system to limit what government can take. That means tax rates would be dramatically lowered. That’s revenue-neutral reform. Nobody’s taxes go up except to lower those of others who have been paying more than their share, in the pursuit of actual fairness.

  7. Roger Grotewold 1 month ago1 month ago

    In 1978, when the Howard Jarvis and Paul Gann backed Proposition 13 was passed, public education funding changed forever. As a fairly young teacher back then, I can remember the upheaval this caused in our education funding system. Property owners were enthusiastic and happy, while proponents for our education system were appalled. From that time until now, funding for our schools has seemed to be a problem every year, especially at the … Read More

    In 1978, when the Howard Jarvis and Paul Gann backed Proposition 13 was passed, public education funding changed forever. As a fairly young teacher back then, I can remember the upheaval this caused in our education funding system. Property owners were enthusiastic and happy, while proponents for our education system were appalled. From that time until now, funding for our schools has seemed to be a problem every year, especially at the state level. Hopefully, some modifications in the Proposition 13 amendment will help make our state public school system great again.

  8. Brent Long 1 month ago1 month ago

    Wow, great. Let’s just give more business’ a reason to leave the state. It won’t be long until they raise our residential property taxes through this movement as well. How about this, stop ridiculous, out of control spending in Sacramento. Cancel the train and infuse $8 billion to education?! Our state leaders have all lost their minds.