Roots of Change: A Split Roll on Proposition 13

By John Alden

In the years since Proposition 13 passed in 1978, California's education spending levels have plummeted to nearly the worst in the nation. I believe it's time to reform corporate commercial property taxes, to ensure that corporation are paying their fair share and that our state has the funds to invest in the reforms we need to create real progress in California.

However, loopholes carved into Proposition 13 by the Legislature have allowed California's largest corporate property owners to abuse Proposition 13. Not only does this deprive our critical services + like education and public safety + of the funds they need, but effectively raises taxes on homeowners. Today, the draconian budget cuts in cities and school districts forces those districts to rely more and more on parcel taxes and other taxes on local homeowners. This is simply unfair to homeowners. Proposals to close these loopholes are called "split-roll" because they distinguish between two kinds of property tax rolls: one for homeowners and one for corporate commercial properties.

Corporate Property Ownership:

When voters approved Proposition 13, it was designed to trigger reassessment of property taxes on real estate only when the real estate is transferred from one owner to another. This is how it works for real people: our taxes are set when we buy a new house, and then we can depend on steady tax rates every year. When we sell the house, the new owner pays taxes based on their purchase price.

But, when commercial property is owned by corporations, that property may never be reassessed under Proposition 13. That's right + never.

One way for corporations to do this is simply to be corporations. Corporations never die, so they can hold a piece of property forever. Thus, the property is never reassessed.

If the real people who own the corporation change, this very seldom triggers reassessment. In fact, under rules written by the Legislature, such reassessment is only triggered in the rare event a single person buys more than 50% of the corporation's stock. This sort of reassessment is much more likely to be used against small family businesses when they are bought or sold. For this reason, small businesses usually find themselves in the same position as homeowners + reassessed more often, and taxed more often, than the big corporate property owners.

Another way corporations prevent reassessment is by using loopholes to craft tax shelters for their properties that aren't available to homeowners. Complicated leases, corporate shells, and crafty loan financing can prevent corporate commercial property from being reassessed, too.

These loopholes mean California's largest corporations are paying less and less tax than real people + middle class families, small business owners, and seniors. A recent analysis by the California Assembly concluded that non-residential property taxes actually dropped by 5% from 1991 to 2001. The Institute on Taxation and Economic Policy concluded that in that same time period, taxes increased by an average of 1% for all but the richest 20% of Californians.

So if corporate commercial property owners are paying less and less every year, what's happening to our state budget?

Education Funding:

The tragedy of education funding cuts in California are the perfect example of how these tax loopholes are destroying the foundations of California's future.

School funding in California is now down nearly $10 billion from four years ago. According to Education Week, California is now 44th among the states in per-pupil funding. Only 1% of students in California attend schools that spend at least the national average of $7,734 per student. And California spends only 3.5% of it total taxable resources on education, compared to the national average of 8%.

These cuts in funding have taken a terrible toll on the quality of education offered. Our student-to-teacher ratio is the second lowest in the country, and our counselor-to-student ratio is the lowest. The gains in classroom size reduction made in the 1990s under both Democratic and Republican Governors have been lost.

We don't have to read these statistics to know our schools are a mess. We've all seen programs cut, teachers laid off, and schools crumbling.

How can we turn this around? When my father went to elementary school here in the Bay Area, he received the best education a child could get in the United States. Today, I know my young cousins here in Marin, Spencer and Michelle, won't have the same options.

And it's not for lack of trying. When we, the voters, approved Proposition 98 many years ago, we guaranteed that schools would get about half of the state's total budget every year. In 2004-2005, education received over $43 billion out of the state's $82 billion budget.

In other words, the problem isn't that we're not putting a big enough share of the state's budget into education, but that the state's total revenues have diminished so dramatically that there just isn't enough funding to cover our most important needs. The problem is the same regardless of whether we examine police and fire stations, health care, or education.

Using Split-Roll Taxation to Fix the Problem:

We must end the tax loopholes that allow our wealthiest corporations to cut funding to education and other vital services. This was never the intent of the voters when we passed Proposition 13.

Proposals to fix these rules have been dubbed "split-roll" taxation because they would create two property tax rolls + one for homeowners that retains Proposition 13 protections, and one for corporate properties. They use a constitutional amendment to simply reclassify corporate and commercial properties so that they are assessed value increases at a modest rate that keeps up with inflation. Twelve other states already use split-roll systems like this. A constitutional amendment would also eliminate the potential for any new loopholes in the future.

California's voters have the political will to back these reforms at the ballot box if necessary. Split-roll proposals have polled very well in recent years. And split-roll has been supported by California teachers, the California State Association of Counties, Children NOW, the League of Women Voters of California, and the Congress of California Seniors, among many other groups. Both Republican and Democratic Legislators have proposed similar reforms along these lines in recent years.

But split-roll proposals have been blocked in Sacramento. The largest of California's corporations pour their money into lobbying against split-roll. So the very loopholes corporations are exploiting help them fund the lobbying to keep those loopholes open. And some Democrats, fearful of the power of these corporations, simply fail to vote for these reforms in the Assembly.

A good example for this failure was ACA 17, put forth by Assemblymember Loni Hancock last session. ACA 17 preserved Proposition 13 protections for homeowners and agricultural properties, but set up a separate property tax roll for commercial properties. But some Democrats balked at the idea, despite ACA 17's strong backing from teachers and the elderly. This is a failure to stand up for education, a failure to stand tall for one of our greatest priorities as Democrats + investing in our children.

As your Assemblymember, fighting for split-roll reforms will be one of my top priorities. We Democrats can't truly fight for our most important values, like education, without it.

To read all of my Roots of Change essays please visit http://www.aldenforassembly.com/roots_archive.html