Nine years ago, when the computer magnate Michael Dell was planning to buy the old Miramar Hotel in Santa Monica, his tax lawyers urged him to rethink the purchase. If Dell became the sole owner of that prime beachfront property, its value would be subject to a reassessment that would significantly raise the property taxes. But if he could find a way to buy it so that no single owner could claim more than 50 percent of the property, no reassessment would take place.
Dell’s team urged him to rewrite the contract. In the revised deal, an entity 99 percent owned by Dell bought 42.5 percent of the hotel; an entity run by Dell’s wife, Susan, acquired 49 percent; and a third company, also majority-owned by Dell, bought the remaining 8.5 percent. This preserved the legal fiction that no single person or entity owned more than 50 percent of the hotel, and as a result the Dells were able to avoid paying market-rate property taxes on their $200 million investment. Los Angeles County asked the Assessment Board to take another look, which it did. But Dell challenged the board’s reassessment, and ultimately a Court of Appeals upheld the fiction. The Dells would not have to pay higher taxes on the Miramar Hotel, which, according to an analysis by the Los Angeles Times, would have amounted to about $1 million per year.
The tax-restricting mandates of Proposition 13, adopted by voters in 1978, have created similar absurdities all over the Golden State. Fabulously valuable corporate properties that haven’t changed hands in decades (Disneyland is an obvious example) are taxed at a fraction of their real worth. This amounts to a vast subsidy for older, more established businesses that is effectively paid for by homeowners, whose share of the property-tax burden has soared, according to estimates produced by reformers. That extra burden is also carried by new businesses, which struggle to compete in a marketplace that taxes older companies at a far lower level.
This reality runs directly counter to the rhetoric of Prop 13’s proponents, who sold it in 1978 and still market it today as a way to protect everyday Californians and mom-and-pop businesses from tax-hungry bureaucrats. Pro–Prop 13 organizations argue that increases in the residential property-tax burden primarily reflect the fact that many valuable manufacturing properties have been converted into residential spaces in recent decades, and that home values have shot up. “Every tax system has its inequities,” argues Jon Coupal, the Sacramento-based president of the Howard Jarvis Taxpayers Association, which spearheaded the Prop 13 campaign and remains its most stalwart defender. “But Prop 13 as a property-tax system is superior to [using] market value.” Capping property-tax increases, Coupal adds, tamps down revenue volatility and forces the state to spend its money more carefully.
Coupal and his allies have recently come out in favor of a legislative fix to tackle the sorts of “abuses” embodied in the Dell case. They support a law that defines “ownership change” as having occurred whenever at least 90 percent of a property shifts hands, regardless of whether any one owner ends up with more than 50 percent. But they have drawn a line in the sand against the idea of a “split-roll tax,” which would impose a higher burden on corporations. Coupal accepts that such a tax would easily boost state revenues in the short term by several billion dollars annually. But his organization, the California Chamber of Commerce, and other opponents of change argue that the cost in lost jobs and leakage from businesses relocating out of state would more than cancel out the benefits in the long run. “Our position has always been that if you’re going to have a tax increase, it should be broad-based and universally applicable,” says California Chamber of Commerce policy advocate Jennifer Barrera. “A split-roll tax treats residential property differently from commercial property, so it’s discriminatory.”
Reform advocates, however, believe that a split-roll tax is exactly the way to go, and their polling research suggests that, for the first time in a generation, they have a decent chance of persuading a majority of the electorate to support them. Over the last few years, they have been calling for a reform that would protect homeowners and renters while taxing corporations at closer to the market value of their properties. Far from being discriminatory, they argue, it is simply a matter of equity: In an era of growing inequality and wealth concentration, this reform would generate desperately needed funds to maintain and expand vital public services.
Economists at the University of Southern California’s Program for Environmental and Regional Equity were recently hired by Make It Fair, a statewide coalition of reform groups seeking to put a split-roll-tax initiative on the ballot. When the PERE team crunched the numbers on more than 1 million properties across the state, they reached an astonishing conclusion: If a reform were enacted that maintained lower tax rates for residential homes but raised them to market rates for commercial and industrial properties, the state would generate $8.2 billion to $10.2 billion in additional annual revenues. It’s a figure large enough to restore the state’s education system, improve its mental-health infrastructure, and reform many of the other areas that have been left to lag in the decades following the 1978 tax revolt.
Prop 13 and follow-up initiatives restricting tax increases at the state and local level “ran a big, ragged hole through the budgets of local government,” argues Los Angeles County Supervisor Sheila Kuehl. The loss of spending flexibility, she adds, was devastating.
PERE researcher Jennifer Ito argues that a split-roll tax would create a more stable, higher-revenue norm for a state long buffeted by boom-bust cycles and overreliant on income and capital-gains taxes—a huge proportion of which are paid by a small number of wealthy Californians.
Although polls indicate that a majority of voters support reform, the groups advocating for the split-roll tax—including labor unions and grassroots community organizations like California Calls and the Advancement Project—aren’t quite ready to push for a referendum. After much debate, the Make It Fair coalition recently decided not to do so in 2016—not least because there are other tax-reform initiatives already heading toward the ballot, which the coalition fears will divert resources from the effort to rework Prop 13. It does believe, however, that by 2018 or 2020, it will have built a winning coalition capable of standing firm in the face of well-funded opposition.
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PERE Director Manuel Pastor believes there is “tremendous symbolism” in this fight. “Prop 13 was the first salvo in the small-government, anti-tax revolt,” he says. A skinny man with glasses and graying hair, wearing jeans and a dark gray T-shirt, he’s sitting in a conference room in a building on the edge of USC’s imposing campus on a blisteringly hot early-autumn afternoon. Pastor has had Prop 13 in his sights for decades. Now, with the data to show how it could be effectively reformed, he radiates excitement. Prop 13’s implementation, Pastor says, has led to a messy generational conflict in California, “because if you’re younger, you’re paying full freight,” whereas older residents and businesses are protected.
For decades, Prop 13 was seen as a political third rail, to be touched at one’s peril. Recently, however, California’s political climate has shifted markedly. In 2012, voters approved Prop 30, which injected cash into a hemorrhaging education system, along with a slew of other progressive tax reforms. Moreover, a new generation of voters has come of age since Prop 13 was passed; for them, it isn’t iconic. If they know anything about it, they’re as likely to have heard that it’s a harmful remnant of past policy fights as that it’s a necessary check on big government. And that perceptual shift may just turn out to be a game changer.
There’s a clear racial-equity issue here as well. Since California’s demographics have shifted massively in recent decades, the state’s newer businesses are more likely to be minority-owned. John Kim, executive director of the Advancement Project’s California branch, describes the struggle as a civil-rights issue. The effect of Prop 13, he argues, both on minority-owned businesses and on public schools and other programs disproportionately relied on by minorities, “has been extraordinarily racist.”
In South Los Angeles, in a large, recently modernized building just down the street from where the 1992 unrest began following the Rodney King trial verdict, Community Coalition organizers are hard at work on this campaign. Staff and volunteers brainstorm ideas in war rooms. They hold phone-bank sessions, during which they call thousands of local residents to discuss the need for reform (as of October, staffers estimate they have contacted 40,000 Angelenos). And they pound the pavement, knocking on doors and building their network of supporters. Above all, they are trying to get younger minority residents—people who traditionally have been less likely to participate in the electoral process—to make their voices heard.
The interior walls of the Community Coalition building offer bold reminders of previous campaigns. There are photographs of demonstrations against the prevalence of liquor stores in poor neighborhoods, protests against the high prices charged by supermarkets in “food desert” communities, and marches on behalf of Justice for Janitors. In the large meeting room is a huge collage of Trayvon Martin, the Miami teenager shot dead in 2012, largely because he seemed scary to his assailant. In each of the more than 300 squares making up the collage is a small photo of a South Los Angeles resident wearing a hoodie.
For these Californians, Prop 13 fits neatly into well-established patterns of injustice and discrimination. “There’s a lack of infrastructure in our communities, and it’s not fair that there are certain folks with resources who are not putting in their fair share,” says Alberto Retana, the coalition’s president and CEO. “We have parks in disrepair and schools struggling to reduce class sizes, while corporations are making record profits. Through this Prop 13 fight, we’re going to mainstream equity as a value in California.”
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In 2014, San Francisco–based state Senator Tom Ammiano, a Democrat, proposed legislation to redefine “ownership change” for businesses. The bill would have ended abusive, patently unfair practices such as those surrounding the Miramar Hotel deal. On the surface, it seemed likely to pass: The GOP wasn’t averse to the reform, the California Chamber of Commerce came out in favor, and the Howard Jarvis Taxpayers Association made statements indicating the group could live with it. Yet the bill died—and not just, or even primarily, because of corporate opposition. Paradoxically, many progressive politicians opposed it, as did organized labor and a large number of community groups. They believed the bill was far too narrow in scope and worried it would take the wind out of a bigger and broader reform movement that was finally coming into its own—one that wouldn’t just change the definition of ownership, but would also require regular reassessments of the value of commercial real estate, both the buildings and the land on which they sit.
This year, State Senators Loni Hancock and Holly Mitchell introduced SCA 5, which would move toward the ballot an initiative introducing a split-roll tax. The proposal would also protect small-business owners through a series of tax offsets and transfer the additional revenues into city and county services, schools, and community colleges rather than into the state’s general fund. It hasn’t moved out of committee yet, but Mitchell believes that it will before next summer.
The walls of Mitchell’s Sacramento office are painted a mustard yellow and a dark wine-red. On one hangs a framed quote from Martin Luther King Jr.: “Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half-baked solutions. Nothing pains some people more than having to think.” Mitchell, who has made a name for herself by pushing a series of anti-poverty initiatives, hopes to change the Prop 13 paradigm. The split-roll tax, she argues, her green-painted fingernails flashing as she moves her hands to emphasize her points, “is fair and makes sense, and we already have great analysis on the amount of money it could bring in.”
Even if legislators don’t move on this, Make It Fair has positioned itself to launch a signature-gathering effort to put a similar reform on the ballot come 2018 or 2020, and to go toe-to-toe with the Chamber of Commerce during the election campaign.
The reform has long been discussed as a Holy Grail by anti–Prop 13 activists like lobbyist Lenny Goldberg. For years a voice in the wilderness, Goldberg suddenly feels optimistic in the twilight of his career. “We are establishing the basis by which reform is inevitable,” he proclaims. “There’s a movement, there’s data, there’s research.”
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Not surprisingly, many businesses and corporate-friendly organizations bitterly oppose change—and are willing to bring tens of millions of dollars to the fight. Coupal believes the split-roll tax’s opponents can keep support below 50 percent. “We could even bury it in a presidential-election year, let alone 2018—which will be an off year,” he avers. One option, Coupal says, might be to put a countermeasure on the ballot proposing a reform of the ownership-change rules while leaving the basic tax caps intact.
Despite the opposition, many Californians recognize that Prop 13 has become a way of protecting entrenched interests at everyone else’s expense. They recognize too that its passage all but ensured a collapse of public services and infrastructure, including California’s once-celebrated public schools—and did so just when a growing number of users of those services were from racial minorities. At a time when young homebuyers were increasingly brown and black, as redlining and housing covenants died off and the suburbs opened up, they found themselves paying more taxes than their older white neighbors. Similarly, Prop 13 ensured that newer, non-white-owned businesses were handicapped with far higher tax bills than their more established, largely white-owned competitors.
Prop 13, it turns out, was a third rail only so long as the majority of voters were white and old. Now, however, that calculus is no longer a given. It turns out young minority residents will vote in high numbers when campaigns connect with them. That’s why Prop 47, the landmark criminal-justice reform adopted in 2014, won majorities even in some deeply conservative inland counties: Young and minority voters flexed their political muscle and changed the state’s approach to crime and punishment. That’s why voters passed Prop 30, which increased taxes to keep the troubled public-school system afloat. That’s why Make It Fair believes it is only a matter of time before California’s electorate reforms Prop 13.
How much time depends on how quickly and how significantly reformers can shift the pool of likely voters to better reflect economic and ethnic demographics. Despite the success of these recent reform initiatives and the state’s majority-minority demographics, the electorate remains disproportionately white, elderly, and affluent. In most elections, 60 percent of likely voters are white, according to Anthony Thigpenn, president of California Calls, one of the driving forces behind the Make It Fair coalition. Moreover, 48 percent are over the age of 55, 71 percent are homeowners, and 40 percent earn more than $80,000 per year.
“We need to change the electorate by 10 percent, in our estimation,” explains Thigpenn, who has spent his adult life working on activist campaigns. “We don’t think we’re ready yet for 2016. We want to be serious and strategic about winning. And we think the terrain only gets better for us.”