California needs to fix Prop 13, but Tom Steyer’s plan has a fatal flaw
California Needs to Fix Prop 13, But Tom Steyer's Plan Has a Fatal Flaw
For decades, Proposition 13 has been a sacred cow in California politics – a constitutional amendment passed in 1978 that fundamentally reshaped property taxation. Its proponents laud it as a safeguard for homeowners, preventing displacement due to soaring property values. Yet, a growing chorus of critics argues that Prop 13 has starved public services, exacerbated the housing crisis, and created profound inequities in the Golden State. The need for reform is clear, but as former presidential candidate and billionaire Tom Steyer discovered with his "Schools and Communities First" initiative, simply proposing a change isn't enough. While well-intentioned, Steyer's plan, a "split roll" property tax reform, carried a fatal flaw that could have inflicted significant damage on California's economy, particularly its vital small business sector.
### The Golden State's Golden Problem: Understanding Prop 13's Legacy
To understand the urgency of Prop 13 reform, one must first grasp its profound impact. Passed during a taxpayer revolt, Proposition 13 capped property taxes at 1% of the 1975 assessed value and limited increases to a maximum of 2% per year. Property is only reassessed to market value when it changes ownership. While this initially offered relief, particularly for seniors on fixed incomes, its long-term consequences have been far-reaching and largely negative.
Consider a stark example that illustrates the disparity: My neighbors, Bob and Carol, have lived in their charming Craftsman home in Los Angeles since 1977. Their property taxes are laughably low, barely a few thousand dollars a year, thanks to Prop 13 protecting their 1975 assessment. Meanwhile, my wife and I, buying a similar-sized home just a few blocks away in 2022, pay nearly ten times that amount annually. We contribute significantly more to local schools, parks, and public safety simply because we bought our home more recently. This isn't an isolated incident; it's a systemic issue replicated across California.
This disparity doesn't just impact individual homeowners. It has created a massive budget shortfall for essential public services. Schools struggle with outdated facilities and underpaid teachers. Infrastructure crumbles. Local governments grapple with limited funds for parks, libraries, and community programs. Business owners often find it cheaper to hold onto older, underutilized commercial properties because their tax burden is minimal, even if the property's market value has skyrocketed. This disincentivizes new development and investment, contributing to California's housing crisis and stifling economic dynamism. The system disproportionately benefits long-term property owners, often large corporations or wealthy individuals, while placing a heavier burden on new residents and smaller businesses.
### Tom Steyer's "Fix": A Closer Look at the Split Roll Proposal
Enter Tom Steyer, a prominent environmentalist and progressive activist, who threw his considerable financial weight behind the "Schools and Communities First" initiative. This ambitious plan, which eventually became Proposition 15 on the 2020 ballot, sought to reform Prop 13 through a mechanism known as "split roll."
Under Steyer's proposal, commercial and industrial properties would be reassessed to market value every three years, rather than only upon sale. Residential properties, including single-family homes and apartments, would remain protected under the existing Prop 13 rules. The rationale was compelling on the surface: it aimed to generate billions of dollars in new revenue for schools and local services, estimated at $8 billion to $12 billion annually, without increasing taxes on homeowners. Proponents argued it would close tax loopholes exploited by large corporations and ensure that profitable businesses paid their fair share. The initiative painted a picture of thriving schools, better public parks, and a more equitable distribution of the tax burden, all funded by corporations and wealthy investors.
### The Fatal Flaw: Unintended Consequences and Economic Fallout
While the intentions behind Steyer's split roll plan were commendable – boosting public education and local services – the proposal contained a fatal flaw that ultimately led to its defeat and highlighted the complexities of tax reform. The problem lay in the assumption that reassessing commercial properties to market value would primarily impact "large corporations" without significant ripple effects on the broader economy, especially small businesses and consumers.
Here's where the plan faltered:
1. **Economic Burden on Small Businesses:** The initiative's messaging focused on "corporate loopholes," but many small and medium-sized businesses operate out of leased commercial spaces. When property taxes on these commercial buildings increase dramatically, landlords typically pass those costs directly onto their tenants through higher rents. This would have meant a substantial increase in operating expenses for countless small businesses – the local diner, the neighborhood bookstore, the independent boutique – already struggling with California's high cost of doing business, minimum wage increases, and the aftermath of the COVID-19 pandemic. For many, these sudden and unpredictable tax hikes would have been unsustainable, leading to closures, job losses, or relocation out of state.
2. **Increased Consumer Costs:** Businesses facing higher operating costs don't simply absorb them; they often pass them on to consumers in the form of higher prices for goods and services. This means that while homeowners might have been shielded from direct tax increases, they would indirectly pay more for everything from groceries to haircuts, disproportionately impacting lower and middle-income families.
3. **Uncertainty and Investment Deterrence:** Regular reassessment of commercial properties to market value, particularly every three years, creates significant volatility and uncertainty for businesses. It becomes incredibly difficult for companies to plan long-term investments, expansions, or even budget accurately when their property tax liability could jump dramatically. This unpredictability could deter new businesses from choosing California and encourage existing ones to seek more stable economic environments, hurting job creation and overall economic development.
4. **No Guarantee of Prudent Spending:** While the initiative promised funds for schools and communities, it lacked robust mechanisms to ensure that the new revenue would be spent efficiently or effectively. Critics worried that it would simply expand existing bureaucracies or be mismanaged, failing to deliver the promised improvements despite the significant economic cost.
In essence, Steyer's plan risked undermining the very economic engine that funds California's public services. By placing an unmanageable burden on the commercial sector, it threatened to slow economic growth, drive away businesses, and ultimately reduce the tax base in the long run, creating a new set of problems far more complex than the ones it sought to solve.
### Beyond Steyer: What a Real Prop 13 Reform Could Look Like
The defeat of Proposition 15 in 2020 demonstrated that Californians recognize the need for Prop 13 reform but are wary of solutions that could inflict unintended economic harm. The challenge remains to find a balanced, nuanced approach that addresses the inequities and funding shortfalls without stifling the state's economy.
A truly effective Prop 13 reform would need to consider several critical elements:
* **Targeted Commercial Reform:** Instead of a blanket market-value reassessment, reforms could introduce more gradual increases or targeted carve-outs for genuine small businesses. Differentiating between a multinational corporation's headquarters and a mom-and-pop shop is crucial.
* **Residential Modifications (Carefully):** While politically fraught, some form of residential adjustment, perhaps reassessment upon sale or transfer (like other states), could be considered, ensuring long-term homeowners contribute a more equitable share without sudden displacement. This would need to be coupled with robust protections for seniors and low-income homeowners.
* **Transparency and Accountability:** Any new revenue generated must be tied to clear, measurable outcomes and have strong oversight mechanisms to ensure funds genuinely benefit schools, infrastructure, and public services. Voters need assurance their money isn't just disappearing into a general fund.
* **Addressing Housing Supply:** True property tax reform cannot be divorced from California's pervasive housing affordability crisis. Reforming Prop 13 could, for example, incentivize the development of more housing or disincentivize holding onto underutilized land.
* **Economic Impact Assessments:** Any proposed changes must undergo rigorous economic analysis to understand the full spectrum of potential impacts on various sectors, from large corporations to individual consumers.
The core issue isn't whether Prop 13 needs fixing – it undeniably does. The question is how to craft a solution that is equitable, sustainable, and doesn't inadvertently cripple the economy it seeks to uplift.
### The Path Forward: A Balanced Approach for California
California stands at a crossroads. The legacy of Prop 13 has created a funding crisis for public services and a deeply unfair tax system. The intent behind Tom Steyer's initiative was noble, aiming to inject much-needed funds into schools and communities. However, its fatal flaw lay in a lack of foresight regarding the widespread economic burden it would impose, particularly on small businesses and consumers, threatening to undermine the very vitality of the state.
Moving forward, any successful reform of Prop 13 must be a product of careful deliberation, incorporating lessons learned from past attempts. It requires a balanced approach that understands the interconnectedness of property tax, public funding, economic stability, and social equity. California needs a fix for Prop 13, but that fix must be smarter, more nuanced, and designed to foster long-term prosperity for all its residents, not just shift the burden from one group to another with unforeseen consequences. The future of the Golden State depends on getting this right.
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