Prop. 13 reform could be big boost to county's tax revenue

Heartbreakingly, the correct title for this article would have been "Prop. 13 reform could be big loss to local schools.”

Below, at length, I run through six major local effects of the initiative’s mechanisms. I apologize — but reality is sadly different from the proposition's supporters’ hopes and imaginings — indeed, from my own hopes when I first saw it. I would be happy to support any statement below with in-depth analysis from public sources.

First, it is the language in the proposition itself that would divert half of San Mateo County's $800 million of new tax revenue to Sacramento. Property tax has NEVER left the county in which it is collected before. Article XIII Section 1 paragraph (a) of the California Constitution has always prohibited it. Until this.

Second, the proposition arrogates ALL new commercial construction property tax revenue to itself — along with all appreciation from sales of existing commercial property. This is not “new money” raised by the initiative, but future revenue that would have been collected anyway.

Thus, the new commercial construction that pushed Redwood City Elementary Schools into basic-aid status in December (sparing them this year’s massive education state-aid deferrals) would have simply been allocated instead to this state pot. The hundreds of millions of recent property sales on Sand Hill and Willow Roads that will be funding Las Lomitas, MPCSD and Sequoia Union HSD this year would also have been redirected, while those districts would just get a fixed $100 a year per student. The legislature is allowed to decide how much school property to redistribute statewide. This year's precipitous $11B drop in the school funding minimum guarantee functionally allows the legislature to divert any proposition-related San Mateo revenue elsewhere in the state to fund schools, sparing its own General Fund revenue to spend outside education.

Third, the proposition effectively ensures that Ravenswood will never get enough property tax revenue to fund itself, unlike every district around it. This is a tragedy. Its tax base is increasing faster than the county as a whole, 12.45% this year, compared with 7% generally. This base has been growing on the back of significant new commercial construction. Meanwhile, Ravenswood’s state school funding allowance is flat, with no adjustment for the high local cost of living. Once again, Ravenswood would find itself the loser — not due to lack of local property tax available or allocated for its use, but due to yet another law favoring city and county interests — and redirecting Ravenswood's tax revenue elsewhere to satisfy the state's commitments.

Fourth, the proposition is measurably punitive towards business properties. California's acquisition-value based property tax system, established under Proposition 13 in 1978, extracts a substantial 40% tax premium from new property buyers for the first decade. Taxed initially at market value, the 2% growth cap provides both predictability and a form of guarantee that an owner can recoup that first decade's subsidy in the second and third decade of ownership. Moving one property segment — commercial and industrial property — into perennial ’new buyer’ status effectively puts a 40% surcharge on that segment, given that the remaining three-quarters of all properties will continue to be assessed at an average of 70% of market.

Fifth, the proposition makes housing less attractive to local governments. Given the hefty 40% surcharge on commercial property, the Proposition encourages cities to pursue commercial development — not housing — making the Housing Commission’s recommendation counterproductive. Commercial development would yield 40% more revenue than residential development — due to its perpetual market-value basis — on top of sales tax revenue, occupancy taxes, business tax revenue, etc.

Sixth, please recognize that San Mateo County is shown as a massive new revenue producer because few local commercial properties would be exempted. Reassuring, it-won't-hurt-a-bit, statewide percentages are weighted heavily by tens of thousands of small parcels in Imperial, Kings, Tulare, Yuba and other inland counties.

No local commercial property has changed hands in Menlo Park for less than $3 million recently except single suites within the medical/VC office buildings at 695 and 888 Oak Grove. The Flegel’s building — double the standard width for Santa Cruz Avenue — is on the market for $22,750,000 and has just gone into escrow. A standard (double-retail-front) parcel would sit in the $7-10 million range for land value alone — which is consistent with the sale of the half-wide 888 Santa Cruz for $3.3 million. The Jeffrey’s building on El Camino is on the market for $5.5 million, while larger properties start north of $10 million.

It was heartbreaking to me to realize that voting for this proposition was not to close the Prop 13 loophole that allows a small percentage of local landlords a big tax break — but to hand revenue our local schools would have received away while overtaxing every commercial property.

Finally, if you wonder what all this is about or how to check my statements, realize that the biggest victim here is civic transparency. Where do our local property taxes go? Until now the one thing I could say with certainty was ’somewhere in the county.’ Then I’d scramble to analyze the original AB-8 allocations, ERAF, Excess ERAF, the VLF Swap, the County Office of Education trial court diversion … and come up with some pretty good estimates. Moving forward, the answer will be ’somewhere.’ It is telling that this initiative requires the recipients to document how much they get — but doesn’t require any county to publish how much they collect, then send to Sacramento, nor Sacramento to publish how much it disburses and where.

Kate, you know how carefully I’ve studied local property tax and school funding. For ten years, I’ve worked to close the loophole that allows about 15% of commercial owners to enjoy ‘widows and orphans’ tax benefits. But this is a smash-and-grab. It is the antithesis of tax fairness. It will hurt, not help, our local schools.

Passage of this measure will devastate business tenants as their rent is increased. The jobs those businesses provide will be lost.

VOTE NO!

Close the loopholes for large commercial landowners.

Vote yes.

Thank you to Jennifer Bestor for that very well reasoned and researched post.