Lawmakers Shudder at Thought of Rewriting Proposition 13

SACRAMENTO —  It was hard to find anyone in the Capitol on Tuesday who relishes the task they may be given next year by the U.S. Supreme Court--rewriting Proposition 13, a document sacred to more Californians than the state’s Constitution.

“Proposition 13 is a very sensitive issue,” said state Sen. Gary K. Hart (D-Santa Barbara). “I’m sure it is going to be dealt with very gingerly.”

If at all, he could have added. The Supreme Court decided this week to rule on the constitutionality of the 1978 voter-approved initiative, the most famous ballot measure in a state that has allowed residents the power of the referendum for almost a century.

Proposition 13 slashed property taxes for millions of California homeowners. Its effect on personal tax bills has kept growing over the years, as real estate values soared, but taxes have rose much more slowly.

“You cannot even talk about Proposition 13 without people going absolutely ballistic,” said Assemblyman Johann Klehs (D-Castro Valley). “It’s the most sacred cow that exists in California today.”

Proposition 13 accomplished its tax cut by reducing all property assessments to 1975 levels--allowing a small yearly increase for inflation--and setting a top tax rate of 1% of the official value. When a property is sold, the sale price becomes the parcel’s new assessed value, and the tax bill rises accordingly.

Proposition 13 is under review in a suit brought by Macy’s department stores over the reassessment provision, which causes property that is sold to be taxed more heavily than real estate that has not recently been sold. If Proposition 13 is struck down, the alternative tax method most under discussion would quickly hike the bill on most commercial property and treat that real estate differently than residences.

It also would cause the tax bite to rise slowly over several years for homeowners whose property has not recently sold and is now taxed at less than true market value. Under the alternative plan, which was crafted by the Senate Commission on Property Tax Equity and Revenue, homes recently sold and assessed at close to their market value would have their taxes lowered.

This would all be accomplished through a so-called “split roll” approach that would tax homes more lightly than business property, according to Hart, a commission member. Under Proposition 13, there is no distinction between homes and business real estate.

Hart said all tax assessments on homes should gradually rise to the actual market value of the home. At the same time, the 1% tax rate--$1,000 yearly on a $100,000 home--would fall so that the bills for individuals will vary but the overall tax bite on homeowners in California does not increase, Hart said.

In return for the break for homeowners, the commission’s plan would increase the assessment on all businesses to market value and retain the 1% tax rate--thereby hiking taxes on most commercial property, in some cases substantially.

The split roll concept drew strong objections from business groups, which say that shifting taxes onto commercial property will drive more corporations out of state and stifle the economy.

Also vocally against a split roll is what remains of the tax revolt organizations of activists Howard Jarvis and Paul Gann that spawned Proposition 13. Both initiative co-sponsors have died, but the Jarvis name remains on a taxpayers’ group in Los Angeles and Gann’s son Richard leads a group in Sacramento.

“We would be totally opposed,” Gann said Tuesday. “There is no way you can improve on Proposition 13. It is working just as it was intended.”

The current method of recalculating taxes when a property is sold works to the advantage of most homeowners, Gann said. Before Proposition 13, a person who paid $50,000 for a house in Los Angeles could in a few years be taxed as if the house were worth $150,000 or more, even though the person’s income may not have changed and the profit is only on paper.

Under Proposition 13, the tax bite is in effect deferred until the profit on a home’s appreciation is actually received, Gann said.

If Proposition 13 is struck down, Gann said, he fears that the Legislature will raise property taxes.

“We’re dealing with the same group of liberal legislators who fought Proposition 13 and who have fought to overthrow it,” Gann said. “They will see an opportunity to get more money.”