SACRAMENTO — Ever since Proposition 13 ignited a nationwide tax revolt in 1978, the California measure has been regarded as politically untouchable — until now.
A powerful coalition of progressive groups and public sector unions called “Make It Fair California” is going where Democrats have long feared to tread by attempting to peel back Proposition 13’s lid on business property taxes.
The idea is to raise billions in additional tax revenue for priorities such as education and infrastructure by creating a “split roll,” assessing commercial and industrial properties at their current market value while keeping Proposition 13’s tight limits on residential property taxes intact.
Bill Whalen, research fellow at the Hoover Institution at Stanford University, said such a plan would have been dead on arrival even a decade ago, but California’s leftward tilt — coupled with the success of the 2012 tax increase of Proposition 30 — has created a far more welcoming political climate for Proposition 13’s foes.
“Proposition 13 is obviously viewed as the third rail, but I’m not sure the third rail is quite what it used to be,” Mr. Whalen said. “Ten years ago, this would have been a very short conversation about Proposition 13, but now it’s much more realistic to say that it’s going to get cracked open.”
The Make It Fair campaign, which began with a May 8 press conference at Sutter Middle School in Sacramento, has yet to submit ballot language, but pro-business groups have wasted no time in organizing to fight the effort.
They recently launched Californians to Stop Higher Property Taxes, chaired by the heads of the California Taxpayers Association and California Chamber of Commerce, which argues that the split roll would devastate the economy, starting with women- and minority-owned businesses.
Given that Make It Fair is backed by a virtual who’s who of the state’s top unions and led by those representing teachers and public employees, the result could be a political bloodletting of historic proportions.
“The notion of adopting a property tax change, which, No. 1, is a direct assault on Proposition 13, and, No. 2, [affects] every business in the state of California — that’s World War III,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association.
The Make It Fair campaign aims to eliminate what it says are “corporate loopholes” that have “allowed a handful of giant corporations and America’s wealthiest commercial property owners to dramatically lower their obligations to California families.”
Under Proposition 13, the property tax rate is set at 1 percent of assessed value at the time of purchase, and the property may not be reassessed until it changes hands. That means longtime property owners, both residential and business, pay far less in taxes than the current value of their homes and offices given California’s skyrocketing housing and commercial property markets.
Prop 13 opponents say their cause is a measure of simple fairness.
“For example, Chevron’s Richmond refinery was last assessed almost 40 years ago, and it is paying taxes on the 1978 value of that land — not what it’s worth today,” said Anthony Thigpenn, who heads the coalition, in a Sacramento Bee op-ed. “Statewide, the underassessment of Chevron’s land alone shortchanges our communities by $100 million annually.”
The result is that residential taxpayers now account for 72 percent of property tax revenue, while businesses contribute 28 percent, he said.
“This underlines a trend we’re seeing across the country — the tax code is enabling the very rich to pay less and forcing everyone else to pay more,” Mr. Thigpenn said.
That soak-the-rich message proved successful in 2012 with Proposition 30, which raised income taxes on the highest earners for five years, but whether California voters are ready to tinker with the iconic Proposition 13 is unclear. A Public Policy Institute of California poll released in January found 54 percent of voters favored the split roll, while 38 percent opposed it.
Those results may sound encouraging, but analysts point out that ballot measures generally need more like 60 percent support at the outset in order to succeed in the face of what promises to be a ferocious and well-funded opposition campaign.
“The 54 percent approval level is pretty tepid in light of the state’s Democratic tilt, as well as the strong likelihood that the measure will lose popularity as it comes under attack,” said Jack Pitney, government professor at Claremont McKenna College.
Mr. Pitney also pointed out that California’s budget has been running a surplus thanks to the booming housing market and Proposition 30, which raised income taxes for five years on the highest earners.
“A lot of Democrats would like to see it pass, but their messaging tends to work against it,” Mr. Pitney said. “Gov. Brown and other top Democrats have been touting robust revenues in recent months. But if government coffers are so flush, why raise taxes?”
Hiking property taxes on companies would no doubt boost tax revenue initially — the Make It Fair campaign estimates a windfall of as much as $9 billion — but foes say it would also speed up the exodus of businesses from California, which already ranks at or near the bottom of many lists of states measuring the friendliness of their business climate.
Opponents cite a 2012 Pepperdine University School of Public Policy study showing that a split roll would hurt California in the long run with $71.8 billion in lost output and 396,345 lost jobs in the first five years.
“In reality, the tax haul reflects the success of the top 1 percent, who pay about half of the state’s personal income tax,” Mr. Pitney said. “To the extent that these folks are owners and shareholders of California businesses, the split roll measure would hit them again.”
The economic climate may not be ideally suited to raising taxes on business, but the November 2016 election presents tax-increasers with their best political shot at passage, thanks to the inevitable surge in voter participation that comes with a presidential race.
“If the choice is to go on the ballot in 2016 or 2018, if I’m the authors, I’m going all out in 2016 because I’d be counting on Hillary Clinton to give you a good turnout in California and put you over the top,” said Mr. Whalen.
As for opponents, they’re already raising the possibility that residential properties could be next, even though the Make It Fair campaign emphasizes that the split-roll proposal would have no impact on homeowners, renters or agricultural land.
“This is what I would do if I were running the ‘no’ campaign: I would say the next stop is going to be your home. And that’s a serious issue in California,” said Mr. Whalen. “There are a lot of people in California who stay here because they enjoy the benefits of Proposition 13. If you were to take away the cap under Proposition 13 and adjust people’s home prices to current prices, not the price when they bought, it would be a sad exodus of seniors leaving California.”
“The home you bought in 1980, you could not afford to live in right now because the taxes would crush you,” he said.
Even Mr. Coupal, whose group exists to defend Proposition 13, agrees that one problem has arisen with the initiative’s implementing language: Some corporations have managed to sell properties without a property tax bump by setting up shell companies in which no entity holds more than 50 percent, thus making it look as if no “transfer of ownership” has taken place.
His group and pro-business organizations supported legislation last year to close that loophole, but the bill failed after objections from — ironically — the left.
“We were very pleased to see the business community step up to the plate and work with the legislature, both Democrats and Republicans, to resolve this ambiguity,” Mr. Coupal said. “What happened is public sector labor realized they didn’t want half a loaf. They wanted the full split roll, so they blew up the deal.”
Pro-union California Calls, one of the groups that launched Make It Fair, said in a statement after the bill was killed by the Senate Appropriations Committee in January 2014 that the measure “was not meaningful reform.”
Analysts have raised the possibility that the campaign may be aimed at achieving another public sector labor goal: persuading Gov. Jerry Brown to support an extension of the five-year tax increase under Proposition 30 by using the split-roll threat as a bargaining chip.
“I think the public sector labor realizes they would be in for a horrific political battle on that, less so than just going out and getting an extension of the Proposition 30 increases,” said Mr. Coupal, who warned that even the political fight to extend Proposition 30 “is no cakewalk in and of itself.”
If anyone understands the power of Proposition 13, it’s Mr. Brown, who served as governor when the measure was on the ballot during his first go-round in office in the late 1970s. So far he has steered clear of the debate over whether to revisit the proposition.
“Jerry Brown had to do a big about-face on Proposition 13,” Mr. Whalen said. “He wasn’t in favor of it, but he sees the train coming down the tracks, and he sees himself getting run over by the train, so he supports it. Now here we are, almost 40 years later, and guess what? It’s the same Jerry Brown in office. We’ll see how he feels about redoing Prop 13.”