The following is a letter that Menlo Park resident Jennifer Bestor wrote to billionaire Warren Buffett concerning her research on the tax burden shift, favoring commercial property owners, resulting from the passage of California Proposition 13.
10 March 2010
Mr. Warren Buffett
Berkshire Hathaway Inc.
3555 Farnam Street
Omaha, NE 68131
Dear Mr. Buffett,
In 2003 you advised Governor Schwarzenegger to review Prop 13 with an eye toward generating more revenue for California schools, cities, emergency services, and other local needs. The governor responded that Prop 13 is the "third rail" in California politics and that you would have to do 500 sit-ups if you mentioned it again.
Please let me know how I can help you with the sit-ups. We desperately need some energy from that third rail.
Looking around at my hometown and reviewing my homeowner's tax bill, I am torn between the realization that, for homeowners, Prop 13 has worked roughly the way that voters thought it would, while for commercial landlords, it's been an incredible windfall.
Prop 13 has allowed my neighbors – especially retirees – to live in their homes relying upon a predictable tax structure. Families have been able plan for the future. It may not be perfect, but it has basically worked as voters expected.
Commercial property tax, however, has evolved in a way that not even the direst opponents of Prop 13 envisioned. The majority of tax "savings" in 1978 went to commercial landlords -- AND those savings have increased disproportionately over the 31 years since. In 1978, commercial property owners and single-family homeowners each paid about half the total tax in San Mateo County. By 2008, homeowners were paying two-thirds and commercial property owners one-third.
Prop 13 – and then Prop 58 that made Prop 13 bases inheritable – has created economic inequities that are evident from simple on-line searches of the county assessor's database – and destroy any idea of a level business playing field. A quick trip around my town illustrates this.
The nondescript little gas station on El Camino near my house pays $30,148 a year in property tax for the privilege of selling me less expensive gasoline than the two Shell stations ($14,214; $17,214), the Union 76 ($15,920), and the Chevron ($20,388) down the street. Those big-name stations have service bays to increase revenue and are on major intersections. But the "new guy" in town (well, actually, there's been a station there since 1978 -- but the new competitor in the market) is the one who's paying $10,000 a year more for police, fire, road repair, education, parks and courts.
Flipping the equation around, the Trader Joe's property -- the "new" market in town -- contributes just $7,471 of general tax towards our local services (for two-thirds of an acre of prime commercial property) compared with Draeger's up the street at $66,585. It isn't Trader Joe's, of course, that's paying the tax -- if they'd bought the property when they moved in, that parcel would be contributing 500%+ more. Trader Joe's leases it from a family trust, descendants of the 1978 owner ... with an address on a leafy street in Cape Cod. Since landlords charge what the market will bear, it's fair to guess that the property tax savings are accruing to those folks in Massachusetts -- while the costs are borne by school kids and residents of Menlo Park.
Of course, if the Cape Codders visited, they would probably look across Curtis Street to the Walgreens (Unamas and Starbucks) building and point out that that whole complex is only paying $8,709 in general property tax ... without providing customer parking. In fact, the Walgreens building pays 51% more for sewer service ($13,181) than it does towards police, firefighters, courts, roads, and maintaining its free city parking ....
Do you wonder whether any commercial properties ARE contributing meaningfully towards our local services? Well, the Chase takeover of Washington Mutual appears to have triggered a reassessment of that property (WaMu's earlier absorption of Home Savings had not). So that's an additional $25,000 into the pot (up to $45,190). And a dry cleaner we use, Menlo Art, is in a building that pays $30,346. The dry cleaner only occupies 25% of the building, so their share is a mere $7,587 -- but compare that with the $944 paid by the much busier cleaner across Santa Cruz Avenue. (Hoot'n'Toot sits on yet another property whose sewer bill dwarfs their property tax contribution -- with an out-of-state owner on the possibly-less-leafy Leisure World Drive in Mesa, AZ.) I wish I could afford Tom Wing's jewelry ($21,687), but I do have pizza at Amici's ($32,809) whenever possible. And Kepler's, our doggedly independent bookstore, occupies about a sixth of a building that pays $220,395.
Well, Mr. Buffett, I think you get the idea. People say that increasing taxes will make prices go up but, frankly, that requires the generous assumption that, in this totally unbalanced model, landlords aren't charging what the market will bear.
To make sure, I tested this. I took identical loads of my husband's laundry into each of the dry cleaners mentioned above (after a particularly depressing talk by our school superintendent -- spending per pupil is down this year over last, with only one new teacher hired for over 120 new kids, and 14 teachers due to be laid off in May) -- and found that cleaning three shirts, two khaki slacks and a cashmere sweater cost me $37.00 at the popular ($944) cleaner, while I paid $35.60 across the street ($7,587). Wherever the savings are going, it's not to customers.
And then there's the threat that Business Will Leave if commercial property taxes go up. Having spent twenty years in the corporate world before becoming a mom, forgive my skepticism. I sat in on many meetings at Apple Computer Inc. in the early 80's and 3Com Corp. in the early 90's discussing siting new sales and manufacturing operations. Property tax was never, to my best recollection, mentioned. Consolidated tax levels, yes, but in the broad context of the overall cost and relative ease of doing business. What attracted us? Locations with a level playing field (not one that discriminated against the new entrant); a highly skilled (educated) workforce; good road-, rail- and air-transportation; fair and efficient courts and public services; reliable infrastructure; and a community environment that made employees want to live there.
OK, out of fear of throwing the baby out with the bathwater, we are now drowning him in it. So what change do we make and how and who?
First, let's cap Prop 13 benefits for commercial property at 20 years. Every twenty years, each non-residential property is reassessed at market value, then gets to enjoy another 20 years of tax relief.
Second, since understaffed assessors offices can't possibly reassess the roughly 40% of all commercial parcels with base years before 1989, why not say that, for the next five years, assessors will use the existing statewide Board of Equalization mark-up percentages gathered on commercial properties sold – which the BoE uses to assess utility property. A property owner who feels that this overstates his total assessed value could file the usual appeal with a private appraisal, which, if accepted, would provide the basis for the subsequent twenty years. By 2015, assessors would have ramped up to reassess commercial properties with 1975 - 1995 bases ... especially since absentee landlords may decide that losing a perpetual and growing tax advantage encourages them to sell to people for whom the property -- not the tax windfall -- is the asset.
It isn't perfect, but it will work. $10,000 a year more in property tax from just one Menlo City commercial parcel generates $1,700 for our four elementary schools, $1,590 for our high school, $690 for the three junior colleges, $1,610 to fight our fires, $1,220 for the City ($450 of which to the police, $171 to road and parking maintenance, $207 for parks and recreation, $68 to the library) ... OK, I'm being boring ... but you and I know that stopping the nonsense of "1978 + 2% forever" will make a difference. Perhaps more of our commercial landlords will be locals -- and maybe even occupy some of the space they owned? Like in 1978.
Who will do this? Would you? Would you ask our governor, once again, to look at Prop 13 for commercial property? Does he have anything to lose? The Republicans seem to hate him. The Democrats seem to hate him. It's just like a movie where the hero gets everything going in the first act, things fall apart in the second, and everyone's against him at the beginning of the third ... until ... he grabs the third-rail, does the right thing, champions a fix that will make a difference ... and saves California. Go and ask him, Mr. Buffett – please!
And the tagline to the eventual movie? "There's nothing more dangerous than a lame duck." Maybe the poster could show you and Arnold doing sit-ups together. I'll hold your feet.
With sincere good wishes,
Homeowner – stay-at-home Mom – erstwhile PTO treasurer – retired high-tech executive – native Californian – lifelong, fifth-generation Republican … in Menlo Park, California, 94025
P. S. If anyone other than Mr. Buffet is reading this, please don't just believe me – or those who might respond with old arguments. Restoring our local services – and regaining local control of these services – rides on this. Please do your own research! Go to www.sanmateocountytaxcollector.org and look up your neighborhood. Then, check out where you shop and eat, bank and work. (Assessors maps on www.smcare.org can help locate APNs, if an address doesn't match.) Who's paying? Who's lunching?