Instead of an equitable 50-50 split, residential property owners now shoulder about two-thirds of the tax load, twice as much as commercial property owners. The imbalance in the tax burden has grown steadily since a few years after Proposition 13's passage in 1978. This is in part due to Proposition 58, a law passed in 1986 that allows property to be passed from parent to child with no reassessment of the property.
Due to the slow turnover rate of commercial property, and perhaps good tax advice, many owners have been able to lock in 1978 tax rates through trusts and other provisions, while far fewer residential owners pass their homes on to heirs.
As reported in The Almanac's cover story, written by News Editor Renee Batti, former high-tech executive and Stanford MBA Jennifer Bestor, whose son attends Oak Knoll School, examined one commercial strip on Santa Cruz Avenue and a street in her own Menlo Park neighborhood. (Ms. Bestor embarked on the project to find out why local property taxes are falling short of paying for her school district's needs.)
On Santa Cruz Avenue, Ms. Bestor found that of the 56 commercial parcels, 23 are assessed at the 1978 rate (plus 2 percent per year). Of those 23 parcels, only four are held by the 1978 owners; 11 have been passed to a son or daughter and in some cases are held in family trusts. The last eight are owned by corporations (six) and partnerships of unknown composition (two), according to Ms. Bestor.
This contrasts significantly with the 53 residential parcels in Ms. Bestor's neighborhood, where 13 are held by 1978 owners and two are held by children of 1978 owners, so are taxed at the 1978 level. Assessments of two other parcels were affected by other factors.
The other 36 parcels, including Ms. Bestor's, have been reassessed after changing hands, she said.
These findings have led Ms. Bestor to say that her residential street is "...paying its way. I think that Prop. 13 did what people hoped it would do (for homeowners). It allowed people to stay in their homes and families to plan their financial futures."
But commercial property owners are not paying their way, she says. "Does it really make sense to subsidize family trusts, major real estate corporations and developers, who make smaller and smaller contributions (proportionally) to public services each year?"
Ms. Bestor also shared details on an inequity in commercial taxes that is repeated in many areas of Menlo Park.
She said, "The Trader Joe's property — now 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 percent-plus more (in taxes).
"Trader Joe's leases it from a family trust, descendents 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 in Menlo Park."
We agree with Ms. Bestor, who suggests that one way to help reduce the inequality of the never-ending 1978 assessments is to revise Proposition 13 to require that all commercial property be reassessed every 20 years. Such a rule would give commercial property owners a 20-year cap on substantial tax increases, but also provide local government agencies with the assurance that valuable local real estate would not be granted a never-ending tax break.
Ending the practice would also level the playing field for businesses that are now paying the maximum property taxes while their competitors enjoy the benefit of the 1978 assessments.
We hope Ms. Bestor's work will help to convince government officials that the commercial side of the Proposition 13 and Proposition 58 legacies needs a serious overhaul. Since the economic downturn brought huge budget deficits to California, the governor and legislators have been looking for more revenue but have focused on slashing expenditures, including devastating cuts to all levels of education. One answer is right under their nose — simply readjust the rules on reassessment of commercial property as stated in Propositions 13 and 58.