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Open Letter to Warren Buffett

Original post made on Mar 15, 2010

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.

Read the full letter here: Web Link posted Monday, March 15, 2010, 11:05 AM

Comments (22)

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Posted by too much tax
a resident of Menlo Park: Downtown
on Mar 15, 2010 at 6:24 pm

You are really a California lover. I don't really think most Californians will get it. They just care about the tax they saved, but they don't know how many other things they have to overpay for the prop 13 and the overpayment they made is really a lot more than what they have saved.


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Posted by Twenty year resident
a resident of Menlo Park: Allied Arts/Stanford Park
on Mar 15, 2010 at 9:47 pm

I find the disparities in relative property tax paid by commercial businesses quite astonishing. Nothing like hard times to zero in on inequities. I'd be fascinated to see a complete table of how prominent Menlo Park commercial properties stack up against each other.

One is hard-pressed to avoid coming to the conclusion that our community's ultimate prosperity may be short-changed through the perverse incentive of capped Prop 13 commercial tax rates fattening the bank accounts of out-of-state legacy landlords. Not that I'm suggesting class or regional warfare, but rather that a community's businesses (landlords) and residents should be paying fairly and equitably towards local services - be they schools, public safety, parks, etc.

A wealthy town such as Menlo Park shouldn't be seeing cutbacks in our schools. It doesn't pass the 'straight face test'. Were all property owners pulling their weight, we'd be better equipping our children for the intensely competitive world we live in.

Prop 13 reform has been a 'third rail' but if these trends as noted by Ms. Bestor continue, there won't even be rails, just a rutted road. Time to face up to a tax code revision that leads towards greater community good. Solid support for the schools via a tax code revision leads to rising property values leads to greater overall town wealth that attracts businesses leading to a more desirable town and so on.

I doubt anyone in Menlo Park wants to see our city become known as 'the town that used to have good schools, used to have high property values'

Let's hope that this year's governor's race and legislative races result in representatives with courage and vision -- and that we support that courage and vision with our own actions.


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Posted by Tom
a resident of Menlo Park: Sharon Heights
on Mar 15, 2010 at 10:38 pm

This is a well written letter that outlines some of the downsides of the Ponzi scheme that we call Proposition 13. Yes it is truly a Ponzi scheme as the new participants pay far more for common services than the longer term residents.

I would not stop at commercial properties as suggested above, we really need to rethink the whole system and drive decision making, revenue collection, and accountability at the local level.

Proposition 13 creates many situations where long term home owners can't afford to move from their homes due to the potential increase in taxes. This causes hoarding and a shortage of supply of housing - which in peak demand times severely drives up the cost of homes. California homes are significantly more expensive than the national average - great if your a Realtor or your house is your retirement plan, but tough if you have just moved here or are starting a family.

The time to abandon Prop 13 is now. We would be better served moving toward a flat - per parcel (or unit) tax that every home owner and apartment owner pays. If you don't trust the "government" to set this rate, fine, put the amount up for public vote every year. Itemize what citizens will gain or loose in terms of services, and take an honest look at privatizing many of the services. People will make good decisions if given the choice.

It will be interesting to watch the crop of candidates for governor address this issue. We are in too much trouble as a state, and we can't dance around this issue any longer. I would love for an honest practical answer which addresses this "third rail".

Full Disclosure - I am neither a Democrat or a Republican, and I generally believe in privatization of services versus public sector approaches.


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Posted by leilah ali
a resident of another community
on Mar 15, 2010 at 11:31 pm

Excellent points all, with excellent initiative and research by Ms. Bestor.

These general arguments have been made in the past -- in much less dire fiscal climates -- always falling on the deaf ears of timid legislators and (sorry) myopic property owners/voters. If you focus on commercial properties alone, there's always the specious argument that (as the letter author states) businesses will be driven out of the area/not want to locate here, or pass on the costs to the consumer. If you look at the examples of Trader Joe's and Walgreens alone, however, you'll see that TJ's has 339 stores in 25 states, and Walgreens has over 7,000 stores throughout all 50 states -- yet only 24 states have Prop. 13-like property tax structures (those states with citizens initiatives)! Of course, these are only 2 of thousands of examples.

Something HAS to be done, and NOW. California's bond credit rating dropped from "AAA" only 2 years ago, to TIED FOR LAST in March 2009, next to LOUISIANA! Further, California's public schools, which in the 1960's had been ranked nationally as among the best, by 2005 have fallen to 48th in many surveys of student achievement (rand.org/publications/.../spring2005).

What are we waiting for?


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Posted by 5 year resident
a resident of Menlo Park: other
on Mar 16, 2010 at 1:56 am

As a relatively new home owner I am blown away by the inequality of Prop 13. We bought our house in 2005 and pay over $11,000 of taxes a year. A few weeks after moving in we found out that the previous home owner was only paying $1,500 of taxes a year (for the exact same property)! That just don't make any sense at all to me. If someone is fortunate enough to have their property value increase by more than 1400% I really don't understand why they should not be accountable for paying taxes on that enormous profit. And I just don't buy the argument that retirees can't afford the higher taxes. If your property value has increased dramatically you can easily take out a small loan on your home to pay the additional taxes. At the end of the day you have still make a huge profit.

And to add insult to injury, for some reason this insane tax brake can be passed on to your children. The bottom line is that people who have lived in their home for several decades no longer pay for any of the services they consume. So basically the new home owners pay the taxes for everyone. This is just wrong and doesn't make any sense.

I don't mind paying my taxes, but it really upsets me that everyone is not paying their fair share. We really need to stop the madness of Prop 13.

Alternative solution: If people are not willing to pay their share, then I would suggest that people only get the services they pay for. Therefore, the new home owners would get the vast majority of services (which makes sense since they are the only ones paying for them).


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Posted by Steve
a resident of Menlo Park: Central Menlo Park
on Mar 16, 2010 at 12:57 pm

Wonder what Meg Whitman's position would be on revoking Prop 13? Seems a valid way to begin to bring our state and local budgets back into balance while restoring a sense of fairness in our patently unfair property tax code. I suspect no candidate has the courage to get behind this sort of tax reform even though it is one of the few ideas big enough to have an impact on our humongous deficits.


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Posted by Sally
a resident of Menlo Park: Allied Arts/Stanford Park
on Mar 16, 2010 at 1:04 pm

One wretched result of Prop 13 is our high real estate values. Without having to budget for property tax payments, many people have taken on large mortgages. The money spent on housing costs therefore goes to banks rather than state coffers for public services. Another scheme where bankers are skimming $$$ out of our pockets without giving us equitable benefits.


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Posted by At Home in Menlo
a resident of Menlo Park: Downtown
on Mar 16, 2010 at 1:11 pm

"...for commercial landlords, it's been an incredible windfall. ... Commercial property tax ... has evolved in a way that not even the direst opponents of Prop. 13 envisioned." Not true; many people predicted in 1978 that this would happen exactly as it has. And Ms. Bestor has not even considered the big corporate landowners whose property never changes hands. I applaud her research and her proposal to rectify the unfairness. Where do I sign???


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Posted by Publius
a resident of Menlo Park: Central Menlo Park
on Mar 16, 2010 at 2:09 pm

Whenever schools in the area face a budget crisis (and would not say that what MPCSD is facing is a crisis), the first to get attacked is prop. 13. I do like was Ms. Bestor has done and do feel that something needs to be done around commercial property, but let's not just scrap a law that has protected many for one immediate need. An across the board hike in taxes would in the end effect the businesses in those properties and in the end the consumers. Any increase of that size would result in shop keepers seeing their rents go up by a considerable amount as well. Those costs are then passed on to the consumers. Fine if we all shopped in our local community, but like gas, people tend to shop where prices are cheaper. No one wins, and the danger is you have a lot of empty stores in your community.

Instead of an across the board hike on commercial property tax, some way to link the value with the income derived from the property would be a more balanced approach. This may not even be legal or feasible but is worth a look by local counties.

With regards to home owners, I have no problem with most of the provisions of Prop 13. There are a few elderly neighbors on the street that have owned their homes well before prop 13. They are all wonderful members of our neighborhood and it would be wrong to basically push them out because of skyrocketing property values during the 90's and 00's. Even passing it on to a child is fine as long as it remains a primary residence. With that said, a change that could be discusses in removing the benefit on second homes or properties that have changed hands and are rentals. This does come across as taking advantage of the passing the property to the children clause.

If I am correct (and I might not be on this one), everyone benefits from the 2% max increase a year limit on property taxes. This is a strong part of the prop that needs to remain. In fact when looking up my parcel tax rates for neighbors on the street, even those that bought 10 or 15 years ago are paying less than those who bought just two years ago.

Finally, for those living in old homes, why should they see their property taxes increase uncontrolled just because someone purchases the property close by and builds a $1m dollar oversized home.

As I see it from this new tread, the Measure C proponents will push every angle to try to maintain the status quo in the district. I would recommend reading the other posts on the Almanac dealing with the MPCSD. The MPCSD is facing only minor cuts compared to our neighbooring districts. That is the real talk about equity.


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Posted by pvnewfie
a resident of Portola Valley: Woodside Highlands
on Mar 16, 2010 at 2:12 pm

It takes courage to talk about increasing taxes..but it is courage that we need in California if we are to help our State regain it's lost status. The state of our schools is despicable; our infrastructure is in dire straits. Let's get Warren Buffet out here for a frank dialogue.
Well done research. Thanks for bringing to our attention.


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Posted by POGO
a resident of Woodside: other
on Mar 16, 2010 at 2:25 pm

I to applaud Ms. Bestor for a thoughtful letter and I agree with her on all counts.

Commercial property interests have clearly and inordinately benefitted from Proposition 13. This is due to the fact that commercial properties do not "change hands" very often and, as property values increase, owners usually refinance (not sell) in order to get cash out of their properties.

But I also agree with Ms. Bestor that for homeowners, "Prop 13 has worked roughly the way that voters thought it would." For that reason, even with changes to the commercial side of Prop 13, there will still be huge inequities on the residential side.

Even with Prop 13 reform, long time residents will still end up paying just a fraction of what a new homeowner pays. That's the price we pay for residential real estate appreciation. New purchasers have to be prepared to pay principal, interest, TAXES and insurance just as their predecessors did.


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Posted by Poster
a resident of another community
on Mar 16, 2010 at 2:31 pm

Another thread on this topic is here: Web Link


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Posted by Ranch Gal
a resident of Menlo Park: Central Menlo Park
on Mar 16, 2010 at 8:59 pm

Having bought my home back in 1966, and then suddenly lost my husband in 1995, and his "income" too, I am one who is so very grateful for Prop 13 at 71 years old to be able to STAY in my home! If the tax structure were the same as before Prop 13, I would have been forced to sell my home to pay the huge taxes. People lost their farms and ranches that were in the family for sometimes generations due to the skyrocketing taxes. That's why the outcry and Prop 13 passed overwhelmingly to allow widows and next generation ranchers to stay in their homes. I have lived in the mid-Peninsula since 1955 and few remember the thousands of acres surrounding us were planted with fruit orchards, vineyards, vegetables, and part of the reason the developers were able to swoop in and snatch this land was the outrageous property taxes that the next generation or the widows had to cough up. They were forced to sell. Then the high rises came, the Silicon Valley blossomed on the backs of the farmers mostly. It was very sad to know many of these folks who sold their apricot, cherry, apple, and plum orchards due to the taxes. NO one talks about that. We old folks who are still able to live in our homes are called GREEDY and not paying our fair share. Well, if "5 Year Resident" above, wants to be"fair" about services, how about those who have never had children paying for schools? Or those that don't drive anymore still paying for roads. The argument is ludicrous. To repeal the Prop 13 on homeowners like myself would be terribly sad and unfair to us. If you derive an income from a commercial building, or apartment rental, then that warrants an increase in taxes because rents increase over the years. But I have NO income derived from my living in my home, and can barely hang on to maintain what I have.
As to our school system deteriorating, I have been voting year after year after year for 'SCHOOL BONDS' and 'CALIF STATE LOTTERY' that will finally fix (yeah sure!) the schools monetary problem, (you younger naive folks should look up the old ballot measures to see how many decades of bonds we have voted yes on, only to see the school system go deeper and deeper down the toilet) and that last election where the school bond initiative actually had the nerve to say" And there will be very strict oversight in the spending of the monies collected for the schools". Doesn't that say something? You can only assume the billions and billions we have thrown at the California School System in the past was squandered away by UNIONS and no bid contracts, and graft and corruption at high levels. The teachers now have to pay on their own for pencils and paper. Do you honestly think "more money" will fix a government entity? More charter schools, school vouchers and accountability for funds and teacher performance is what's needed. Why should taxpayers pay $2,100 for a grammar school desk to one of their cronies when you can look on the internet and find the same desk for $650. Citizens wake up! Money isn't always the answer especially when government is in charge of it.


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Posted by Jennifer Bestor
a resident of Menlo Park: Allied Arts/Stanford Park
on Mar 16, 2010 at 10:40 pm

Jennifer Bestor is a registered user.

Thanks to everyone who has taken the time to read, think and comment about the issues raised here.

Publius, I, too, felt that "costs would go up" -- I wonder if it's programmed into us to think that. It wasn't until months after I'd first looked at different parcels on the online tax collector's database that, walking down Santa Cruz Avenue, I suddenly questioned the effect of the unevenness of the playing field for commercial property owners. The 40% who have their original 1978 bases are, typically, paying about one-fifth of what their competition is paying in property taxes. Conversely, the 20% who have bought in the past ten years are paying 5-10 times what their competition is paying.

Every test I then did of consumer prices failed to show any connection between the price I paid and the property tax paid by the underlying landlord. Which makes sense, since the landlord would have to altruistically decide to pass his tax savings on to the tenant business, which would have to generously decide to pass the savings on to me.

This flies in the face of three basic business tenets. First, that businesses (including landlords) work to maximize profit. Second, that prices are determined by what the market will bear. Third, that costs determine whether you stay in business, not how you price.

The only exceptions are cost increases that affect all players in the market, or near-monopolies. Thus, proposals to address the commercial/residential imbalance by raising the tax rate for all commercial property probably would affect prices, while those proposals that level the playing field by raising the lowest 40% would probably have a very small impact.

That said, I would be happy to work with anyone who would like to test this further. For example, we could go onto various online rental databases and cross-correlate rents to property taxes for commercial buildings around the city.

Finally, I'd like to add that one reason I did this analysis was that I was frustrated that many people immediately assumed that retirees and widows were the cause of the shortfall. One key data point for me is that, in 1978, the 56 parcels on Santa Cruz Avenue paid three times what my street did in general property tax on land and buildings (improvements). Currently, it pays 1.3 times as much.

And that's with our street's full complement of Prop 13-protected older neighbors, many of whom I've known now for years and whose loss to the neighborhood would be immeasurable. They watch out for me and mine -- and I for them.

There are many problems facing California, its schools, cities, and institutions, right now -- but I wanted to raise this issue because I feel like we're all trying to balance on a property tax stool, the commercial leg of which gets a little shorter each year.


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Posted by retiree
a resident of Menlo Park: Central Menlo Park
on Mar 17, 2010 at 1:37 pm

Excuse me, 5 year resident, but at the time we bought our home in Menlo Park, we took our turn to be the family that paid the highest amount of taxes in our neighborhood. We paid then and we voted for and paid for every school tax that came around. We care about education even though we have an empty nest.
Now we are living off of social security and our nest egg (much smaller than a year or so ago). We see virtually no upside to our income picture, and realize that we could not today buy into the neighborhood that we have loved and participated in many ways. What you may think is fair doesn't feel very fair to us.
Ms. Bestor's analysis shows that commercial property owners reaping the benefits of Prop 13 without paying their fair share are the right target.


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Posted by 10 yr Renter
a resident of Menlo Park: Downtown
on Mar 17, 2010 at 5:19 pm

As a 10 year renter of a 30 year old property that probably pays a tiny amount of property taxes, the system is inequitable.

We would be happy to take our turn paying somewhat higher taxes than people who bought a while ago, but you have to admit paying 3-10x our neighbors would not be fair. I doubt anyone paid 3-10x their neighbors tax bill until the current housing bubble.

We make a very good living by most american standards, but can't buy an entry level home in menlo park. What's really wrong with this picture? So instead we rent and our landlord pays almost no tax, and we will shortly have 2 kids in school. Is that fair?


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Posted by retiree
a resident of Menlo Park: Central Menlo Park
on Mar 17, 2010 at 9:39 pm

to 10 yr renter who said "I doubt anyone paid 3-10x their neighbors tax bill until the current housing bubble."
Not so - Because of Prop 13, we paid 10x our neighbor's tax bill on a similar property when we lived in the east bay (they told us they felt bad about it) and more than 10x neighbor's when we moved to Menlo Park nearly 20 years ago. Remember, most of the value is in the land. The recently built McMansions are valued even higher, but that seems fair to us because they are much larger homes.


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Posted by 10 yr renter
a resident of Menlo Park: Downtown
on Mar 18, 2010 at 12:25 pm

Interesting! And was it reasonable affordable? New buyers are now paying 10-20k a year property tax which is 10% of the average annual income of a Menlo park resident (see the US census data). When you paid 10x your neighbors, was that also about 10% of avg household incomes then?

Sending 10% of income to property tax, 8+ to sales tax, 20-30 to state and fed income tax, etc is fairly overwhelming.

But then there are only 2 guarantees in life... death and taxes.


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Posted by Johnny G
a resident of another community
on Mar 23, 2010 at 2:27 pm

I agree with you up until a point. You would like to cap out the benefits to commercial property owners, but I say we should make all for profit landowners pay full taxes on that property. Commercial owners should pay the full property taxes. That part of Prop 13 has got to be eliminated. The point of prop 13 was to protect retired property owners from having to pay property taxes when there was suddenly massive inflation, and they could not meet those taxes without having to sell the property. Businesses, on the other hand, make profit from the commercial property it uses. As such, there should be absolutely NO windfall to them. It isn't just about inequity between businesses. It is about the principal of Prop 13 not operating based on what it purported to achieve. If I make profit on the property I own, then I should be forced to pay taxes on it. It is as simple as that.


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Posted by Charlie
a resident of another community
on Mar 23, 2010 at 9:46 pm

Excellent article! I've been hoping that California's perennial budget problems would stimulate more discussion on Propositions 13
& 78. Hopefully this dialog will spread.

It's important to consider property tax in the context of the rest of the taxes paid by corporations and individuals in the State of California. With property tax reform (both personal and commercial) we could afford to reduce income, corporate, and sales taxes, all among the highest in the US. A side benefit would be to stabilize the state's revenue, which fluctuates wildly depending on the income of the richest portion of the population.

Personal property tax reform could be managed with compassion for low income / net worth individuals by providing needs based exemptions, much as is done for higher education in the form of need based grants and scholarships. Not all seniors are hard-up, just as all students aren't from families that can't afford to pay for college

Just my two cents.


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Posted by Dennis
a resident of another community
on Mar 26, 2010 at 5:47 am

[POST REMOVED. Argue your point. Don't attack, label, characterize and make assumptions about people.]


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Posted by Jack
a resident of another community
on Mar 26, 2010 at 11:43 am

I think Ms. Bestor is on the right track, but I would suggest that 20 years is too long.

It might be better to look to either the average turnover (not clear whether mean or median would be better without looking at the data))of owner occupied residential property and to set the commercial reassessment period as something less than that. For example, if the average turnover of residential owner occupied is 8 years, the reassessment cycle for commercial property would be 7 years.

Note that I am not suggesting that the cycle be continuously adjusted, rather that the study be done today and the results used to set the reassessment cycle going forward.

The reason I suggest setting the cycle shorter than residential is to offer a different concession to businesses.

Companies don't like to pay taxes, but they hate unpredictability. I would suggest that to make up for a shorter reassessment cycle, commercial owners be given longer "warning" of their assessment increase. For example, commercial owners would get a one year "delay" in the assessment.

So, to put it all together, if the average turnover of owner occupied residential property is 8 years, commercial property would would be reassessed every seven years, with a 1 year delay. The result would be an 8 year "effective cycle" for commercial property and a better level of predictability for businesses so they could plan for upcoming increases in their normal budget/planning cycles.


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