Who is prospering from Prop 13?
Concerned about diminishing school funding, local parent examines effects of 1978 property tax measure, and makes some startling discoveries
It's been called California's "third rail" — as in, untouchable. When billionaire Warren Buffett was serving as candidate Arnold Schwarzenegger's economic adviser during the 2003 gubernatorial race, he touched it.
Proposition 13, Mr. Buffett said, was damaging the financial health of the state, and needed to be repealed or changed. Zap.
Under immediate fire over his adviser's comment, the soon-to-be-elected governor recovered by telling the world that he had admonished Mr. Buffett never to mention Proposition 13 again, or he would be forced to do 500 sit-ups.
Mr. Buffett appears to have reined himself in since that time, but questions about Proposition 13's fairness and financial consequences haven't gone away.
Menlo Park resident Jennifer Bestor had long heard many arguments for and against Proposition 13, which was passed in 1978 to control rapidly rising property taxes in the state. About three years ago, when she was the incoming treasurer of the parents' group at her son's school, Oak Knoll in Menlo Park, questions about the property tax law's consequences, particularly on the state's schools, became more pressing.
As the budget news from Sacramento became increasingly worse, Ms. Bestor recalled an opinion piece she had read in the Palo Alto Weekly several years before: The writer "pointed to the increasing share of property tax paid by single-family homes in Santa Clara County, and the decreasing portion paid by commercial landlords," Ms. Bestor recalls.
She asked herself: Does the same trend exist in San Mateo County? And if so, are commercial property owners paying their fair share toward public services — schools, parks, police and fire services, and public works?
Then one day, during a meeting at which Superintendent Ken Ranella of the Menlo Park City School District painted a bleak picture of the district's finances and likely program cuts, Ms. Bestor crossed a line. "It was like a big dog picked me up by the scruff of the neck and shook me," she says.
"I told myself, I can't just wonder about this — I have to figure it out."
Countless hours later — hours spent in the county assessor's office, in county and city archives, and poring over assessment rolls she had purchased — Ms. Bestor has come to the firm conclusion that, while Proposition 13 has generally worked for homeowners as voters had intended, "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."
Ms. Bestor, a talented writer as well as a dogged researcher, took a whimsical approach to spreading the word about her findings: She composed an open letter to Warren Buffett, which she sent last week, in which she offers: "Please let me know how I can help you with the sit-ups. We desperately need to get some energy from that third rail."
Growing tax-burden imbalance
Ms. Bestor, who has an MBA from Stanford and is a former high-tech executive, collected countywide tax statistics, but her most focused research was on properties in the Menlo Park City School District. She did a parcel-by-parcel examination of commercial properties on Santa Cruz Avenue, and residential parcels in her own Allied Arts neighborhood.
Before she started her project, she says, "I wrote down all of my bad assumptions." The most erroneous among them: Commercial property owners pay more of the property tax burden than residents.
What she concluded after gathering data and crunching numbers from the assessor's office was startling: Although the countywide property tax burden was almost equally shared between homeowners and commercial property owners in 1978, "by 2008, homeowners were paying two-thirds and commercial property owners one-third (of property taxes), despite the fact that the major development in the county over those 30 years was commercial property east of (U.S.) 101."
The growing tax-burden imbalance reflects the fact that houses change hands far more frequently than commercial properties. Under Proposition 13, the tax rate is capped at 1 percent of a property's assessed value, and that value can be increased by no more than 2 percent annually. That formula is kept in place until the property is sold, at which time it is reassessed to determine its value at the current market rate.
In 1986, voters passed Proposition 58, which allows property to be passed from parent to child with no reassessment of the property.
A tale of two streets
Ms. Bestor's research of Menlo Park properties — particularly of parcels on one commercial strip and one residential street — sheds light on how the provisions of propositions 13 and 58 created the lopsided tax-burden equation.
Looking at Menlo Park's main downtown street, she found that of the 56 commercial parcels on Santa Cruz Avenue, 23 are at the 1978 assessment (plus 2 percent per year) level. Of those 23 parcels, only four are owned by the same people who owned them in 1978. Eleven have passed to a son or daughter, and in a number of cases are held in family trusts.
By contrast, of the 53 residential parcels in Ms. Bestor's neighborhood, 13 are owned by the same people who held them in 1978, and two are held by children of the 1978 owners, so are taxed at the 1978 level. The assessment of two other parcels was affected by other factors.
The other 36 parcels (including Ms. Bestor's) have been reassessed after changing hands, she says.
"My street is paying its way," Ms. Bestor says. "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."
On the other hand, commercial property owners who are assessed at 1978 levels 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?"
In her letter to Mr. Buffet, Ms. Bestor cites a downtown Menlo Park example to underscore the inequity: "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 percent-plus more.
"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 of Menlo Park."
The consequences of the "windfall" to many commercial property owners go beyond the diminishing revenue to schools and other public services, she says. Business people who operate out of property they purchased in the last decade or so are at a disadvantage in the marketplace because their tax burdens are much higher than competitors paying a 1978-level property tax.
Another citation in Ms. Bestor's letter: "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."
Meanwhile, all property owners, no matter what their Proposition 13-dictated tax burden is, benefit equally from the public services paid for through taxes, Ms. Bestor notes. If a building catches fire, or a business is being robbed, publicly funded emergency workers will rush to the scene as quickly for a property owner paying $7,000 a year as they will for one paying $66,000. Also, she notes, business owners benefit from an educated workforce, making quality schools important for a strong business community.
So what is to be done? Ms. Bestor suggests capping Proposition 13 benefits for commercial property owners at 20 years. "Every 20 years, non-residential property is reassessed at market value, then gets to enjoy another 20 years of tax relief," she writes.
She also suggests a system whereby properties can be reassessed gradually so as not to overburden assessors' offices, and a process for appealing reassessments.
Ms. Bestor also is attempting to launch local fundraising efforts that would focus on commercial property owners who benefit from lower tax levels. "I have the feeling these people are ready to be asked," she says.
"They need strong schools and a vibrant residential community just as much as anyone else does."
Recently, she met with a leader of the Menlo Park-Atherton Education Foundation, and with a member of School-Force, the Belmont-Redwood Shores Education Foundation, to discuss such an effort. It's too early to know whether the idea will catch fire, but it's safe to predict that Ms. Bestor will do what she can to spark the flame.
Go to tinyurl/BuffettLetter to read Jennifer Bestor's open letter to Warren Buffett.