Prop. 15 Would Close a Corporate Tax Loophole. Here's How It Got There in the First Place

When anti-tax crusader Howard Jarvis barnstormed across California for Proposition 13 in 1978, he made it clear who the measure to slash property taxes was aimed at helping.

“The people that are being hurt are the elderly people on limited income who have spent all their life earning a home,” Jarvis said in a KQED debate that year. “And the state is kicking them out in droves. And this is what this is about.”

Voters overwhelmingly passed Prop. 13, but now, 42 years later, voters are being asked with Proposition 15 to undo a major loophole in that 1978 ballot measure which has allowed corporations to keep their property taxes artificially low for decades.

Jarvis was correct that with inflation pushing the value of homes in California through the roof in the 1970s, homeowners were seeing their property tax bills increase to the point where some couldn’t keep up.

“People were losing their homes because of property taxes. People on fixed incomes, Social Security, who suddenly had their taxes double and triple, couldn’t afford it. And it was causing a tax rebellion,” recalls Randy Goodwin, who ran the “Yes on Prop. 13” campaign.

Jarvis capitalized on voter anger and anxiety with Prop. 13, whose passage ushered in the “tax revolt” that swept across the country and helped elect Ronald Reagan president of the United States.

Prop. 13 did indeed roll back residential property taxes, setting the tax bill at 1% of the 1976 assessed value and capping annual tax increases at 2%.

But the proposition did not distinguish between residential, commercial, industrial or agricultural property. So all property in California benefited from the measure.

It was a point the late San Francisco Assemblymember Leo McCarthy made during the same KQED debate with Jarvis.

“Pacific Telephone would have a $130 million cut. Standard Oil, $13 million. Southern Pacific, $12 million. They didn’t ask for the cut but Mr. Jarvis was kind enough to give them to them,” said McCarthy, who was Speaker of the Assembly at the time.

The question is, was the windfall to corporations — which saves them billions of dollars on property taxes — a kind of “Trojan horse” benefit deliberately snuck into the measure by pro-business groups?

Not according to Joel Fox, who was an assistant to Jarvis at the time and later became director of the Howard Jarvis Taxpayers Association.

“All property was taxed the same from 1850 onward. So in writing an amendment to the Constitution on property taxes, it was just simple to maintain what was already in the Constitution,” Fox said recently.

In fact, the business community didn’t really support Prop. 13, at least not outwardly, remembers Prop. 13 campaign manager Randy Goodwin.

“Not only did they not participate in the drafting, they didn’t support Proposition 13. So that tells you a lot right there. They did not support Proposition 13. They gave no money to it,” Goodwin told KQED recently.

“The big corporations in California had a cozy relationship with the powers that ran the state government,” Goodwin said. “And they together paid for the opposition to Proposition 13. We didn’t have Chevron. We didn’t have AT&T. We didn’t have any of those big corporations supporting Proposition 13.”

“The argument that business would have the same treatment as residential property was in the ballot arguments. So voters were aware of it, and they had an alternative,” said Jarvis’ former assistant Fox.

That alternative was Proposition 8, another tax cutting measure placed on the same ballot by then-Gov. Jerry Brown and the Legislature in a futile attempt to prevent Prop. 13 from passing.

Prop. 13 was simply written and did not specify how it would be applied to commercial property. In fact, the implementation of Prop. 13 was left to the Legislature.

“I wrote the implementation process after it had been passed by the voters,” said former Assemblyman Willie Brown recently.

Brown chaired the  that determined how and when commercial property would be reassessed with higher property taxes.

Under the current rules written back then, a reassessment is only triggered when a person or legal entity acquires more than 50% of the ownership interest. Companies have used that loophole to avoid property tax increases, by selling no more that 49% to any one person or entity.

As a result, companies like Disneyland, Intel and Chevron are currently paying taxes based on property assessments from the 1970s.

Willie Brown says now that the legislature blew it back then.

“We should have said anytime there is a change in the ownership of the property through any means, that constitutes a transfer for reassessment purposes,” Brown said recently.

“The legislature can do that. And that’s where it ought to be done,” said Brown, who opposes Prop. 15 and has received consulting fees from the “No on 15” campaign.

Whether the legislature “blew it” when it wrote the Prop. 13 implementation rules for commercial property or did it intentionally to please business interests is hard to know. One thing’s for sure: It’s much easier for lobbyists to influence legislation than ballot measures.

In fact, the Legislature tried to revise the law to close the loophole and to reassess commercial property more often. In 2010, Assembly Bill 2492, authored by former Assemblyman Tom Ammiano, would have defined a “change of ownership” as happening whether or not any one legal entity or person that is a party to the transaction acquires more than 50% of the ownership interests. The bill died in committee.

Prop. 15 would require that commercial and industrial properties be reassessed on a regular basis, with property taxes based on current market value, rather than what the property cost when it was purchased. According to the nonpartisan Legislative Analyst, the measure would send $6.5 to $11.5 billion in new revenue annually to schools and local governments.

Residential and agricultural property along with commercial property worth less than $3 million would be exempted from the change.

Prop. 13 passed at a time when California was a much different place than it is today — more white, more conservative and less diverse. Manuel Pastor, director of University of Southern California’s Program for Environmental and Regional Equity, says that over the years, the measure has worked to exacerbate the wealth gap.

“You’ve got a system right now that is inequitable in terms of where the burden of the property taxes are more on residential folks and more on the most recent buyers who tend not to be the wealthiest, tend to be more people of color,” Pastor said.

He says the fate of this year’s Prop. 15 could indicate how much California has changed.

“The question is, are we the California that passed Prop. 13? Or are we the California that wants to reevaluate that and think about investments in young people?” Pastor asked.

Polls show Prop. 15 is close to the 50% support threshold needed for passage, but its fate is far from secure.