Instead of an equitable 50-50 split, as in pre-Prop. 13 days, residential property owners now shoulder about two-thirds of the tax load. This imbalance in the tax burden 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. By comparison, far fewer residential owners pass their homes on to heirs.
The Prop. 13 story was based on research by a former high-tech executive and Stanford MBA, Jennifer Bestor, who compared taxes paid on commercial property in downtown Menlo Park and in her own Menlo Park neighborhood. (She embarked on the project to find out why local property taxes are failing to cover the needs of her son's school district.)
On one block of Santa Cruz Avenue, the city's main street, 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 an heir and in some cases are held in family trusts. The last eight are owned by corporations (six) and partnerships of unknown composition (two).
This contrasts significantly with the 53 residential parcels in 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 hers, have been reassessed after changing hands, she said.
These findings have led Bestor to conclude that her residential street is "paying its way." By contrast, she asks, "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?"
Examples of the sort Bestor uncovered in Menlo Park are common in many California cities, including Mountain View. Allowing commercial property owners to pass their holdings on to heirs without a reassessment has become a significant factor in inheritance strategies, and seems to be causing real inequity in the system.
By allowing so many commercial property owners to opt out of contemporary tax rates, the state is shortchanging many of its most important governmental institutions, including schools, local governments and special districts, to name just a few. Given the constrictions placed on property taxes through Prop. 13 — with a crucial nudge from Prop. 58 — we propose that commercial properties in California be reassessed every 20 years.
Ever since the economic downturn brought huge budget deficits to our state, 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: Readjust the rules stated in propositions 13 and 58, and take a fairer cut of this state's commercial property taxes.