Now Is The Time to Change Proposition 13!

We need to use this recession to create positive changes for the future. One of these is to make changes to Proposition 13. No, Proposition 13 should not be changed to affect residential property. That idea is so unpopular that it can’t even be discussed rationally. Instead, now is the time to split the tax roles into residential and commercial properties.

Proposition 13 was passed by the California voters in 1978 to keep older homeowners from losing their homes because of the increases in property taxes due to the inflation of home values. Proposition 13 uses the purchase price or market value at the time the property was purchased, then limits the increase in the property tax valuation to 2% per year with a property tax rate of 1%.

Of course, property owners have the right to appeal the tax valuation if the market value is lower than the value on the tax rolls. But since residential property rarely lost value in California before the last few years, most homeowners didn’t know or need to know about the appeals process.

But since the value of commercial property, such as office buildings, shopping centers and warehouses, is based on the income from the tenants of the properties, the commercial real estate market is more volatile and fluctuates up and down in a cyclical pattern. Commercial property owners have always known about and used the ability to appeal tax valuations to reduce their property taxes. The problem is that once the appeal to reduce the property tax valuation is competed, the maximum increase in property tax valuation for any property is 2% a year, whether the commercial real estate market is booming or not. So commercial property uses this reassessment process to keep property taxes artificially low. Commercial real estate has been enjoying this protection since Proposition 13 was passed in spite of the fact that most people are not aware of this benefit.

Now is the time to adjust the inappropriateness of Proposition 13’s valuation protection for commercial properties. With property values already low, let’s adjust all commercial property tax valuations to the market value and let the tax valuations fluctuate with the market value of the properties. This would allow an increase in property tax income in good times from commercial properties, and with only a 1% property tax rate, without a hardship on the commercial property owners.

© 2009 Judy Kane