Prop 13: Closing the Corporate Loophole
If you spend time in California education spaces, there’s a good chance you’ve heard people bemoan Prop 13, especially around budget time. Here’s a quick read on how a ballot initiative designed to protect elderly homeowners became the third rail of California politics, and devastated our public resources along the way.
California’s first major change to education funding was the 1972 Serrano v Priest ruling. For nearly a century, property tax rates were set locally, which resulted in wildly varying per pupil funding between districts. The state supreme court determined that schools in low-income cities received so much less funding under this system that it violated the Equal Protection clause of the state constitution.
While the state legislature worked to comply with Serrano, anti-tax groups got Prop 13 on the ballot. Passed in 1978, Prop 13 made major changes to the state constitution:
Limits annual increases of assessed value to 2% or the rate of inflation, whichever is less
Upon the transfer of properties, allow them to be reassessed at one percent of their sale price and reset the limit on annual increases of assessed value.
Prohibits the state from passing any new taxes based on the value or sale of property
Requires a two-thirds (supermajority) vote of the legislature to increase other taxes
Requires local governments to place special taxes on the ballot and receive two-thirds of the vote
Makes the state responsible for distributing property tax revenue among local governments.
Prop 13 taxes residential and commercial properties the same. So while the law was billed as a way to keep elderly homeowners in their homes, it’s become a gigantic gift to commercial property owners who are still paying those 1975 rates. This is because the state legislative committee tasked with setting the rules for commercial properties under Prop 13 – led by then-Assemblymember and later San Francisco mayor Willie Brown – decided commercial properties should be reassessed only when a person or legal entity acquires more than 50% ownership in a property. To get around reassessment, companies often sell no more than 49% to any one individual or LLC.
In 2019, the state Legislative Analyst Office reported that fixing the corporate loophole would bring in $8-12 billion annually to help fund schools, community colleges, parks, hospitals, fire departments, and many more community services. This change, known as a “split roll,” was attempted in 2020’s Prop 15, the Schools and Communities First initiative. That measure was narrowly defeated, possibly because rural voters incorrectly believed it would raise taxes on homes and farms (it did not).
Prior to Prop 13, California schools received about 60% of funding from local property taxes and 30% from state sources. In the 40 years since, that balance has completely shifted. California voters approved usage of lottery funds for public schools in 1984, but that only makes up about 1% of total funds. In 2020, an audit found that the Lottery had decreased the revenue directed to education and owed $36 million to the state Department of Education for the 2017-2018 fiscal year alone.
For more than 40 years, our schools and community services have been starved due to a ballot initiative that the business community didn’t even support at the time. This corporate loophole has turned into such a windfall that few state legislators will broach the subject of Prop 13 reform. We believe it is well past time to close the Prop 13 loophole and move toward our goal of fully funding public education.
To learn more about the background and effects of Prop 13, click through to our sources. Thank you to our allies Evolve CA for their input and their continued work