In 1978 Palo Altans voted against "The Peoples Amendment to Control Taxation" aka Proposition 13. This historic constitutional amendment was placed on the ballot during a time of soaring real estate prices and out of control property tax assessments ranging between 2.5% and 3.5%. Proposition 13 pinned all property tax assessments at 1% of existing value or purchase price when property sold. This created a new base valuation methodology.
The initiative was targeted at helping senior citizens remain in their homes and governments to control public spending. Yet, it was unpopular with Palo Alto voters, who worried about funding for schools and public services. Sure enough, it dropped revenue by more than half.
Times have changed, and today Prop. 13 homeowner protections are popular, even in Palo Alto.
Existing inequalities were strengthened and expanded by Prop. 13. For example, I pay about one quarter in property taxes than my next-door neighbor. Our house is assessed at about $500,000 because our base value began in 1984. Our neighbors, who have school-age children, purchased their home 10 years ago for about $2 million.
Inequities between commercial property base valuations are more extreme, and costing California public services about $12 billion year after year.
Prop. 13 protects both residential and commercial property equally. Yet, unlike people, publicly held corporate entities, like multinational corporations, live forever — shareholders change, but property ownership does not, which means that base valuation from 1978 continues indefinitely. Today residential property funds 72% of our public services. When voters enacted Prop. 13, property tax revenue was split equally between commercial and resident parcels.
Based on the Santa Clara County Assessor's office annual report, 15% of commercial properties maintain pre-Prop. 13 base valuations, and only 58% have current assessment.
Proposition 15, which is on the November ballot, will correct this loophole by changing the valuation methodology for commercial and industrial properties every few years to market rate. This will add a steady stream of revenue to local communities and schools.
There will be no change to residential property protections, including corporately held residential rental complexes.
The Schools and Communities First Initiative will raise an estimated $12 billion across the state once deployed. In fact, research identifies that 10% of California commercial property will raise about 92% of the new revenue. When fully implemented, an estimated $1 billion of new revenue will flow to our county.
These new revenues are split between schools and communities; 60% will go to municipalities, special districts, and the county. The city of Palo Alto will receive an estimated $22 million annually, the Midpeninsula Regional Open Space District about $9 million.
I was on Palo Alto City Council during the Great Recession, and staffing basic community services like fire and police was a challenge. Since the city's daily population doubles as employees arrive at our business centers, staffing and equipment for first responders is a large part of the city's budget, yet annual revenue from commercial property roles was anemic in our general fund.
Prop. 15 directs the remaining 40% of new revenue, estimated at about $4 billion, to California public education. Using a formula similar to how Partners in Education allocates to each student after centralizing funds, it will be distributed to schools throughout the state after securing a margin for basic-aid districts like Palo Alto Unified.
In Jennifer Bestor's Aug. 21 Guest Opinion column titled "Where did the other $713 million go?" she identified the mechanics of how new revenue for education will be allocated. Sadly, most of the inequalities of school funding will not be resolved. These inequities escalated when Prop. 13 was enacted in the late 1970s. Jerry Brown was governor and ordered each county to create a formula to distribute property tax revenue between counties, municipalities, districts and schools. No two counties have the same formula. For example, San Francisco is a city and county, whereas Santa Clara County is populated by many municipalities and special districts. Prop. 15 will distribute equally to each school based on student population.
This is not a tax initiative. Since the tax rate will not change, a simple majority of voters can correct this loophole. Santa Clara County Assessor Larry Stone promotes a different correction to Prop. 13 by changing the tax rate for commercial properties from 1% to 2-3%. This correction, which is not on the November ballot, would require support from a super majority of voters (67%).
The argument made by opponents of Prop. 15 — that this loophole correction will harm small businesses — has been invalidated. A study commissioned by Silicon Valley Community Foundation found that Prop. 15 "will not impact small business renters, including triple net lease tenants" and that "the burden will fall on the state's largest corporations and highest-value properties."
Small businesses in general are subject to escalating assessments. For example, shortly after my husband's Palo Alto office secured a new lease, the building was sold for $12 million, which escalated the triple net pass-through to tenants for all building expenses. During my 25 years as a commercial real estate controller/accountant, our projects never profited from the corporate entity loophole. Many of our tenants were small businesses and start-ups. Rents are calibrated based on market forces, not property tax valuation.
Most small businesses do not rent from Chevon, Disneyland or Intel.
The League of Women Voters, city of Palo Alto and Santa Clara County support Prop. 15 and encourage Palo Altans to vote "yes." This is a small but vital step to restore revenue for our public services and invest in our future.
Nancy Shepherd is president of the League of Women Voters Palo Alto, former mayor of the city of Palo Alto and advisory board member for Evolve, a coalition partner of Prop. 15. She can be reached at [email protected]
• Read the opposing viewpoint on Proposition 15 by Menlo Park resident Jennifer Bestor: Guest opinion: Where did the other $713 million go?