Explaining The California Schools and Local Communities Funding Act

The California Schools and Local Communities Funding Act, known as Schools and Communities First, is a statewide ballot measure that seeks to make changes to provisions of California’s landmark 1978 property tax limitations, Proposition 13. Schools and Communities First is the first qualifying initiative to change Proposition 13 in over 40 years. The ballot initiative would raise an estimated $12 billion in local revenue to schools and local governments by amending the commercial and industrial properties’ tax rates.

Background on Proposition 13

Proposition 13 passed with 64 percent of voter approval in 1978 while property values increased and created a higher tax burden on property owners, including homeowners. Between 1970 and 1980, the median property value increased by 250 percent, while the median household income remained mostly stagnant. This increase led to growing concern among homeowners whose incomes did not increase with the sudden rise of housing costs but were subject to higher property taxes.

Proposition 13 made three substantial changes to California’s property tax law:

• It limited the property tax rate for all properties, regardless of type, to 1 percent of the purchase time value.

• It established a ceiling for the assessed value of at most 2 percent per year unless a change in ownership occurred or the property was remodeled.

• It amended the state constitution to require that any statewide tax increase require a two-thirds vote in the Legislature. Local state increases or designations would also require two-thirds voter approval. 

After Proposition 13 passed, local communities and schools saw a drastic drop in funding. According to the Legislative Analyst’s Office report, local revenue fell by nearly 60 percent, leaving cities and counties to rely heavily on other revenue sources such as local sales taxes o compensate for the loss. Despite the state’s efforts to intercede and support cities and counties with additional funding, schools and cities have remained chronically underfunded compared to pre-1978 levels.

Voter Sentiment on Proposition 13

Over the past 40 years, Proposition 13 has remained a prominent issue for homeowners, commercial property owners, and taxpayers’ association groups. According to a 2018 Public Policy Institute of California (PPIC) survey, 57 percent of Californians say Proposition 13 was “mostly” a good thing. In contrast, 61 percent of African Americans say Proposition 13 was harmful.

Past ballot initiatives and state bills seeking to weaken or repeal Proposition 13 have all but failed due in part to heavy lobbying by groups such as the Howard Jarvis Taxpayers Association. Schools and Communities First is the first initiative in over 40 years to qualify for the November ballot focused on repealing some of the tax protections given to commercial properties under Proposition 13.

California Schools and Local Communities Funding Act

The California Schools and Local Communities Funding Act seeks to constitutionally change the property tax law enacted under Proposition 13 as it applies to commercial and industrial properties. This ballot measure is often referred to as “split roll” since it would split taxing among commercial properties such as residential, agricultural, and small business properties.

If enacted, commercial and industrial properties would be required to undergo regular and ongoing reassessments to bring the property to its current market value. Property owners would then be required to pay property taxes on the newly assessed value. As proposed, the ballot measure does not affect the value assessment of residential, agricultural, or small business properties. Also, the measure does not change the property tax rate of 1 percent, regardless of property type. The measure includes an exemption for businesses with a combined property value of $3 million or less and eliminates the business personal property taxes on business fixtures and equipment up to $500,000.

Increased revenue, a higher tax burden on businesses, and more money for cities, counties, and K-14

Schools and Communities First would raise over $12 billion in local revenue from the commercial property tax code changes. As written, the revenue generated by the ballot initiative would be directed to K-12 schools, community colleges, and cities across the state.

While Proposition 13 was primarily driven by homeowners in response to increased property values and taxes, corporations with significant landholdings have benefited from Proposition 13. An analysis by the Make it Fair campaign, partly funded by California Community Foundation, found that Google’s offices headquartered in Venice currently leases over 100,000 square feet, with rates as low as $6 per square foot. In contrast, nearby parcels of land are estimated at $300 to $400 per square foot. Under the existing tax guidelines, Google currently pays a 1 percent property tax on land already undervalued by at least 100 times the going market rate.

Below market, rate-assessed properties are common throughout Los Angeles County. Nearly 57 percent of all commercial real estate in the county has not been reassessed since 1999, while 18 percent of these properties have not been reassessed since 1978 when Proposition 13 passed. This failure to reassess property results from businesses’ creative ways of transferring property ownership through trusts or other transactions, thus avoiding the reassessment requirement.

Of the estimated $12 billion in statewide revenue as a result of Schools and Communities First, USC’s Program for Environmental and Regional Equity (PERE) estimates that the most significant gains would be in Los Angeles County ($3.6 billion), Santa Clara, and Orange County ($1.1 billion each). Estimates from the Schools and Communities First campaign show over 40 percent, or $5 billion, of the total statewide revenue allocated to K-12 schools across the state. Projections highlight that nearly 40 percent of the $3.6 billion in revenue would go to schools and community colleges in Los Angeles County, 29 percent for cities, and 24 percent for the County. USC PERE estimates that more than 75 percent of the projected $3.6 billion in revenue will come from the largest and wealthiest corporations, only 12 percent of properties assessed over $5 million.

If the Schools and Communities First initiative is successful, California’s commercial properties would still pay one of the nation’s lowest property tax rates due to the 1 percent tax limit. The City of Los Angeles will still rank 42 out of the 50 largest cities regarding commercial property taxes. Under the 2017 Tax Cuts and Jobs Act, businesses may fully deduct the 1 percent property tax from their federal taxes. 

Supporters

Supporters of Schools and Communities First argue that corporations should contribute fairly to public society as they continue to benefit from California’s low property tax rate. By returning billions of dollars to local schools and communities, supporters argue that California can begin to restore the damage that resulted from decades of disinvestments. 

Housing advocates support reassessing commercial properties as studies show it could lead to new housing developments and high-density growth. According to housing advocates, vacant properties such as parking lots or strip malls avoid reconstruction or new ownership to evade reassessment. An analysis by the Southern California Association of Governments (SCAG) states that under-assessed properties are more likely to remain vacant and, therefore, underutilized. By requiring reassessments to market value, long-held and underutilized commercial property may be prime spots for developing more housing in light of today’s housing crisis.

Education activists also argue that the decades of disinvestments from schools due to Proposition 13 may explain California’s low rankings in overall school performance. Data from EdSource confirms that California ranked 7th in per-pupil spending in 1977, the year before Proposition 13 passed. In 1978, the state’s ranking fell to 14th. Today the state ranks 41st in the nation for per-pupil spending. According to a National Bureau of Economic Research report, the Schools and Communities First initiative would increase per-pupil spending by nearly 20 percent.

Lastly, some may argue that Proposition 13 was rooted in racial undertones. In Serrano v. Priest, a 1971 California Supreme Court case, the court ruled that California must equalize education funding generated from property taxes across the state. According to an analysis of this court case by economist William A. Fischel, white homeowners supported Proposition 13 to directly oppose the Court’s decision to equalize funding across all school districts, primarily to under-resourced schools. Dr. Manuel Pastor of USC PERE also notes that California’s demographics shifted rapidly during this time as the number of minority youth jumped from 30 percent in 1970 to 44 percent within a decade. Dr. Pastor argues that Proposition 13 was a reaction by white homeowners to prevent their tax dollars from being invested in poorer communities of color. 

This measure is sponsored by Schools and Communities First, a statewide coalition of over 300 social justice, faith-based educators, labor, and philanthropic organizations. This coalition includes the Advancement Project, California Calls, the Coalition for Human Immigrant Rights (CHIRLA), PICO California, ACLU California, and many others.

Known philanthropic supporters include Liberty Hill Foundation, California Community Foundation, East Bay Community Foundation, San Francisco Foundation, Silicon Valley Community Foundation, etc. According to these philanthropic members, the disinvestments in local schools, infrastructure, and social services have impacted many of our most vulnerable communities’ quality of life.  Although the philanthropic sector continues to better the communities we seek to serve, philanthropy alone cannot indefinitely fill the gap for critical social services programs and community needs.

If passed, philanthropic supporters argue that this measure would increase local schools and social services investments, easing the public’s dependence on philanthropic resources. The increased revenue would create more space for our sector to support innovation, creativity and incubate solutions to better our communities.

Opponents

Opponents of this ballot measure argue that raising business and corporate property taxes will negatively impact businesses with higher costs, which will hurt consumers and California’s economy. By preserving the existing property tax protections under Proposition 13, businesses, regardless of size, are not vulnerable to market fluctuations in property values and do not have to worry about sharp increases in property taxes from ongoing reassessments.

Business association groups have also voiced their concern about Schools and Communities First’s impact on small businesses. Opponents also argue that small businesses will still reckon with landlords who can increase the rent or lease contracts due to increased taxes, placing higher financial burdens on many small businesses not own their property. They also state that businesses will have no choice but to pass the financial burden onto consumers with increased property taxes and operating costs by raising prices and hurting the workforce. The Orange County Taxpayers Association argues that the increased tax burden will result in a loss of 400,000 jobs across the state.

Also, opponents question the Schools and Communities First coalition’s intention to close the “change of ownership” loophole, one of the coalition’s primary arguments for the measure. In 2018, State Senator Patricia Bates (R-Laguna Niguel) introduced SB 1237: Property taxation: change in ownership, which would have clearly defined the “change of ownership” clause, thus closing the loophole. However, the Senate Governance and Finance Committee blocked the bill from moving forward. Opponents of Schools and Communities First use this example to argue that special interests were focused more on getting on the ballot than they were about addressing the loophole itself.  Following the bill’s failure, Rob Lapsley, President of the California Business Roundtable, shared his frustration at the Legislature’s inability to pass SB 1237, which he argues would have generated over $50 million in property tax revenue.

Taxpayers association groups also indicate their frustration at the opposing party’s claim that California lacks funding for schools and communities. Carolyn Cavecche, CEO and President of the Orange County Taxpayers Association, draws attention to the fact that the 2019-2020 California general fund is $144.2 billion, which is over $20 billion more than the previous year. She argues that the state is not experiencing a “funding shortfall.” Instead, she suggests that the lack of investments in schools, colleges, and cities is not a result of Proposition 13 but instead due to other funding priorities.

The opposing coalition, Californians to Stop Higher Property Taxes, consists mainly of business associations such as the California Business Roundtable, California Chamber of Commerce, Orange County Business Council, Los Angeles County Business Federation, and the Valley Industry Chamber Association. Taxpayers groups are also a vocal coalition sector, most notable being the Howard Jarvis Taxpayers Association.