I’d support a land value tax myself so don’t take this following comment as criticism, but you don’t even need a land value tax in the case of LA. You do need to repeal Prop 13 for investment properties. I wager most of those years-vacant properties have a generous Prop 13 assessment and so the owner can just sit on it because their carrying cost is closer to zero than what it would be in any other tax regime. Then all of us folks around them continue to make the adjacent area nicer and they just ride off into the sunset while the absurd delta between their taxable value and market value increases.
Prop 13 is like the anti land value tax. Makes places like Texas look downright progressive.
We were very close to repealing Prop 13 on commercial property a few years ago (via Prop 15).
One of the biggest objections to a straight repeal Prop 13 on commercial property is that most commercial leases are triple-net, meaning that the businesses directly pay the taxes. Which means that a bunch of small businesses that are just barely on the edge of profitability will shut down when they finally have to pay their fair share of property tax.
Agreed on the need to do it though (and also Texas typically has higher taxes for a normal person, with worse services than California). We might just want to pass a gradual phase in or a requirement that landowners pay it without increasing rent )and doing reach through to modify all those triple net leases... or something. Or we just let the businesses fail, but the public tends to not like lots of small businesses failing.
The inability to pay a high tax increase constantly comes up in discussions on Prop 13, and it seems like a willful failure to find a solution.
For personal property, raise the taxes, and give the home owner the option to defer the raise as a lien against the property, accruing fair interest. Nobody gets kicked out of their home, and the taxes get paid when the home is sold. If it is inherited, then the inheritors will have to increase their taxes paid at least so that the lien amount no longer increases relative to the home value.
For commercial property, cap the property tax paid by the lease-holder to the historic rate + a several percent growth to gradually meet the current tax bill. The rest of the tax becomes a lien on the property to be paid on sale, with forced payment increases if the lien to value ratio becomes too large. It would be up to the property owner whether they pay the additional tax or take it as a lien. Ultimately, commercial prop 13 was a mistake, and businesses that can't compete on a level playing field need to be gradually pressured to improve profitability or make the space available to someone that can.
Edit: one more thing that people seem to forget is that if we repeal Prop 13, we can reduce the property tax rate and keep the same tax income. So the unpayable increase is much more affordable than a naive analysis would suggest.
Yeah, I feel like the yimby's are going to take another run at repealing it for investment properties (5+ units of multifamily and all of commercially-zoned property) and it stands a much greater chance of passing the next time because of how close it was last time. The messaging will be much sharper.
Re your NNN comment, would you mind sharing a source for that? My gut says it's not accurate, but happy to be proven wrong. If you meant total square footage of leased space, that would make more sense, but having a hard time believing most leases are NNN (and since your point was about businesses going under what I think matters is the number of leases because (a bit over-simplified) 1 lease = 1 business regardless of the square footage leased by the business.
The ironic thing about this whole topic of businesses going under is that there's no rent control, for the most part, for businesses and yet Prop 13 acts as rent control (i.e., carried cost control) for landlords. If the landlords only charged the market rent that was achievable at the time they bought the property with a nominal capped annual increase that'd be pretty good for operating businesses, just not for the landlord's real estate business.
P.s. I personally benefit from Prop 13 and would be happy to have its market-distorting bullshit eliminated!
You could probably adjust the annual percentage increase and find a balance between pre-prop13 problems of rapidly increasing property tax and the post-prop13 problems of significant gap between capped assessment and actual value.
Probably also need to do something about transfers via holding companies as well, since there's a ton of commercial properties that have never had their assessment cap reset because of the way the beneficial holding rules apply to corporations. OTOH, if the capped assessment grows at something like 5% per year, maybe it can catch up soon enough anyway.
You note that a bunch of small business just won't be viable if you up the taxes, but you agree on the need to do it. So do you just keep upping the taxes until nothing is profitable except giant soulless corporations (who will then probably subvert the tax system anyway)?
Profitability doesn't only come from large corporations. And it's likely that many large corporations would shut down businesses too if it impacted them.
The limit is that if no other more profitable business exists, the landlord lowers rent until they get some one. But that's often a multi year discovery process. And it's very likely that person will be some other small business that wouldn't have had a chance if the same spot was occupied.
It's hard to overstate just how much the random subsidy is for Prop 13 taxes; there is literally a 20x difference purely based on when a property was purchased or a building was built. This leads to very poor and inefficient allocation of real estate to businesses.
We need to repeal Prop 13 completely. The fact that my neighbors pay 1/10th the property tax that I do, despite being younger and less at risk of being forced out of their home due to going fixed income or some financial crisis, is absurd.
Doing that would be good policy but bad politics. The people it would hurt the worst are the ones who vote most (older people) and the people most responsible for cities being the way they are (people who have lived in one spot a long time). So it's unlikely to directly happen, for that reason.
Piecemeal reform is much easier to swallow. Especially if you start with something like commercial properties, and especially since the increased income that results can be used to create tangible community improvements.
So even if your ultimate goal is full repeal, the correct strategy to make that come about is piecemeal reform, and pushing for a full repeal is counterproductive to that happening.
Prop 13 passed originally as a taxpayer revolt against uncontrolled spending increases by local governments. I agree that reform is needed but I'll only support changes if they maintain some sort of reasonable revenue limits on local governments. Otherwise the money will just be wasted giving fat raises to public employees.
I'm a former (i.e. not irrelevant to the question) Californian who also thinks Prop 13 should be repealed, and am probably supportive of LVT;
Can you walk through the scenario that younger neighbors pay a tech of the property tax you do? Are they legacies and benefiting from some sort of inherited trust or something?
Not OP, but it's probably about inheritance rules. If you inherit a property then you inherit its tax basis. In fact, if I remember correctly, you inherit the tax basis, but the capital gains basis resets. You effectively inherit a property that has a low property tax, but face zero capital gains if you turn around and sell it.
All of this is subject to limits and rules and stuff. I think prop 19 made it so that you have to use it for your primary residence for the first year. And I think there's a cap on the difference between property value and tax basis of ~$1m.
That's a soft cap, you get the full benefit if the value difference is up to $1m (in 2021, adjusted biennally for inflation since) or less, and if its greater you get the amount of value increase beyond the limit is added at full value (but the amount below the limit is still waived) in setting the tax basis value at transfer.
As the parallel comment said, this is probably inheritance, and the low tax basis can be passed to children and grandchildren.
This was recently modified, due to Prop 19, so that only the first million of property value can escape fair taxation. Since it was passed, there have been two attempts to bring back the landed gentry aspect of Prop 13, and there is a third attempt under way:
The example house used in the story was taxed at $1,300/year before inheritance, on a $2M home value. After inheritance, it's an annual $18,000 bill, discounted from something like $30k-$40k.
Prop 13 is like the anti land value tax. Makes places like Texas look downright progressive.