Los Angeles Mayor Tests ‘Third Rail’ in Call for Proposition 13 Changes

Los Angeles Mayor Antonio Villaraigosa proposed dismantling California’s Proposition 13, which helped begin a nationwide anti-tax movement, in favor of a “grand bargain” that would boost levies on business property.

The Democrat who leads California’s largest city called on Governor Jerry Brown not to shrink from making sweeping changes in state tax laws that Villaraigosa, 58, said could produce as much as $36 billion a year in new revenue.

Villaraigosa urged the removal of Proposition 13’s limits on commercial-property assessments while retaining its cap for homes. The mayor said boosting tax revenue in the most-populous state would shore up the University of California system, promote budget stability and restore public-school funds.

“It’s time to address the unfairness inherent in a system that allows Wall Street hedge-fund managers to devise complex real-estate investment trusts that give the super-rich a free pass on taxes every ordinary homeowner in California has to pay,” Villaraigosa said in a speech at the Sacramento Press Club. “Let’s apply, as an idea, Proposition 13’s protections to homeowners and homeowners alone.”

The 1978 referendum, which allows unlimited reassessments for tax purposes only when property is sold, excludes some commercial transactions in real-estate investment trusts, or REITs, according to the mayor.

Easier Overrides

Lower vote thresholds should apply when local communities seek to raise taxes and fees, Villaraigosa said, calling for passage of such measures by a simple majority, not the two- thirds required now. He also proposed extending the state’s 7.25 percent sales tax to service providers such as lawyers.

Proposition 13, which passed with 65 percent of the vote, inspired similar measures in Massachusetts, New York and New Jersey. It restricts tax assessments to 1 percent of a property’s purchase price, plus annual increases of no more than 2 percent, even if market values rise at a much faster pace.

Before its passage, cities, counties and school districts could set their own rates. In the first year under the law, property tax collections in California fell 52 percent to $4.9 billion from $10.3 billion in 1978, according to state data.

Since it became law, California public schools have fallen from seventh place among states to 27th in per-pupil spending, according to the U.S. Census Bureau, as the law curbed receipts from the biggest traditional source of education money.

Broadly Popular Law

The measure remains broadly popular, said Terry Christensen, who teaches politics at San Jose State University. Only by promising to keep residential property caps can Villaraigosa hope to persuade the public to support his proposal, Christensen said by telephone.

“You’ve heard it referred to as the Third Rail of California politics,” he said. “It’s still a very live rail. There’s a real knee-jerk reaction to any effort to change it. This conversation is going to be a very tough sell for many people.”

Brown, a 73-year-old Democrat who was governor when Proposition 13 passed, hasn’t publicly embraced changes in the measure. Gil Duran, a spokesman, declined to comment on the details of the mayor’s proposals.

“We appreciate the mayor adding his voice to the important debate about the future of California,” Duran said by e-mail.

The Howard Jarvis Taxpayers Association, named after Proposition 13’s late author, opposes exempting businesses from its limits, said Jon Coupal, the group’s president.

Struggling Businesses

“Right now small businesses and large businesses are struggling” in California, Coupal told reporters after Villaraigosa’s speech. “We have an effective unemployment rate above 20 percent. There is a correlation between taxes and the regulatory climate and economic development.”

Increasing taxes on commercial property would hurt small businesses disproportionately, said Rex Hime, president and chief executive officer of the California Business Properties Association, which represents owners and management companies.

“If anything homeowners have had an advantage in this marketplace,” Hime said by telephone. “Home values skyrocketed faster than everything else. Proposition 13 has created a certainty in terms of tax values.”

“Pension funds, insurance companies, retirement plans are invested in commercial property,” Hime said. “To undercut that has a significant economic impact.”

Villaraigosa, in his second term as mayor, also suggested reducing or eliminating levies “that don’t make economic sense.” He proposed credits for companies that hire workers; eliminating the state’s corporation tax, which is as high as 10.84 percent for banks; and studying an 11 percent across-the- board cut in income taxes. Villaraigosa also backed changes in pensions for California’s public employees.

“We can’t do it piecemeal,” he said in an interview after the speech. “We have to be bold.”

To contact the reporters on this story: James Nash in Sacramento at jnash24@bloomberg.net; Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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