Reforming Proposition 13 to Tax Land More and Buildings Less

26 Pages Posted: 5 Feb 2016 Last revised: 2 Sep 2017

See all articles by Kirk J. Stark

Kirk J. Stark

University of California, Los Angeles (UCLA) - School of Law

Date Written: February 1, 2016


Advocates for reforming Proposition 13, California’s historic property tax limitation initiative, typically emphasize the measure’s implicit preference for owners of commercial and industrial property. Unlike most property tax regimes, Prop 13 assesses property at the owner’s purchase price rather than the property’s market value. In a rising real estate market, this “acquisition value” rule favors longtime owners relative to more recent purchasers. Reform advocates claim that, because commercial and industrial property changes ownership less frequently than residential property, Prop 13 has shifted tax burdens from commercial and industrial property owners to homeowners. To counter this trend, reformers advocate a “split roll” property tax in which commercial and industrial property would be regularly reassessed to market value.

This article draws attention to a different and additional argument in favor of reforming Prop 13 to adopt a split roll regime. While most arguments for a split roll are rooted in fairness claims relating to the distribution of the property tax burden, this article highlights the efficiency gains from taxing commercial and industrial property at market value. These gains derive from the fact that the benefits of Prop 13’s acquisition value rule accrue disproportionately to land rather than structures. Standard planning techniques utilized in the commercial-industrial setting (e.g., ownership of real estate by legal entities, long-term leases) operate to preserve low base year values for both land and structures. Over the long term, however, the physical and design limitations of aging structures will lead to new construction, which under Prop 13’s rules will enter property tax rolls at market value. The result is a concentration of Prop 13’s benefits in underassessed land. This observation leads to the important insight that any reform assessing non-residential property at market value would be, in large measure, a tax on post-1975 appreciation in land values. Current estimates suggest that two-thirds of the revenue gain from adopting a split roll would come from taxing land, arguably the most efficient source of tax revenue available. Coupling such a reform with a reduction in property tax burdens on new construction (for example, by exempting from tax for a period of years some percentage of the owner’s investment in new construction) would further enhance the efficiency gains from adopting a split roll regime.

Keywords: taxation, tax policy, state and local taxes, property tax, Proposition 13

JEL Classification: H20, H21, H70, H71

Suggested Citation

Stark, Kirk J., Reforming Proposition 13 to Tax Land More and Buildings Less (February 1, 2016). California Policy Options 2016, UCLA School of Law, Law-Econ Research Paper No. 16-01, Available at SSRN:

Kirk J. Stark (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

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