Thursday, June 4, 2020

On Gold Coast, a Legacy of Low Taxes
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With its private tennis court, baronial rooms and dead-on view of the Bay, Gladyne Mitchell’s house is among the most valuable in the world—so valuable, in fact, that she brushed off an opportunity to sell it for more than $40 million.

It was 2007, and the Mitchell home was being made over for the San Francisco Decorator Showcase, an annual society fundraiser. The Italian-inspired palazzo sits snugly in the middle of a two-block stretch of Broadway that runs from the Presidio east to Broderick Street. This is the choicest section of San Francisco’s “Gold Coast,” which is generally defined as Broadway from the Presidio to Divisadero, and it has long been the city’s most expensive and showiest enclave. Gladyne Mitchell may lead a quiet, relatively anonymous life, but her neighbors the Gettys, the Ellisons and the Trainas do not.

Amid the buzz over the Showcase, a wealthy couple offered to buy the Mitchell house for between $40 million and $45 million, says Dianne Weaver, the would-be buyers’ agent. Weaver says Mitchell declined the offer for the home her father had bought for $93,000 in the 1940s and left to his only daughter upon his death in 1987. (Mitchell’s real estate agent, who said Mitchell is travelling and cannot be reached, disputed this version of events but declined to elaborate.)

Mitchell soon put the house on the market for $55 million.

Usually, the financial burden of owning a large and valuable house includes a hefty property tax bill. Indeed, if Gladyne Mitchell had sold her house at 2901 Broadway, the new owners would have faced an annual tax of about $500,000.

But this is California, and thanks to the magic of Proposition 13, Gladyne Mitchell’s annual property taxes total just $7,722.

Mitchell’s tax bill is not the lowest on the Gold Coast. (Based on interviews with local real estate professionals and data from the most recent sales on the street, The Bay Citizen is using a per-square-foot value of $2,500 for all of the homes discussed in this story.) That distinction belongs to Theo Schwabacher Jr., who pays $3,890 for 3050 Pacific Ave., worth about $12 million. Maryon D. Lewis, whose family gave San Francisco its Davies Symphony Hall, pays a tax bill of $4,965 at 2900 Broadway, worth about $21 million. The $19 million Kitt family home at 2801 Broadway pays $5,220. At 2950 Pacific Ave., the tax bill for the $22 million house is $5,435; Jane Newhall’s grandmother built the commanding grey-shingled house at 2950 Pacific Ave. in 1908 and her family has occupied it ever since. Each of these homeowners pays less than what the tax would be on a just-purchased $500,000 San Francisco starter home, because Prop. 13 froze property tax rates and limited increases in assessments to two percent per year as long as the home is not sold.

Taking a close look at the disparate tax contributions of this small but telling corner of the city illustrates the bottom-line impact of Prop. 13 in a way that no economic study can. It is one thing to know that a state with a $19 billion budget shortfall, whose governor earlier this month proposed eliminating CalWORKs, the social safety net for poor families with young children, is in dire fiscal condition. It is another to see how the legacy of Prop. 13 works at a house-by-house level, granting some of the state’s wealthiest citizens dramatically below-market property taxes. U.S. Supreme Court Justice John Paul Stevens, the lone dissenter on the court when it upheld Prop. 13 in 1992, called California’s pre-Prop. 13 landowning class “the Squires” whose tax advantages are “a privilege of a medieval character.”

The Bay Citizen calculated the tax per square foot of all of the Gold Coast houses on these two blocks to more clearly illustrate the relative tax burdens of these 28 properties. An analysis by PropertyShark.com, a website that compiles detailed property information, showed that the average tax per square foot for all single-family homes in San Francisco is $3.41.

On the Gold Coast, a house sold for $29 million in August 2009 (and thereby establishing a rough market rate) pays $42.65 in tax per square foot. Theo Schwabacher Jr.’s tax per square foot is 82 cents. Maryon Lewis, whose home is larger, pays 58 cents, the lowest tax per square foot on the street. Jane Newhall pays 61 cents, and the Kitts pay 69 cents. Mitchell, whose home is still on the market, now for $45 million, pays $1.13. In fact, according to PropertyShark, 15 percent of the single-family homes in San Francisco pay less than 50 cents in tax per square foot.

These glaring imbalances can be disturbing even for those intimately familiar with this milieu. “The baby boomers and younger buyers pay the brunt of the taxes,” notes one longtime real estate broker who has, over the years, played a role in the sale of a few of the houses on the Gold Coast. “I don’t feel the taxes newer buyers all pay is necessarily inflated. The problem is that all these others are so deflated. That’s why our state is going to hell. There’s no money for schools, for roads, for infrastructure. It’s bizarre that people think it is fair.”

Others on the Gold Coast, while ponying up substantially more than those mentioned above, still pay a fraction of what their tax would be if their homes were assessed at market rates. Some of these families and individuals are among the most generous and lauded philanthropists in the Bay Area, and their charitable contributions supporting local arts, educational and other organizations cannot and should not be overlooked. But charitable giving is pleasantly elective, allowing the benefactor to support activities or organizations that reflect personal passions and beliefs. A tax bill is stonily obligatory.

So while Gordon and Ann Getty pay $67,611 in tax for their 19,000-square-foot home, that is about 12 percent of what the tax would be at its estimated market value of $47.5 million. (In 2007, the Gettys bought a neighboring house. It carries a $120,582 tax bill, though it is one-fifth the size of their original home.) The Gettys are famously hospitable; President Obama was there for dinner Tuesday night on his swing through San Francisco to raise money for California Senator Barbara Boxer. Next door, Oracle CEO Larry Ellison’s stark modern cube at 2850 Broadway, also purchased in 1990 and now worth about $27 million, is assessed at about a quarter of its market value, paying a tax per square foot of $7.46. Couture-clad bon vivant Georgette “Dodie” Rosenkrans’ 17,286-square-foot house, purchased in 1979 for $1.6 million and now worth an estimated $43 million, is assessed at about 6 percent of its market value and pays a tax per square foot of $1.79.

The owners of all of the homes cited in this story were contacted by either phone, email or letter and asked if they would like to comment. All either did not respond or declined, except for Mitchell’s agent and Jane Newhall. “Proposition 13 has been very good to us,” says Newhall. “The taxes haven’t gone up. It has been pleasant.” Does she have any views on the tax disparities on the street? “No, I don’t. It is none of my business what other people have to pay.”

These houses sit cheek-by-jowl with neighboring homes purchased more recently, and which therefore face market-rate taxes that climb well into six figures. After selling the social-networking site Bebo to AOL for $850 million, Englishman Michael Birch, together with his wife, Xochi, bought 2799 Broadway for $29 million in August 2009. They pay $336,110 in property tax, the highest tab for a single residence in San Francisco. Their new home’s tax per square foot, at $42.65, is 73.5 times higher than the 58 cents paid by their new neighbor Maryon Lewis.

According to PropertyShark’s analysis, of the six most highly taxed homes in San Francisco, four stand along this two-block stretch of Broadway.

Across town, on Potrero Hill, 33-year-old hospital account manager Amy Widdows pays $8.48 per square foot on the thousand-square foot home she bought in 2008. Her tax bill is higher than many on the Gold Coast and her tax per square foot is more than twice the San Francisco average. “Housing is a huge, huge portion of my yearly budget,” she says. “That tax bill is definitely not a drop in the bucket for me. I might be paying double [my neighbor’s taxes], though we receive the same services.”

“Is it fair?” she asked rhetorically. “No. Regardless of which side I am on.”

Widdows, who studied economics in school, articulates another, perhaps unforeseen, effect of Prop. 13: Over time, it tends to place a greater tax burden on the young and the less wealthy, since the higher tax rates are levied on those with lower incomes and fewer assets.

“Typically, if you are lower- to middle-income, property tax is consuming a larger percentage of your overall income than that of a wealthier person,” Widdows says. “Also, if the [government] is not making enough revenue from property tax, not collecting from the wealthy who have owned a long time, it will raise other taxes” like sales tax and income tax to fund essential services. And that, Widdows concludes, “makes things even more regressive.”

Fair or not, Prop. 13 is the law, embedded in the state constitution, and polls indicate that it remains quite popular.

In the 1970s, California real estate saw rapid price increases, and since the property taxes were based on the county assessor’s determination of current market value, homeowners were receiving shock-inducing increases in their property-tax bills. Some seniors and others on fixed incomes were forced to sell their homes because they could not pay the tax on their property that had, on paper, greatly increased in value. Meanwhile, the state budget was actually running at a surplus, and the state government held on to the surplus funds while county assessors were simultaneously mailing out tax bills containing dramatic increases.

When the state’s voters passed Prop. 13 by a wide margin in 1978, all the real property in the state – commercial and residential – saw assessed valuations rolled back to 1975-1976 levels. Tax rates were slashed by about two-thirds, to 1 percent of a property’s assessed value, and the 2-percent-per-year cap was imposed on any increase in assessed value.

Any change in the law would require a two-thirds majority, which conventional political wisdom says is impossible. And that is why any challenge to Prop. 13 is commonly referred to as “the third rail” of California politics and public policy. (In actual railroad parlance, the third rail is the exposed, high-voltage metal rod that powers a train as it travels over the tracks. Touching it can cause electrocution.)

While owners of more modest homes who have held them for many decades also pay dramatically lower taxes than their more-recently arrived neighbors, it is the wealthiest homeowners in the oldest and most rarefied enclaves of San Francisco and Los Angeles who score the greatest benefit, notes Tulane University economics professor Steven M. Sheffrin, who wrote extensively about Prop. 13 and tax fairness in his twenty years at UC Davis.

Sheffrin estimates that 15 percent of houses statewide are still held by their pre-Prop. 13 owners. The bulk of these properties are likely among the most valuable, their owners being the “Squires” whose advantages Justice Stevens lamented.

The advantage of being a “Squire” was further enhanced by changes made to Prop. 13 in the mid-1980s. The so-called Dynasty Provision allowed a principal residence to be inherited by a child or grandchild – with no change in the property’s tax. The Dynasty Provision also permits children or grandchildren to inherit and retain the lower tax assessments on $1 million in other property, such as vacation homes or investment property.  And those heirs may pass along the properties and their advantaged tax status to a theoretically never-ending succession of descendants.

Owned by Maryon D. Lewis, daughter of philanthropist Louise M. Davies, who gave San Francisco its Davies Symphony Hall.

At the same time, Prop. 60 enabled anyone over age 55 to sell a principal residence, buy another home of equal or lesser value, and transfer the tax bill to the new location, as if it were a valuable Chippendale highboy or Grandad’s favorite chair. 

Apply this rule, hypothetically, to Gladyne Mitchell. Her family acquired 2901 Broadway for $93,000. If she sells, hypothetically, at her current asking price of $45 million, netting $44,907,000, and buys a new home for $44,906,999, she would not face a tax bill at the market rate of about $500,000 a year. Instead, she would pay $7,722—her obligation at her old address. And if she were to give her $44,906,999 house to a hypothetical child or grandchild, that heir would also inherit what is essentially the legal right to skirt roughly a half-million dollars in annual taxes. And since Prop. 13 applies to commercial properties as well, the five-story commercial building the Mitchell family trust owns at the corner of Ellis and Powell streets has an assessed value of $775,163 and a tax bill of $8,984.

“Particularly when a property is valuable, there is a real incentive to find ways to pass through to children and grandchildren,” Sheffrin says. “With very, very valuable homes in L.A. and San Francisco—that is the older money to begin with—people find ways to keep them. At the very top [of the market], a higher percentage [of families] keep the properties by using the family rules.”

Occasional complaints about the real-world fairness of all this are hardly new, though the amounts involved and the relative disparities balloon with the passage of time.

In 2003, investor Warren Buffett famously advised gubernatorial candidate Arnold Schwarzenegger to consider amending Prop.13 as a way to right the state’s finances. The Wall Street Journal ran a front-page story in which Buffett appeared to say in an interview that he felt California’s tax rate was too low, based on the low taxes he (still) pays on a Laguna Beach house he has owned since 1971. At his far less valuable primary residence in Omaha, Buffett noted he paid a much higher tax. The Wall Street Journal editorial page seized on the story, deriding what it saw as Buffett advocacy of scuttling Prop. 13 and raising the taxes of “the non-billionaires in Chico.” There was an outcry.

Schwarzenegger made it clear he would consider no such thing, and Buffett fell silent.

After the election, Buffett wrote a testy letter to Paul Steiger, then the editor of the Wall Street Journal. His point in the interview, Buffett wrote, was not that property-tax rates in California were too low, but that property tax rates within California are “wildly capricious, tied as they are to the date of purchase rather than the value of the property or financial circumstances of the owner.”

Not mentioned in the Journal’s story, though he says discussed at length in the original interview, was Buffett’s other house in Laguna Beach, a house much smaller and half as valuable as his first. But Buffett noted that his tax on this second house was ten times higher.

Buffett’s brief willingness to raise Prop. 13 and tax fairness issues was short-lived. Post-election, his frustration was still evident in his letter to Steiger: “My sympathies are clearly with the ‘non-billionaire’ family purchasing a $300,000 house in Chico today that faces real estate taxes marginally higher than those borne by this non-resident billionaire on his $4 million house in Laguna. This family, because of Proposition 13, has been selected to subsidize me.”

Prop. 13 remains popular, even if, as Professor Sheffrin notes, it creates “more little losers than big winners.” A 2008 Field poll reported that 57 percent of registered voters would again approve the measure. It seems that even recent purchasers who currently derive no reduced-assessment advantage from Prop. 13 favor the law because it offers predictable tax bills year in and year out. “People are so scared,” observes San Francisco Assessor-Recorder Phil Ting. “They don’t want anything to impact their own tax situation. They feel okay that a lot of people are really below market. Overall, [it reflects] a lack of faith in the public sector.“

This lack of faith that any revamping of the state’s property tax system would actually result in an improvement of services that taxpayers could see and value in their own communities is the “biggest disaster” and the most corrosive effect of Prop 13, says Sheffrin.

The determinative emotional issue for California taxpayers is not tax fairness or horizontal equity, but rather the knowledge that property tax raised locally won’t necessarily be used to enhance the schools or any services in their communities. Until the 1970s, property taxes were collected locally, and local schools were funded with that money. Prop. 13 turned the property tax into a “state tax,” Sheffrin notes, with all revenue now diverted to Sacramento, which then metes it out to local governments and school districts according to arcane formulas. At the same time, the state of California was dealing with the repercussions of the Serrano decision, a judicial mandate to equalize education spending across all the state’s school districts. Those two factors meant that local property-tax payers could no longer control or see the services their own tax payments were making in their own communities.

Meanwhile, amid all the carnage of the last two years’ budget shortfalls, two small casualties drew little notice. Both were state programs cited by Justice Stevens in 1992 as far more effective and equitable safeguards against fixed-income seniors and the disabled being forced from their homes due to high tax bills. Giving every long-term property holder in the state a tax break was unreasonably broad, Stevens observed. But he approved of the Senior Citizen Property Tax Assistance program, in which the state refunded up to 96 percent of a qualifying person’s tax payment, and the Senior Citizens Property Tax Postponement program, which allowed those qualified to defer their tax payments until the house was sold.

Both programs were suspended in 2009, victims of the state budget crisis.

Data is from the San Francisco Assessor-Recorder’s office or PropertyShark.com, a service that aggregates real estate data from public and proprietary sources for a dozen U.S. markets.

The Bay Citizen estimated market value per square foot of $2,000 to $3,000 for all the Gold Coast properties. Many other factors can affect value, such as view and condition of the house. That value range was based on interviews with local real estate professionals with long experience in the top tier of the San Francisco market. The house at 2799 Broadway sold in August 2009 for $3,680 a square foot. And though the asking price of a property can differ from what it will actually sell for, two properties on this two-block stretch of Broadway are currently on the market: 2901 Broadway at $6,571 a square foot, and 2950 Broadway at $4,540 a square foot.

Square footage, even drawn from public records, can be imperfect and impossible to independently verify. For example, the sales brochure for 2901 Broadway claims that it has 10,000 square feet, though the sales material is careful to note that this figure has not been verified.

For simplicity, The Bay Citizen has used the most recent 1.159 percent tax rate, the rate used in PropertyShark’s calculations.

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