With AB 2492, State would close a '$7.5 billion' annual corporate tax loophole


Posted on 06 May 2010

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By Dan Aiello

The idea of a revision to the state’s property tax law - established with passage of Proposition 13 more than three decades ago - is in no way new to Sacramento.

It was born with the post-Prop 13 realization that what came to legally define a commercial property sale was not the same as what traditionally defined a residential property sale and revisionist proponents claim it was that legal definition which created a corporate tax loophole unintended by the overwhelming number of California voters who supported - and still support - the "stable tax" Jarvis-Gann initiative.

The idea to revise Prop 13's commercial property exemption has been championed by former Senators Quentin Kopp (I-SF) and Martha Escutia (D-LA) over the course of a decade, and more recently by Warren Buffet while acting as Governor Schwarzenegger's financial advisor and as legislation sponsored by the California Teacher’s Association desperate to turn around the state’s lagging national ranking in per-student spending ratios.

In 2010, Assembly member Tom Ammiano (D-SF) is the new standard bearer for revising the state’s property tax code – which would require voter approval – as he introduces AB 2492, a ‘homeowner-exempt’ split roll revision intended to “close the loophole” created for commercial property owners with the passage of Prop 13.

“We used to have a parity,” between residential and commercial property taxes, Assembly member Ammiano told California Progress Report. “But now, I think we need this reform.”

Ammiano contends that, while he understands that California voters still overwhelmingly support Prop 13, he believes most voters do not realize that the legal definitions of what constitutes a property sale following passage of the initiative created a corporate tax loophole so big that most of the commercial property in the state over the last 30 years has been driven through it, avoiding the same reassessment that occurs when any comparable residential property is sold.

And over time, the avoidance of reassessment by commercial property owners has meant noticeable declines in commercial property tax revenue share in at least two counties.

‘A virtual flip' in property tax burden

Proponents of AB 2492 claim there has been a profound shift in the tax burden from commercial property to residential homeowners because of the existing commercial property tax loophole created, not by Prop 13, but by the definition of a sale following the initiative’s passage.

In Los Angeles County, in 1979, residential property contributed 40 percent of total property tax revenue. By 2009 residential property’s share increased to 56 percent of all property tax revenue, according to Ammiano’s Communications Director, Quintin Mecke.

Commercial property in Los Angeles County likewise flipped, decreasing from 47 percent of all property tax collected in 1979 to 31 percent today, claims Mecke.

In San Francisco County, residential property owners increased their percentage of property tax revenue from 41 percent in 1979 to 57 percent last year, while commercial property saw a decrease from a 59 percent to a 43 percent in 2009 revenue share, according to the San Francisco Assessor’s office.

Asked if there were any factors that would explain the figures, San Francisco Assessor and “Close the Loophole” advocate, Phillip Ting, pointed out that the city’s population has remained largely stagnant, only increasing by 50,000 residents over the last 60 years, while the ‘Manhattanization of San Francisco’ undertaken by then-Mayor Dianne Feinstein through the late 70’s to mid 80’s, along with continued commercial property growth since - an increase in commercial square footage Ting called "significant," - should be reflected in an increase in commercial tax revenue and total tax share, not the decrease evidenced today.

When a sale is not a sale

The issue is simple, claims Ting, a proponent of the legislation and the person behind the web site, closetheloophole.com. “The definitions that you and I hold about what defines a sale are much different than the legal definition that has been created following passage of Prop 13,” Ting told CPR.

Ting gave one abstract example where a commercial property sale is not treated the same as a residential property sale.

It is referred to as Legal Entity Ownership. If a property is owned by a legal entity in which four individuals each own a 25 percent interest, then if an individual sells their 25 percent interest in the legal entity to someone else, no reassessment will occur. This is true even if each of the four individuals sell their interests to other persons. Only if one person or entity obtains control (more than 50 percent) will a change in ownership be triggered.

Because commercial property becomes part of a business, the property ownership often transfers with the ownership of the business, but the property itself is not subject to reassessment.

An alarming number of commercial properties fail to meet the legal definition of sale.

Specific examples where sales are not sales

“I just received a letter last week from the Board of Equalization regarding the JP Morgan acquisition of Washington Mutual informing me that the board determined this did not constitute a sale,” said Ting.

According to Ting, the BOE’s determination prevents a statewide reassessment of the hundreds of Washington Mutual locations. That means every Washington Mutual bank statewide will not be reassessed unless individual county assessor’s choose to challenge the BOE findings.

Similar financial institution mergers have left properties legally “unsold,” for purposes of tax reassessment, including The Bank of America - Security Pacific merger, and the Bank of America - Nation’s Bank merger, which included the Bank of America headquarters on California Street.

Doesn’t it strike you as strange that we are giving these huge financial institutions these property tax breaks while the Federal government is giving them huge bail outs?” asked Ting.

Assembly member Ammiano points to the recent sale of Jiffy Lube to Shell Oil. According to Ammiano, none of the Jiffy Lube locations in the state were reassessed, though he believes California’s voters would consider the properties to have sold.

In 2002, Shell Oil Company purchased Pennzoil Quaker State, which owns the Jiffy Lube Franchise, but two San Francisco Jiffy Lube stations have not been reassessed.

According to the San Francisco Assessor’s Office, the Jiffy Lube located at 6099 Geary Blvd. was last reassessed in 1984, 26 years ago, and is listed as being owned by Jiffy Lube International.

The Jiffy Lube located at 2030 Van Ness is listed as being owned by Rosalie S. Anixter in 2008. The owner of the property in 2007 was listed as Sandra Jeanne Hyman Trust. Despite what appears to be a clear sale of the property to a new owner, the property was last assessed 25 years ago, in 1985, and is not considered to have been sold under the legal definition of commercial property sales.

And that, says Ammiano, is just plain wrong.

Ammiano told CPR that while he’s aware the California Chamber of Commerce and other business lobbying organizations have been traditionally opposed to split roll tax revision, he doesn’t see this as a business versus resident fight, and points to the business-to-business disadvantage the current tax loophole gives to independent and small business owners trying to break into any market, like the independent oil changer trying to compete with the Jiffy lube stations.

Ting concurs.

“When you have tax subsidies, they’re generally given to new businesses to help them get started,” says Ting. “We’ve created a huge barrier to new businesses that are at a huge disadvantage competing with businesses not paying half the property tax. And where are these subsidies going?”

Ting says often the subsidy is simply going out of state. "We’ve created a tax
structure that’s taken money away from students and given it to large
corporations," Ting told CPR.

CalChamber’s tax guide, which was forwarded to CPR in lieu of an interview with spokesperson Kyla Christofferson, claims it knows.

“Higher property taxes could unfortunately result in higher rents for the thousands of California businesses that lease their commercial space,” Christoffersen said in a March 11, 2008 press release. “This could significantly worsen the already-troubled housing market and state budgetary situation.”

“That isn’t the way the market has been driven, not based on taxes, otherwise you’d see prices all over the place on rents,” responded Ting. “So in some cases that argument has fallen flat on its face.”

CalChamber’s tax guide also threatens that every percent increase in taxes on business will result in loss of 43,000 California jobs.

“People are resorting to scare people about losing jobs,” said Ting. “We’ve transferred wealth from students and teachers to [in many cases out of state] commercial property owners. We are, for the first generation in California history, passing a worse life on to our children, which is what we’ve been doing for the last ten years.”

“We pay half per pupil what New York and New Jersery pay for education. Half,” said Ting.

Business to Business disadvantage

Ammiano cites the tale of two hotels at Fisherman’s Wharf. In 2008, according to the San Francisco Assessor’s Office the Holiday Inn located at 1300 Columbus Avenue in Fisherman’s Wharf was purchased by FJM Wharf Associates LLC. However, according to the San Francisco Assessor’s Office the property has not been reassessed at market value. The property was last reassessed at market value in 1993. The property’s land values for 2007 and 2008 are $15,508,814 and $15,818,990, respectively. A neighboring property across the street, Courtyard by Marriot which was last reassessed at market value in 2005 has a land value of $29,442,154, despite having a much smaller lot 55,688 square feet compared to Holiday Inn’s 81,060 square foot lot.

Revision proponents say they want Prop 13 protected

When passed in 1978, Proposition 13 capped property tax rates at 1 percent of assessed value, and restricted that value from growing more than 2 percent a year.

“Prop 13 passed for a very specific reason, people were losing their homes because they could no longer pay their taxes,” said Ting. “We have to ensure that never happens again.”

According to Ting, that is the reason why AB 2492 specifically exempts residential property from any tax revision.

On May 7, 2009, the Board of Equalization issued a report stating that statewide commercial properties are assessed at 58% of fair market value and San Francisco commercial properties are assessed at 49% of fair market value.

In April 2009 the State Board of Equalization issued a Spilt Roll Tax Revenue Estimate:

In 2006-07, a split roll would have generated an additional $6.7 billion in revenue

In 2008-09, a split roll would have generated an additional $7.5 billion in revenue

CPR requested an interview with Brenda Yee of the Board of Equalization but did not receive a response.

An additional SF Commercial Example:

Retail on the Same Block-

o Macy’s Men’s Store (Union Square)

§ 1995 base year

§ 263,000 sq ft

§ $93,608,263 assessed value (2008 Roll Year)

§ $355 Assessed value per sq ft

versus

o Neiman-Marcus (Union Square)

§ 2006 base year

§ 252,000 sq ft

§ $192,092,520 assessed value (2008 Roll Year)

§ $761 Assessed value per sq ft

Both properties were purchased in the early 1990's, but Neiman Marcus had new construction done to the old City of Paris department store building, triggering a reassessment.

Ting argues the law is also subject to endless manipulation by the taxpayer, which violates the basic precept of tax policy that tax laws should provide clear and known results to taxpayers.

Buyers can avoid reassessment even if 100% of a property changes hands.

Among the more egregious examples, in one transaction that took place in Napa County in 2001 where 12 shareholders of E&J Gallo Winery acquired the shares owned by approximately 20 shareholders of the Martini Winery, with the name changing and the deed changing. Since no shareholder bought over 50% no reassessment took place.

CalChamber argues that, when taxes must be increased, it prefers a broad based tax, like sales or income, rather than a "tax targeting a specific group of taxpayers," such as commercial property owners.

Ting disagrees with the CalChamber argument.

"We have one of the highest sales taxes and highest income taxes in the country," responded Ting. "The sales tax is the most regressive of all taxes.  It targets low to moderate income families, and the lobbyists for low to moderate income families have not been as effective as lobbyists for large corporations."

"The assessment [of California commercial property] is no longer based on the value of the property," admitted the San Francisco County Tax Assessor, an issue he believes only worsens over time. Ting cited several cases where the subsidies go to out of state corporations or property owners, not benefiting California at all, including one Massachusetts property owner of a Menlo Park Trader Joe's.

Ting and his staff admit to a certain amount of frustration over decisions like that made by the BOE regarding JP Morgan, but says, "We are bound by the law."

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Dan Aiello reports for the California Progress Report.

A pointer to the exact change in the definition would help.

"the legal definitions of what constitutes a property sale"
{cite}

and exactly how the language before{cite} and after it was changed

"following passage of the initiative created a corporate tax loophole"