Proposition 13: Tax Breaks For The Big Boys


Posted on 31 October 2011

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By Peter Schrag

It’s been just a third of a century since the passage of Proposition 13 in June, 1978. In that time few of its offspring have caused more damage than the great loopholes allowing corporations to evade hundreds of millions in local property taxes that they’d owe in any fair and economically rational revenue system.

Exact numbers are hard to come by, but as schools, cities, counties and other local agencies scratch for funds to pay cops, firefighters, teachers, librarians, and park and street maintenance workers, the cost becomes more glaring by the day.

In county after county, as Lenny Goldberg of the California Tax Reform Association has been trying to tell us for years – and as he demonstrated again in a 2010 report written with David Kirsten – Proposition 13, which was supposed to protect homeowners, has become a great gusher of benefits for banks, drug and grocery chains, hotel corporations, oil companies, and real estate speculators.

In the meantime, the share of the property tax burden borne by homeowners has grown; the part paid by commercial property has continued to go down.

In Santa Clara County, the booming Silicon Valley center of high tech, where the proportions were roughly even in 1978, residential property owners now pay about 65 percent of property taxes; commercial property pays 35 percent.

In Los Angeles County, where residential property owners carried just over half the burden in 1975, they now pay nearly 70 percent of all property taxes. In Contra Costa County, it’s gone from 48-52 in 1970 to 73-27.

Some of those shifts can be attributed to new housing and increased home prices, but not all.

How did that happen? The answer begins with the provision in Proposition 13 that allows property to be reassessed only when ownership changes or when improvements are made. In most cases, that’s a simple rule for residential property.

For commercial property, however, it raises a long list of frustrating questions – a lawyer’s dream -- that opens endless possibilities for avoiding a reassessment even when ownership changes. “The law is a mess,” Goldberg said in his study, “and impossible to enforce.”

The implementing legislation for Proposition 13 says, in the words of one legislative analyst, “that when one person or entity acquires more than 50% of the ownership interest of the property”, ownership changes.

But problems quickly arise because “a sale or transfer of controlling interests can be legally structured so that no one entity acquires more than 50% interest in the legal entity - thereby avoiding the reassessment.”

How often does ownership of a corporation change, when stocks are traded daily?  What about limited partnerships or family trusts? What about corporate mergers?

When Wells Fargo bought Wachovia in 2008, some Wachovia branches were reassessed, some weren’t. In the two years after JP Morgan Chase bought Washington Mutual in 2008, few WaMu branches were reassessed. After a private equity firm bought the Hilton Hotel chain in 2007, some Hiltons were reassessed; some weren’t.

 It’s estimated that because of stock trading more than 50 percent of the “ownership” in most publicly traded corporations change about every three years, but no reassessment takes place. Similarly, if three purchasers buy 100 percent of a single property in equal shares, it triggers no reassessment.

The “incredible complexity used to avoid taxes,” in Goldberg’s words, imposes not only a great cost on the local agencies to which those taxes would otherwise be paid, but on new businesses and business expansions that must pay taxes based on the market value of the property they buy.

That in itself is a damper on competition and new enterprise – and of course it’s unfair. Taxes, Goldberg has long argued, should capture the gain in the value of property generated by business success; it should not tax the newcomer just trying to get started.

The Howard Jarvis Taxpayers Association, named for the co-author of Proposition 13, says it’s there to protect homeowners. But through the years it’s opposed any reform that could reduce their tax burden relative to commercial property.  (Which of course wasn’t supposed to be the prime beneficiary in the first place).

Thirty years ago, when Macy’s filed a suit challenging the unfairness of a system that taxed the new store on the block more heavily than the established one across the street, the Jarvis group campaigned so vigorously among Macy’s customers, many of whom sent back their shredded credit cards,  that it dropped the suit.

The present system is good, the Jarvistas contend (in a slippery slope sort of argument) because it encourages “property owners from all corners -- homeowners and businesses – [to forge] a strong political alliance to preserve” Proposition 13 without change.

Goldberg has talked for years about a split roll -- treating commercial property differently from residential property -- both in tax assessments and in tax rates. But more political groundwork has to be laid to make clear to local voters what the convoluted rules of the current system are costing them in police protection, school support and countless other public services.

A bill that would change the assessment system, AB 2492 by San Francisco’s Tom Ammiano, made it partly through the Assembly last year and may return in some form in January. But because any change in the assessment system now requires a two-thirds vote, the chances for any change are slim.

That means a lot more groundwork to make clear to the voters and taxpayers of, say, Richmond, how much they’d gain from a fair assessment of the huge Chevron refinery there. Or to enable the citizens of almost any town or county to learn what they’re losing when one bank corporation or drug chain or grocery chain gobbles up another but pays at a valuation that was set at 1975 prices. The agenda, as Goldberg says, is “expose, expose, expose.”

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Peter Schrag, whose exclusive weekly column appears every Monday in the California Progress Report, is the former editorial page editor and columnist of the Sacramento Bee. He is the author of Paradise Lost: California’s Experience, America’s Future and California: America’s High Stakes Experiment. His newest book, Not Fit for Our Society: Nativism, Eugenics, Immigration is now on sale.

We hear this same tired old song all the time from the tax-it-forward crowd.

Prop 13 is unfair, it doesn't allow California to tax as much as the rest of the country. We have to let go of First responders and teachers and public safety workers, all because of prop 13. There are corporation who enjoy a benefit from prop 13 (and that alone just grinds in the face of California Democrat Legislative types who think business is the root of all greed).

Then, the argument goes, that some mythical anti-tax group is so powerful that they force the voters into rejecting any changes.
Macy's lost out on their customers sympathy all because of the magic anti-tax cabal.

The bottom line on why it won't get changed, according to Prop. 13 opponents? The California voter is thought of as too ignorant to understand that increasing taxes and giving the CA Legislature more power to raise taxes is a good thing.

We voters, supposedly, can't decide enough is enough on our own.
News flash:
We can, We do, We did and we will again.
-Jim

California has a crushing tax burden. The problem is that folks like you want to spend more money for entitlements than could ever be paid for.

Mr Schag - Im sure it is easy for folks like you to think "to" this position, but if you actually take the time to think "through" it, you might change your narrow and closed mind. Small business like mine would not be profitable (read: sustainable) if we had higher costs. Our margins are the lowest in centuries, why? Rents are through the roof; minimum wage is the highest it has ever been; the local economy is lousy and folks like you want to do the unimaginable - raise another cost that could drive many of us out of business and put us in line with everyone else milking the govt teat. You want to write a "Progress Report"? Focus on finding ways to reduce the billions of tax dollars we are spending on countless social welfare programs, now that WOULD be progress!

See David R. Doerr's California's Tax Machine: A History of Taxing and Spending in the Golden State

The reason real reform of prop 13 isn't happening is that the debate is too abstract. Specific, good examples need to be selected so people in a particular communities can see how their community's taxes on homes [the one's that aren't worth much anymore] went up, while the transnational fat cat in the neighborhood kept its taxes low.