PD Editorial: Old Prop. 13

KENT PORTER / The Press Democrat

Dan Walters, Sacramento Bee, Published May 11, 2010.

Proposition 13, the famous – or infamous – property tax limit passed by voters in 1978, requires property to be reassessed upon a “change of ownership.”

For homeowners, that’s an easily understood provision. When one buys a house, its base tax value is pegged at its sales price.

When it comes to commercial property, however, change-of-ownership rules adopted by the state three decades ago are anything but simple. If business property changes hands entirely in a single transaction with a single buyer, the rules governing homes also apply – but business deals are typically more complex.

If no one buyer purchases more than 50 percent of the property at any one time, it generally does not constitute a “change in ownership.” Business deals in California are frequently structured to avoid reassessment.

That, say critics, is a giant loophole that artificially depresses commercial property taxes, thus costing local governments – and indirectly the state – untold billions of dollars.

Altering Proposition 13, which many public employee unions and other liberal groups support, would require a ballot measure that it’s generally believed would be impossible to pass. But for decades, those groups have dreamed of altering the rules governing “change in ownership” so that taxes on commercial property would increase.

In theory, it could be done with a vote of the Legislature and a governor’s signature, but numerous attempts have failed.

There’s another effort afoot in Assembly Bill 2492, by Assemblyman Tom Ammiano, D-San Francisco, that would broaden the definition of “change in ownership.” And advocates are wielding a 122-page study by the California Tax Reform Association, alleging that commercial property’s share of property taxes has declined steadily in the past 32 years, while the portion borne by residential property has risen.

There’s reason to be skeptical of the study. It includes apartments and other rental property in the residential component, not merely owner-occupied homes. It also does not offer any underlying data on actual rates of residential and commercial construction since 1978 that could affect changes in proportionate tax burden.

Business groups such as the California Taxpayers Association are dwelling on those factors, contending that the report’s data and conclusions are skewed, and that it’s an initial effort at undoing Proposition 13′s tax limits. “The report is so full of holes that it should have been printed on Swiss cheese,” Cal-Tax said.

The battle was rejoined Monday at an Assembly Revenue and Taxation Committee hearing, and after a sharp debate, the Democrat-dominated committee approved Ammiano’s bill. But for all the verbiage, it was probably a futile gesture. The measure would require a two-thirds legislative vote, and Republicans are solidly opposed.

© Copyright The Sacramento Bee. All rights reserved.

By DANIEL WEINTRAUB

Like wine? Swallow this:

E&J Gallo of Modesto, one of the world’s largest wineries, bought Louis M. Martini in 2002.

Gallo – with annual sales of some $2 billion – got 1,765 acresof some of the best vineyards in Napa and Sonoma counties, worth an estimated $75 million. But since Gallo split the purchase among 12 family members – so no one person owned more than 50 percent – the property was not reassessed for tax purposes.

That loophole in California’s beloved Proposition 13 kept the $75 million-worth of property valued at less than $14 million, costing the state hundreds of thousands of dollars a year in property taxes.

Gallo is not alone in enjoying this quirk of the law, according to a provocative (and controversial) study by the California Tax Reform Association.

Like skiing? Here’s a face-plant:

Intrawest of Vancouver, a resort conglomerate with $1 billion or so in annual revenue, obtained a majority of the stock of Mammoth Mountain ski area in 1997. But the deal was structured in such a way that there was no “change in control” as far as Prop. 13 was concerned – and thus no reassessment – costing Mono County upwards of $4 million a year in property taxes.

We’ve been telling you lately about the CTRA report ( Tax burden falls to homeowners, not businesses, in Prop. 13’s wake; and Leave Prop. 13 – and business taxes – alone, group says; and Disneyland, businesses, enjoy Prop. 13 loopholes, study says), but these glaring examples of Prop. 13 gone, perhaps, awry, were first reported by our editor here at The Watchdog, Chris Knap, in 2004.

The CTRA study uses them as examples of what’s wrong with the law.

“The system by which commercial property is assessed is irrational, loophole-ridden, complex, increases assessment on some properties while allowing others to escape reassessment, and generally is incapable of being defended as rational public policy,” the study says. “While business groups defend the outcome—very low property taxes for many businesses—we challenge anyone to defend the confused and confusing system which treats similar commercial properties very differently, depending on how they are organized.

“Despite the complexities of property ownership, the problem in the law can be simply understood: a change of ownership does not occur unless over 50% of a property is purchased by a single owner. So if three purchasers purchase 100% of a property, no change of ownership occurs. If stock transactions for a publicly-traded corporation occur every day and 95% of the company changes hands over time, but no one purchaser buys more than 50% of stock, no change of ownership occurs. If limited partners who own a shopping center sell to several other limited partners, no change of ownership occurs if no one buys more than 50%. If two private equity firms and a real estate investment trust each buy an entire company, no change of ownership occurs. Or, if a change in company ownership occurs, but the property is held through a leasehold, no change of ownership for the property occurs.”

And thus, business property taxes can stay at low, low, low levels. Try that when you buy your next house.

“There can be no doubt that Proposition 13 greatly lowered the property tax burden on average in California, despite far higher land values than the rest of the country,” the report says. “In 1977-78, California ranked 5th in the country in property tax as a percentage of personal income, at $63.47 in tax per $1000 of income, compared to a national average of $43.74.

“In 2006-07, California ranked 36th in percentage of personal income, paying on average $27.61 per $1,000 of personal income, compared to a national average of $34.92 ….

“With the property tax burden cut by more than half from the pre-Proposition 13 level, the question becomes how the lowered tax burden has been shared.”

The CTRA says counties should immediately reassess many properties to avoid cuts in state services and programs (“There appears to be many millions of dollars in tax revenue which is going uncollected); and that the law should be changed “at least to make sure that obvious changes of ownership, such as private equity buyouts and corporate takeovers, trigger a reassessment.”

A bill pending in the Assembly (AB 2492, Ammiano) would make this change. It’s not the first time. And we suspect it won’t be the last.

June 3, 2010, by Teri Sforza, Register Staff Writer

Has ownership of Disney changed hands since 1978, when property-tax-shrinking Proposition 13 changed the face of California government?

One could argue that such publicly-traded corporations have changed hands many, many times since then – but Prop. 13 was not written to consider such complex forms of ownership, or decide when a reassessment might be prudent.

So there is no reassessment. Business wins, and the state loses, according to a provocative study by the California Tax Reform Association.

“In 2004, the bulk of the land in Disneyland was taxed at 1975 values, at a rate of five cents per square foot,” CTRA says. ”Subsequent Disneyland expansions show land taxed at growing amounts as new properties were acquired, until, in 2002, new property is assessed and taxed at 37 cents/square foot of land. If the under-assessed and under-taxed Disney land were brought up to 2002 values, Disneyland would pay Orange County $4,672,217.74 more per year in tax. This amount is likely to be larger in 2010, because at an increase of 2% per year as permitted by law, the tax difference between the vast amount of property valued at 1975 values becomes even greater.”

Disney declined comment on the report (see a critique of the report’s methodology here, and more below) but its authors – who argue that businesses far too often and far too easily escape reassessments when they change hands – point to it as a prime example of unintended consequences of Prop. 13.

“The problem in the law can be simply understood: a change of ownership does not occur unless over 50% of a property is purchased by a single owner,” the report says.

“So if three purchasers purchase 100% of a property, no change of ownership occurs. If stock transactions for a publicly-traded corporation occur every day and 95% of the company changes hands over time, but no one purchaser buys more than 50% of stock, no change of ownership occurs. If limited partners who own a shopping center sell to several other limited partners, no change of ownership occurs if no one buys more than 50%. If two private equity firms and a real estate investment trust each buy an entire company, no change of ownership occurs. Or, if a change in company ownership occurs, but the property is held through a leasehold, no change of ownership for the property occurs.”

The Disney Corporation, it says, “provides an accessible example of the types of tax losses which accrue from failure to reassess property.”

The basic problem is that the law does not fit the reality of property ownership, the report says, because commercial property is held in many complex forms which make “a change of ownership” difficult to determine.

Consider when JP Morgan Chase merged with moribund Washington Mutual  Bank in a $1.9 billionbuyout in 2008. Chase, the new owner, added more than 2,000 WaMu locations to its portfolio. Now, if those banks were homes, and you were the new owner, you could rest assured the property would be reassessed by the county assessor and then taxed accordingly. But very few of Chase’s new properties have been reassessed, according to the report – including the bank at 1455 Baker Street in Costa Mesa, which was last reassessed in 1998.

“While we have long contended that the law is inapplicable to the complexity of commercial property ownership as well as loophole-ridden, we have made that contention specific: we have found major changes of ownership in major properties which have gone without reassessment,” it says. “The ones we examined are predominantly those of private equity buyouts, corporate purchases of companies, and bank mergers which have avoided reassessment. In particular, what we have found is a tax system which is inconsistently applied in many counties. We believe that there are many properties, particularly the banks and other commercial properties, which should have been reassessed but have not been, and found that some counties have assessed these properties while others have not.

“Our legal analysis suggests why this inconsistency occurs: the law is a mess and impossible to enforce,” it said. “The inconsistencies we have found make clear that the system is failing.”

The classic examples of big businesses that have clearly changed hands – but avoided more taxes – are called out, including when Martini winery properties were sold to E.J. Gallo through many complex steps, resulting in no reassessment despite deed changes recorded with the county; and the sale of Mammoth Mountain resort in such a way that there was no “change in control”— and no reassessment.

Chris Knap, our editor here at The Watchdog, used to earn an honest living as a crack reporter, and we refer you to his 2004 story on these very problems: A taxing predicament.

How to fix? Counties should immediately reassess many properties,to avoid cuts in state services and programs (“There appears to be many millions of dollars in tax revenue which is going uncollected); and that the law should be changed “at least to make sure that obvious changes of ownership, such as private equity buyouts and corporate takeovers, trigger a reassessment,” it says. A bill pending in the Assembly (AB 2492, Ammiano) would make this change. But such changes have been proposed before, only to die swift deaths.

LEAVE WELL ENOUGH ALONE

David Kline of the conservative California Taxpayers’ Association  – sort of the CTRA’s nemesis – says Prop. 13 is working well for homeowners and for businesses, and should not be monkeyed-around with.

“The big case they’re trying to make is that it’s somehow unfair, but the courts ruled, and we agree, that it is fair because it treats every property owner the same,” Kline said. “When you buy your property, you have that certainty that you’re not going to be taxed out of your home.  That was the problem.”

The revenue and tax code outlines what counts as a change in ownership for businesses, he said, and that system is working, and not as full of loopholes, as the “pro-tax side” would have you believe, he said. “It doesn’t make sense, especially when the unemployment rate is high, to make it more expensive to run a business and hire people in California,” he said.

But that $20 billion state budget shortfall looms….

Kersten Communications (KC) has completed a brief report, titled “Summary of November 2010 Ballot Measures,” which provides of summary of the three measures that have qualified for the November 2010 statewide ballot and seven other measures that have collected the requisite number of signatures but are pending verification.  To view this summary click here.   

Another KC report, titled “New Report Finds Major Shift in Property Tax Burden From Commercial to Residential Property Since Prop. 13, Describes Loopholes In System,” summarizes a new report which was co-authored by Lenny Goldberg, executive director of the California Tax Reform Association, and David Kersten, with Kersten Communications.  To view this report click here. 

The full report, titled “System Failure: Califonria’s Loophole-Ridden Commercial Property Tax,” is available by clicking here.   

KC Blog Briefs:

“Summary of Analyses of the Governor’s May Revised Budget Proposal.”

“House and Senate Reach Compromise on ‘Job Creation’ and ‘Tax Loophole Closure’ Legislation.”

On May 14, 2010 Governor Arnold Schwarzenegger released is May Revised budget proposal which outlines a series of solutions to close the $19 billion budget gap projected for 2010-11.  To view the proposal click here.   Legislative deliberations on the proposal have already begun.  Below is a list of the various analyses of the Governor’s May revision: 

“The 2010-11 Budget: Overview of the May Revision.”  Legislative Analyst, May 18, 2010.

“Governor Releases May Revision With, As Promised, ‘Absolutely Terrible Cuts,’ No Tax Increases.”  California Budget Project, Updated May 19, 2010. 

“Highlights of the Governor’s May Revisions 2010-11.”  Assembly Budget Committee, May 14, 2010. 

“May Revision Highlights.”  Senate Budget and Fiscal Review Committee, May 14, 2010. 

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 The California Institute for Federal Policy Research (CIFPR) reports that House and Senate negotiators on May 20, 2010 reached a compromise on the conference agreement to H.R. 4213, the American Jobs and Closing Tax Loopholes Act.  The original legislation, the Tax Extenders Act of 2009, passed the House of Representatives on December 9, 2009.  The Senate passed a similar package, the American Workers, State and Business Relief Act, as an amendment to that bill on March 10, 2010, according to CIFPR.

The House hopes to garner sufficient support for the measure from moderate Democrats to allow it to pass the bill early next week. The Senate will need to find at least one Republican supporter to reach the 60 votes it will need to overcome a filibuster. Leaders of both bodies hope to secure final passage of the bill before the beginning of the Memorial Day recess, which begins on May 28, 2010, according to CIFPR.

Below is a CIFPR summary of the numerous provisions contained in the bill, the cost of which could total in the neighborhood of $200 billion, are the following:

        - extend eligibility for unemployment insurance benefits and COBRA health care tax credits through December 31, 2010;

        - extend the American Recovery and Reinvestment Act small business lending program that eliminates the fees normally charged for loans through the SBA 7(a) and 504 loan programs and increases the government guarantees on 7(a) loans from 75% to 90%;

        - extend the Build America Bonds (BABs) program for two years (through 2012);

        - exclude bonds financing facilities that furnish water and sewage facilities from state volume caps;

        - extend for one year (through 2010) the expensing of costs associated with cleaning up hazardous “brownfield” sites;

        - distribute the Projects of National and Regional Significance (PNRS) and National Corridor Infrastructure Improvement (National Corridor) surface transportation program funding among all States based on each State’s share of FY 2009 highway apportioned funds rather than to only 29 States and Washington, D.C., that had PNRS and National Corridor projects under SAFETEA-LU; the bill would also distribute “additional” highway formula funds (which the bill makes available in lieu of additional Congressionally-designated projects) among all of the highway formula programs rather than among just six formula programs;

        - reinstate for one year (through 2010) the research and development tax credit;

        - extend for one year (through 2010) the designation of certain economically depressed census tracts as Empowerment Zones;

        - support over 300,000 jobs for youth ages 14 to 24 through summer employment programs;

        - expand the Trade Adjustment Assistance for Communities – Community College and Career Training Grant Program to include individuals who are eligible for unemployment insurance, or are likely to be eligible for unemployment insurance, or have exhausted their unemployment insurance;

        - extend for one year (through 2010) the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes;

        - extend for one year (through 2010) the above-the-line tax deduction for qualified education expenses;

        - extend for one year (through 2010) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid for books, supplies, and other supplementary materials;

        - extend for one year (through 2010) the $1.00 per gallon production tax credit for biodiesel and the small agri-biodiesel producer credit of 10 cents per gallon, and also extend for one year (through 2010) the $1.00 per gallon production tax credit for diesel fuel created from biomass;

        - extend for one year (through 2010) the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States);

        - prevent 20 percent reduction in Medicare physician payment rates in June and allow rates to increase in 2012 and 2013 if spending growth on physician services is within reasonable limits, with an extra allowance for primary and preventive care; and

        - provide a 6-month extension of the temporary 6.2 percent increase in Federal Medicaid Matching Rate (FMAP), as well as the additional percentage points for states with high unemployment.

        Detailed information on the bill can be found at:

http://waysandmeans.house.gov/press/PRArticle.aspx?NewsID=11185 .