The California Tax Reform Association (CTRA) and the Alliance for Californians for Community Empowerment (ACCE) released a report earlier this month based on newly collected data that shows the property tax burden has shifted from commercial and industrial property to residential property in virtually every county in the state since the passage of Proposition 13 in 1978.
The 122-page report, titled “System Failure: California’s Loophole-Ridden Commercial Property Tax,” was co-written by Lenny Goldberg, executive director of CTRA, and David Kersten of Kersten Communications, with the primary research done by Kersten Communications. To view the report click here.
The first part of the report, “Who Pays the Property Tax?” provides county-by-county data on the shifting property tax burden between residential and non-residential property since the passage of Prop. 13. This part of the report is based in part on newly-discovered county survey data reported over many years to the Board of Equalization (BOE) which to our knowledge has never before been examined and utilized, and in part on data provided by county assessors.
The data is consistent throughout the state: in virtually every county in the state, the share of the property tax borne by residential property has increased since the passage of Proposition 13 in 1978, while the share of the property tax borne by non-residential property has decreased. Some examples: in Contra Costa County, the residential share of the property tax went from 48% to 73%. In Santa Clara County, the residential share went from 50% to 64%, despite massive industrial/commercial growth. In Los Angeles County, it went from 53% to 69%. In Orange County, it went from 59% to 72%, states the report.
The California Taxpayers Association (Cal-Tax) and other business groups immediately assailed the report as “meaningless” and “deeply flawed.” “The report is so full of holes that it should have been printed on swiss cheese,” states Cal-Tax in statement issued on the report.
Cal-Tax contends it is “incredible sophistry” to contend that Prop. 13 has shifted the tax burden to residential property because Prop. 13 limits property taxes to 1%, plus a maximum of 2% a year—concluding that “property owners would be paying vastly higher taxes if Prop. 13 did not exist.” It is true that Prop. 13 significantly restricts the taxes that residential property taxpayers pay, but at the same time, restricts the taxes that commercial/industrial taxpayers pay to a greater degree, which is the main contention of the report.
Cal-Tax contends that the shift in the overall property tax burden has “nothing to do with the effectiveness of Prop. 13.” This is a ridiculous claim because Prop. 13 created the property tax system that has been in place since the measure passed in 1978.
Cal-Tax also criticized the report for including “residential-income property” (i.e. apartment buildings, investment properties) in its definition of “residential property.”
The second part of the report, “More Loophole than Tax,” examines the way “change of ownership” is applied to commercial property and summarizes the loopholes in the current system. This section provides specific examples of major properties where 100% of a property’s ownership has changed hands without being reassessed.
Prop. 13 requires both residential and commercial properties to be reassessed upon a “change in ownership.” But loopholes in Prop. 13’s implementing statutes allow commercial properties to routinely change hands without being reassessed—costing state and local governments hundreds of millions of dollars in tax revenues every year (potentially more than $1 billion).
In particular, the report found that California’s commercial property tax system 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,” states the report.
The property transfers examined are predominantly those of private equity buyouts, corporate purchases of companies, and bank mergers which have avoided reassessment.
For example, Hilton Hotels and its family of hotel chains (incl. Doubletree, Embassy Suites, and Hampton Inn) was bought by the Blackstone Group in October 2007 but many of their California-based hotel properties have not been reassessed. Jiffy Lube was bought by Shell Oil in 2002, but very few of the Jiffy Lube service centers have been reassessed. JP Morgan Chase bought Washington Mutual (WaMu) in 2008 for $1.9 billion, but many of WaMu’s assets have not been reassessed to date.
“Our legal analysis suggests why this inconsistency occurs: the law is a mess and impossible to enforce. We examined records and cases from the Board of Equalization which demonstrate incredible complexity used to avoid taxes, complexity which should have nothing to do with the assessors’ job, which is to determine property valuation,” states the report.
The report concludes that the results of Part 2 of the report can be interpreted in two ways:
–One, counties should right now be reassessing many properties, in order to avoid basic cuts in services and programs. There appears to be many millions of dollars in tax revenue which is going uncollected.
–Second, 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 great deal more research on assessment inequities among similar properties needs to be done. The inconsistencies we have found make clear that the system is failing,” concludes the report.
Cal-Tax contends that most assessors are doing a good job and points to routine surveys of assessment practices by the BOE which shows that assessment values hover at between 99 percent and 100 percent of correct values. These surveys look at a very small number of properties and do not review changes of ownership that the BOE may have missed initially. In fact, some of these surveys have found that some counties have failed to reassess major properties despite notification by the BOE (i.e. Riverside, Imperial County).
Assemblymember Tom Ammiano (D-San Francisco) has introduced a bill, AB 2492, that would close the most egregious loopholes in the system by requiring reassessment if 100% of a property changes ownership and increasing penalties on violators. This bill passed the Assembly Revenue and Taxation Committee on May 10 and is currently awaiting action in the Assembly Appropriations Committee.
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