What has happened to the property tax in the Great Recession? In 2010, the California Tax Reform issued a study (click here) which showed a long-term historic reduction in the share of the property tax paid by commercial property, and a substantial increase in the share paid by residential property.
High-Tech, Low Tax: How the Richest Silicon Valley Corporations Pay Incredibly Low Taxes on Their LandMarch 12th, 2012
Read our new report on the massive undertaxation of Silicon Valley property.
Read the PDF here.
Watch the report at http://www.kcet.org/shows/socal_connected/content/politics/budget-buster-1120110407.html
Reporter: Brian Rooney; Producer: Rebecca Haggerty
Prop 13 was a game changer when it was passed by voters in 1978. Capping property taxes at 1 percent of assessed value, the initiative has protected homeowners, but, say advocates, it has done an even greater job protecting commercial property. Brian Rooney investigates whether legislation intended to help families has instead proven a boon for some businesses which, thanks to Prop 13, are paying property taxes on values far below their market rates.
New tv report demonstrates inequities in commercial property.
Originally posted at http://www.latimes.com/news/local/la-me-0403-lopez-prop13supporters-20110328,0,3745941.column
by Steve Lopez
Now I’ve done it. I made a few idle comments last week about rethinking Proposition 13, and the column ticked off hordes of senior citizens — the most loyal of all newspaper readers.
“The question I ask you is, would you have my husband and me homeless in order to balance the state budget?” asked Betty Vanole, 71, of Burbank.
No, Betty, there’s no need to start packing.
“May we get together over a cup of coffee and talk about Proposition 13?” asked Barbara Menendez, 81, of the San Fernando Valley.
Yes, Barbara. And I’ll spring for the java.
“I have lived in our modest single-family home … in Sherman Oaks since 1954….My first husband was a beginning school teacher with a modest income and I was a stay-at-home Mom with two small children,” Menendez wrote. The house cost $13,750.
“A few years later I was divorced and to make ends meet, went to work nearby for a minimum wage at Bullock’s department store wrapping customer purchases,” she went on. She still lives in the same house, now with her second husband.
“Had it not been for Howard Jarvis instigating Proposition 13 … not many seniors over the years would have been able to afford the consistent annual increases in the property tax rates.”
I do understand, Barbara. I was a California homeowner when Proposition 13 passed in 1978, so, yes, I know the history. But the fix was too radical, with taxes limited to 1% of a home’s value at time of purchase, with a cap on annual increases of 2%.
That has led over the years to huge inequities. Two people living next door to each other in identical houses can pay widely varying taxes depending on when they bought. Warren Bufffet famously pointed that out in 2003 as one of Arnold Schwarzenegger’s advisors. At the time, he paid only $2,200 a year in property taxes on a Laguna Beach home valued at $4 million. At the same time, he was paying $14,000 in annual taxes on a $500,000 house in Omaha.
We’re still paying for Proposition 13’s failings in countless ways, with local governments and school districts endlessly hammered. And, in order to make up for our lower property taxes, California has high income and sales taxes compared with other states. But that has made for a revenue stream that rises and falls with the economy, crippling the state when the economy is in the dumps.
As Californians, we’ve all heard the same sermon: Proposition 13 is untouchable because it’s political dynamite.
But Gov. Jerry Brown is old enough that he doesn’t have to worry about his political future, only his political legacy.
Brown, who first opposed and then embraced Proposition 13 in his first term as governor, has a $26-billion deficit to close. So what’s he doing? He’s messing with the little things, like an extension of a temporary vehicle registration tax, when he should be telling the truth about the state’s screwed-up tax system while making smart budget cuts.
Alan Auerbach, director of UC Berkeley’s Burch Center on Tax Policy and Public Finance, said the state could tinker with Proposition 13 without putting Barbara Menendez and Betty Vanole on the street.
“You could do a gradual phase-in” of a new system, Auerbach said, but everyone over a certain age would get a pass. For younger homeowners, a gradual property tax increase would take place over several years, based on market value rather than on when a home was purchased.
Auerbach said a smart makeover of the state’s tax system might also include lowering income and sales taxes but applying the latter to more goods and services. He’d also recommend continued budget cuts.
But the most obvious thing to do, he argued, would be to quit giving owners of commercial property the windfall break they’ve gotten under Proposition 13. Lenny Goldberg, of the California Tax Reform Assn., has been lobbying for that very thing for years.
“In virtually every county in California,” Goldberg said, “commercial property owners are paying a much smaller portion of the total property tax burden since Proposition 13.”
In Los Angeles County, he said, homeowners paid 53% of all property taxes in 1975, but today they pay 69%. Commercial property owners have gone from 46% to 30%. In Orange County, homeowners have gone from 59% of the burden to 72%, while commercial property owners have gone from paying 40% to 27%.
One reason is that commercial property doesn’t change hands as often as residential property, so it doesn’t get reassessed as frequently. The other reason, Goldberg said, is that commercial property owners have exploited “huge loopholes” by transferring properties to various partnerships and affiliates and avoiding reassessment.
Cracking down on inequities and abuses on the commercial side could reap an additional $8 billion to $10 billion in property tax revenue each year, Goldberg estimated. When I suggested that the business lobby would surely crush any such attempt, he argued that the current system is so inequitable, it saddles new businesses with onerous taxes and stifles economic development.
A new gas station, dry cleaner or hotel will pay higher property taxes than competitors who have been in the same neighborhood for years, Goldberg said.
And what does Barbara Menendez say about tinkering with the commercial side of Proposition 13?
“Oh, I’d go for that,” she said. But she wanted to know if we could still meet for coffee.
Absolutely, I said, promising to take her anywhere she wants to go.
McDonald’s, she said. Still frugal after all these years.
As California faces a severe fiscal crisis at the state and local level, all aspects of our tax system, including the property tax, must be examined. This report provides an examination of the property tax system as it applies to commercial property, and provides significant new data which comes to two clear and related conclusions:
1. In virtually every county, commercial property is paying a far smaller share of the property tax since Proposition 13 passed in 1978.
2. Commercial property is able to exploit huge loopholes in the law to avoid reassessment upon change in ownership.
The first part of the report, “Who Pays the Property Tax” provides county-by-county data on the changing shares of the property tax between residential and non-residential property. It 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, some of whom have substantial records going back in time.
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, the residential share went from 50% to 64%, despite massive industrial/commercial growth. In Los Angeles, it went from 53% to 69%. In Orange, it went from 59% to 72%.
And there is no counter-shift in any counties at any level of significance. We looked at the data from numerous angles but different approaches only led to marginal changes in the numbers and did not affect the trends. We also looked at whether employment growth-an indication of the commercial/industrial sector-outstripped residential population growth, as it did in many counties, but the burden still shifted away from non-residential property, as it did in San Francisco (56% to 67% despite limited population growth and substantial employment growth). With regard to the question: how has the burden of the property tax changed in the last 30 years? The answer is: it has shifted markedly away from the commercial sector and towards the residential sector.
The second part of the report, “More Loophole than Tax” examines the way “change of ownership” is applied to commercial property. 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. 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 but also hotels 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. (Exhibit A)
Our legal analysis suggests why this inconsistency occurs: the law is a mess. 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. (Exhibit B)
The results of Part 2 can be used 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. AB 2492 (Ammiano) in the 2010 session would accomplish this modest change.
And, 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.
The following is a letter that Menlo Park resident Jennifer Bestor wrote to billionaire Warren Buffett concerning her research on the tax burden shift, favoring commercial property owners, resulting from the passage of California Proposition 13.
10 March 2010
Mr. Warren Buffett
Berkshire Hathaway Inc.
3555 Farnam Street
Omaha, NE 68131
Dear Mr. Buffett,
In 2003 you advised Governor Schwarzenegger to review Prop 13 with an eye toward generating more revenue for California schools, cities, emergency services, and other local needs. The governor responded that Prop 13 is the “third rail” in California politics and that you would have to do 500 sit-ups if you mentioned it again.
Please let me know how I can help you with the sit-ups. We desperately need some energy from that third rail.
Looking around at my hometown and reviewing my homeowner’s tax bill, I am torn between the realization that, for homeowners, Prop 13 has worked roughly the way that voters thought it would, while for commercial landlords, it’s been an incredible windfall.
Prop 13 has allowed my neighbors - especially retirees - to live in their homes relying upon a predictable tax structure. Families have been able plan for the future. It may not be perfect, but it has basically worked as voters expected.
Commercial property tax, however, has evolved in a way that not even the direst opponents of Prop 13 envisioned. The majority of tax “savings” in 1978 went to commercial landlords — AND those savings have increased disproportionately over the 31 years since. In 1978, commercial property owners and single-family homeowners each paid about half the total tax in San Mateo County. By 2008, homeowners were paying two-thirds and commercial property owners one-third.
Prop 13 - and then Prop 58 that made Prop 13 bases inheritable - has created economic inequities that are evident from simple on-line searches of the county assessor’s database - and destroy any idea of a level business playing field. A quick trip around my town illustrates this.
The nondescript little gas station on El Camino near my house pays $30,148 a year in property tax for the privilege of selling me less expensive gasoline than the two Shell stations ($14,214; $17,214), the Union 76 ($15,920), and the Chevron ($20,388) down the street. Those big-name stations have service bays to increase revenue and are on major intersections. But the “new guy” in town (well, actually, there’s been a station there since 1978 — but the new competitor in the market) is the one who’s paying $10,000 a year more for police, fire, road repair, education, parks and courts.
Flipping the equation around, the Trader Joe’s property — the “new” market in town — contributes just $7,471 of general tax towards our local services (for two-thirds of an acre of prime commercial property) compared with Draeger’s up the street at $66,585. It isn’t Trader Joe’s, of course, that’s paying the tax — if they’d bought the property when they moved in, that parcel would be contributing 500%+ more. Trader Joe’s leases it from a family trust, descendants of the 1978 owner … with an address on a leafy street in Cape Cod. Since landlords charge what the market will bear, it’s fair to guess that the property tax savings are accruing to those folks in Massachusetts — while the costs are borne by school kids and residents of Menlo Park.
Of course, if the Cape Codders visited, they would probably look across Curtis Street to the Walgreens (Unamas and Starbucks) building and point out that that whole complex is only paying $8,709 in general property tax … without providing customer parking. In fact, the Walgreens building pays 51% more for sewer service ($13,181) than it does towards police, firefighters, courts, roads, and maintaining its free city parking ….
Do you wonder whether any commercial properties ARE contributing meaningfully towards our local services? Well, the Chase takeover of Washington Mutual appears to have triggered a reassessment of that property (WaMu’s earlier absorption of Home Savings had not). So that’s an additional $25,000 into the pot (up to $45,190). And a dry cleaner we use, Menlo Art, is in a building that pays $30,346. The dry cleaner only occupies 25% of the building, so their share is a mere $7,587 — but compare that with the $944 paid by the much busier cleaner across Santa Cruz Avenue. (Hoot’n'Toot sits on yet another property whose sewer bill dwarfs their property tax contribution — with an out-of-state owner on the possibly-less-leafy Leisure World Drive in Mesa, AZ.) I wish I could afford Tom Wing’s jewelry ($21,687), but I do have pizza at Amici’s ($32,809) whenever possible. And Kepler’s, our doggedly independent bookstore, occupies about a sixth of a building that pays $220,395.
Well, Mr. Buffett, I think you get the idea. People say that increasing taxes will make prices go up but, frankly, that requires the generous assumption that, in this totally unbalanced model, landlords aren’t charging what the market will bear.
To make sure, I tested this. I took identical loads of my husband’s laundry into each of the dry cleaners mentioned above (after a particularly depressing talk by our school superintendent — spending per pupil is down this year over last, with only one new teacher hired for over 120 new kids, and 14 teachers due to be laid off in May) — and found that cleaning three shirts, two khaki slacks and a cashmere sweater cost me $37.00 at the popular ($944) cleaner, while I paid $35.60 across the street ($7,587). Wherever the savings are going, it’s not to customers.
And then there’s the threat that Business Will Leave if commercial property taxes go up. Having spent twenty years in the corporate world before becoming a mom, forgive my skepticism. I sat in on many meetings at Apple Computer Inc. in the early 80’s and 3Com Corp. in the early 90’s discussing siting new sales and manufacturing operations. Property tax was never, to my best recollection, mentioned. Consolidated tax levels, yes, but in the broad context of the overall cost and relative ease of doing business. What attracted us? Locations with a level playing field (not one that discriminated against the new entrant); a highly skilled (educated) workforce; good road-, rail- and air-transportation; fair and efficient courts and public services; reliable infrastructure; and a community environment that made employees want to live there.
OK, out of fear of throwing the baby out with the bathwater, we are now drowning him in it. So what change do we make and how and who?
First, let’s cap Prop 13 benefits for commercial property at 20 years. Every twenty years, each non-residential property is reassessed at market value, then gets to enjoy another 20 years of tax relief.
Second, since understaffed assessors offices can’t possibly reassess the roughly 40% of all commercial parcels with base years before 1989, why not say that, for the next five years, assessors will use the existing statewide Board of Equalization mark-up percentages gathered on commercial properties sold - which the BoE uses to assess utility property. A property owner who feels that this overstates his total assessed value could file the usual appeal with a private appraisal, which, if accepted, would provide the basis for the subsequent twenty years. By 2015, assessors would have ramped up to reassess commercial properties with 1975 - 1995 bases … especially since absentee landlords may decide that losing a perpetual and growing tax advantage encourages them to sell to people for whom the property — not the tax windfall — is the asset.
It isn’t perfect, but it will work. $10,000 a year more in property tax from just one Menlo City commercial parcel generates $1,700 for our four elementary schools, $1,590 for our high school, $690 for the three junior colleges, $1,610 to fight our fires, $1,220 for the City ($450 of which to the police, $171 to road and parking maintenance, $207 for parks and recreation, $68 to the library) … OK, I’m being boring … but you and I know that stopping the nonsense of “1978 + 2% forever” will make a difference. Perhaps more of our commercial landlords will be locals — and maybe even occupy some of the space they owned? Like in 1978.
Who will do this? Would you? Would you ask our governor, once again, to look at Prop 13 for commercial property? Does he have anything to lose? The Republicans seem to hate him. The Democrats seem to hate him. It’s just like a movie where the hero gets everything going in the first act, things fall apart in the second, and everyone’s against him at the beginning of the third … until … he grabs the third-rail, does the right thing, champions a fix that will make a difference … and saves California. Go and ask him, Mr. Buffett - please!
And the tagline to the eventual movie? “There’s nothing more dangerous than a lame duck.” Maybe the poster could show you and Arnold doing sit-ups together. I’ll hold your feet.
With sincere good wishes,
Homeowner - stay-at-home Mom - erstwhile PTO treasurer - retired high-tech executive - native Californian - lifelong, fifth-generation Republican … in Menlo Park, California, 94025
P. S. If anyone other than Mr. Buffet is reading this, please don’t just believe me - or those who might respond with old arguments. Restoring our local services - and regaining local control of these services - rides on this. Please do your own research! Go to www.sanmateocountytaxcollector.org and look up your neighborhood. Then, check out where you shop and eat, bank and work. (Assessors maps on www.smcare.org can help locate APNs, if an address doesn’t match.) Who’s paying? Who’s lunching?