Executive Summary

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.

Read the full report (pdf) here.

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,


Jennifer Bestor

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?

Updated for the California Working Families Policy Summit 2010 February 25, 2010

Read the full report in PDF

With the state facing a current deficit and ongoing yearly deficits of $20 billion, the survival of basic services and a healthy public sector is at stake. To address this looming future, the burden of recovery must be shared fairly—in contrast to the current path by which public services, the poor and education have taken the largest cuts and the middle-class has borne the increased tax burden.

The following summarizes 10 measures which will spread the burden in a way which arguably have a minimal impact on economic growth and recovery. These include eliminating new loopholes recently opened, taxing untaxed windfalls, ending tax breaks with no benefits, imposing taxes on the very rich, and increasing sin taxes.

Vote Requirements:  Local taxes designated for any specific purposes require 2/3 vote.  Local taxes for general government purposes require a majority vote.

Parcel Taxes/ “Special Taxes”: Parcel taxes can be enacted in a variety of ways.  While they usually are a flat amount per parcel, there are actually not many restrictions on how they can be enacted, but they will always require a 2/3 vote.  They cannot be enacted on property value, but can be on square footage of land and/or buildings, on the street frontage (business improvement districts), and can vary among types of property, business versus residential, apartments vs. single-family homes.  School districts have successfully used parcel taxes, generally on homeowners.

Hotel and Admission Taxes: The state does not pre-empt the field with regard to entrance fees/admissions.  Localities usually have substantial hotel taxes, although only some jurisdictions have admissions taxes.  These can include sporting events, movies, golf courses, amusement parks, and parking lots-all of which are not subject to sales tax and can be taxed by localities on a per admission basis.

Utility Taxes: Many cities and counties have taxes on gas, electric and telecommunications services.  Some of the telecommunications taxes have been recently re-enacted because of federal rulings (e.g. Los Angeles), and can include cell phone services.  Cable companies pay franchise fees to the localities for the privilege of running their cables and cable services are also taxed in a number of cities and one county.

Local Sales Tax Increases: Counties and cities may increase sales taxes, up to 2% above the state rate, for county services.  Many counties already have an increase for transportation, and in some cases cities have enacted their own increases.  These taxes can also be shared among cities and counties.

Business License Taxes: These are often structured on a per employee basis, or as gross receipts on professionals.  Most cities have them.

Fees: These generally require nexus with the service.  By legislation, birth certificate surcharges are permitted for child abuse, marriage fees for domestic violence. Cities have many kinds of fees for services and for property development.

Nuisance Abatement and Mitigation Fees.  Cities and counties have authority to charge fees for various health and safety and public protection programs.  Oakland placed a fee on liquor stores, upheld by the courts, in order to provide additional policing of the nuisance caused in neighborhoods.  San Francisco is considering a mitigation fee on alcohol to pay for the harm to public health caused by alcohol usage.

Potential new authority for local taxes: AB 2113 (Evans) would authorize use of a county-wide vehicle license fee and a county-wide income tax, approved by local voters.

The Governor’s tax commission did the state the favor of opening the discussion of the economics of taxation, and Schwarzenegger called for “major, radical reform” in his State-of-the-State address. So perhaps an economics discussion will attract some real debate, instead of the “just say no” discussion which applies to all taxes, however rational they may be.

The Commission on the 21st Century Economy (COTCE) also did an inadvertent favor to the discussion through their proposal to tax the net receipts of all businesses, which the Governor called “great, great reform.”
One key point made by many analysts of this tax is that many businesses would be taxed heavily even if they incur significant losses, because major expenses — labor, interest on debt — would not be deductible from the tax. The result of the backlash to this proposal was, helpfully, to reinforce the concept that taxing profits through the corporation tax and the income tax makes economic sense, contrary to the misguided COTCE goal of eliminating the corporation tax and flattening the income tax for the wealthy.

The Governor provided another inadvertent favor in the tax discussion by proposing to delay the new secret corporate loopholes as part of his budget trigger mechanism. With this delay, he effectively acknowledges that these loopholes, part of the last year’s budget hostage-taking, have nothing to do with economic recovery, a.k.a “jobs jobs jobs.”

Allowing corporations to get refund checks for taxes they previously paid when they take a loss (“loss carry-back”) destabilizes the budget in a down year and, because the refunds are two years after the fact, provide zero incentive effects for job creation.

Allowing corporations to share unused tax credits with affiliates (“credit-sharing”) benefits only a handful of very large companies, and also gives out tax dollars for activity already engaged in — not any new activity. And allowing corporations to choose how they want their taxes to be apportioned to California (“elective single-sales factor”) provides huge tax cuts without requiring a dime of new investment or a single job to be created.

The result, if these take effect: Programs will be cut by hundreds of millions of dollars, with thousands of real jobs lost. So, thank you, Governor, for de-linking these loopholes from any notion of economic recovery.

But that may be as much appreciation as we can muster.

The Governor’s proposals for housing tax credits and job tax credits are, alas, giveaways that he apparently believes in.

Last year’s developer credit, which only applied to new houses not yet lived in, gave preference to developers with excess inventory over homeowners trying to sell in a collapsing market. The new $200 million credit takes taxpayer dollars and temporarily pumps up a housing market which eventually has to seek a real level. Doesn’t anyone believe in market forces anymore? And, this $200 million does not have to create a single new job, nor is it likely to, by artificially delaying the settling (in economists’ terms, equilibrium) in the housing market.

And, there’s a $3,000 job training credit for employers. Low-wage jobs may cost employers well over $20,000 per year; good jobs will cost, in total, $50,000 to $60,000 a year when other employment costs are figured in. In the real economy, employers hire when the new employee contributes to the bottom line, not just temporarily but permanently.

Dan Walters got it right in the Bee: if you want to enact a useless tax break, get rid of some other useless tax breaks, such as the $500 million enterprise zone program, which, through rigorous economic analysis, has been shown to create no new jobs. Better yet, use the revenue from eliminating useless tax breaks to stop real cuts in programs and jobs. Real economics, anyone?

Beyond that, of course, there are the weakest links in our tax system.
Economists recommend taxing “economic rents” — that is, windfalls earned as a result of the actions of others —because they do not affect new investment. A tax on oil production, proposed once by the Governor, is the most obvious of those. Heavy, expensive California oil costs about $20 per barrel to produce, yet the world market prices reflected in California are in the range of $70. A tax of about $7 per barrel, as opposed to our current 60 cents, would have no effect on gas prices or production, according to a Rand Corporation study. In terms of economic impact, this is a free $1 billion, most of it from four multinational oil companies.

The oil industry mobilized a large astroturf campaign against a bill by Assemblyman Alberto Torrico for an oil production tax to be used for higher education, but the only economic argument they could muster was that 10-barrel/day stripper wells would be shut in early—except, of course, these have been exempt from tax in every oil tax proposal in the last 50 years! So, big oil can mount a major lobbying effort but cannot muster a single economic argument.

What is better for the economy, useless tax breaks or slashing public programs? Withholding revenues from independent contractors (which are supposed to be paid anyway), as Sen. Darrell Steinberg has proposed, or eliminating school support employees? Allowing multi-nationals to use tax havens, or making it easier to students to go to college, as addressed in a bill by Assemblyman Marty Block?

We have presented a $20 billion list of low-hanging fruit in the tax system (www.caltaxreform.org ), and the economics of some of those could, admittedly, be debatable. So let’s debate them, and maybe only agree on $10 to $15 billion. But let’s take up the Governor’s challenge: a real economic debate over the impact of sensible taxation versus massive budget cuts.

*It provides disproportionate tax relief–$7.6 billion yearly– to the top 3%
of income tax payers—those least burdened by state taxes.  “The reason that the
tax system relies so heavily on the wealthy is because they have an historically
unprecedented share of the income”, said Goldberg.  A chart demonstrating
disproportionate relief is here:
http://www.cotce.ca.gov/documents/correspondence/public/documents/
GOLDBERG%20-%209%209%2009.pdf


*It relies entirely for its reforms on a completely unknown and untried tax,
the business net receipts tax (BNRT).  There are huge legal and economic
problems with this tax, including:  burdening companies disproportionately which
have  higher labor costs; burdening companies, including start-ups, with tax
which otherwise would have losses;  taxing rental housing, childcare, food and
other necessities of low income people; assuming the ability to tax interstate
commerce which is highly questionable; possibly disadvantaging California-based
companies;  encouraging the contracting out of labor services, rather than hiring
employees.


Many critiques of the BNRT have been put forward from virtually every
perspective.   Perhaps the clearest critique comes from Commissioner Richard
Pomp, at http://www.cotce.ca.gov/documents/correspondence/
staff_and_commissioners/documents/Why%20I%20Think%20We%20are
%20Heading%20in%20the%20Wrong%20Direction.pdf Pomp notes in particular
that the only effort at a similar tax, in Michigan, is at a very low 1% level, and is
integrated with a corporation tax.  The proposed California tax would be 4%.
One unnoticed part of the BNRT is that it would fall heavily on rental housing, so
that, in a world where homeowners receive major tax benefits, renters would be
expected to pay.  “With homeowners doing so well in the tax system, it would be a
travesty of good tax policy to now burden renters, but that’s what this proposal
would do,” said Goldberg.  The whole distributional impact of the BNRT has not
been analyzed, with regard to the extent that it would burden California
consumers or fall on domestic businesses.


*Elimination of the corporation tax would disproportionately benefit out-of-
state shareholders and the federal government.  Corporations doing business in
California put demands on California services.  The profits generated from
business in California would be untaxed in this proposal, increasing the return to
shareholders, many or most of which may be out-of-state beneficiaries of the tax
break.  And, since these taxes are deductible from federal taxes at a 35% rate, the
outflow of revenue to the federal government from eliminating this tax will be
several billion dollars in addition.
As Commissioner Pomp has noted, the corporation tax exists in 47 states, and
has served California consistently for many years.  From our perspective, the issue
which needs addressing the corporation tax is the erosion of its base, particularly
from the new loopholes put in place in the recent budgets, not its elimination.


*The Commission failed to examine one of the dominant changes in the 21st
century economy:  the growth of internet usage, electronic commerce, digital
downloads, internet taxation, and interstate nexus issues which arise from
growing electronic commerce.  “It is a stunning failure of the Commission that it
barely examined the many new issues of the new economy which surround the
internet”, said Goldberg.


*The Commission failed to adequately examine alternatives, such as failures
in the commercial property tax, the lack of an oil severance tax, and the option for
a carbon tax.  CTRA presented twice with regard to the proposal for a split roll,
which we have called “the single largest hole in the tax system”, but the
Commission did no independent analysis, nor did it consider this seriously.
Similarly, it never really considered Commissioner Fred Keeley’s proposal for a
fuel tax or other approaches to taxing carbon, again a major issue of the 21st
century economy.  The split roll presentations are here:
http://www.cotce.ca.gov/meetings/testimony/documents/LENNY%20GOLDBERG
%20-%20COTCE%20-%20cotce%20property%20tax%20discussion%20-
%204%209%2009.pdf


“Ultimately, the report suggests that California take  a complete shot in the dark,
basing our tax system on something unknown and untried in order to provide
massive tax relief to the wealthy and large corporations,” said Goldberg.
CTRA also presented alternative approaches to the Commission, including
broadening the sales tax base, addressing commercial property, and addressing
tax expenditures, here:
http://www.cotce.ca.gov/documents/correspondence/public/documents/
GOLDBERG%20-%209.3.09%20-%2011%2018%20AM.pdf

It’s time to close a big tax loophole for businesses