System Failure: California’s Loophole-Ridden Commercial Property Tax

Read the full report (pdf) here.

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.

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