Is Prop 13 Hurting Small Businesses?

NOV. 11, 2010

By KATY GRIMES

On the corner of a major intersection in Menlo Park, a small, independently owned gas station owner pays $30,148 a year in property taxes. On the other corners of the intersection, gas stations owned by Shell, Unocal and Chevron pay less than one-half of what the independent station owner pays in property taxes. Across town, the local Trader Joe’s market pays $7,471 in property taxes each year for two-thirds of an acre of prime commercial property, while the nearby, locally owned Draeger’s Market pays $66,585 in property taxes annually.

Such contrasts exemplify a loophole in Proposition 13, the well-known property tax cap passed in 1978, said Lenny Goldberg, the founder of the California Tax Reform Association.

“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,” he said. “The law makes no sense, and I haven’t found anyone who can defend it.”

Proposition 13, titled “the People’s Initiative to Limit Property Taxation,” limited property taxes to one percent of the property’s purchase price, with annual increases limited to two percent. The intent of the measure was to freeze the tax-assessed value of properties at the time of purchase with a two percent cap on annual assessment increases, and to require a two-thirds majority vote when the legislature wants to raise taxes. When a residential property changes owners, the property is reassessed and taxes are recalculated, based on the new assessment.

Polls taken since 1978 show voters still largely support the measure. Prop 13 advocates say that prior to 1978, California residents were paying escalating property taxes as a result of the rapidly rising property values that marked one of worst periods of inflation in our nation’s history. California real estate values were rising twice as fast as inflation, and the resulting property tax hikes were pushing many out of their homes.

But Prop 13 opponents like Goldberg say that loopholes in the law are actually resulting in single-family homeowners paying the bulk of property taxes. “The majority of tax ‘savings’ since 1978 have gone to commercial landlords, and the savings have only increased disproportionately,” he said.

Goldberg said that his research indicates that assessments vary from county to county, and that he found most commercial property owners pay a far smaller share of property tax since the passage of Prop 13.

In the May 2010 study System Failure:  California’s Loophole-Ridden Commercial Property Tax, which Goldberg authored, he found that commercial property taxes are inconsistently applied county by county. He also found that commercial property taxes often weren’t being reassessed at sale times because of a quirk in the law. “Even with a change in ownership, if shareholders own less than 50 percent of the property, it is not reassessed,” said Goldberg.

For instance, Goldberg discovered that none of the Long’s Drug locations in the state were reassessed after the chain’s sale to CVS. “The property is still owned by a wholly owned subsidiary of Long’s Drugs, LLC, in Rhode Island,” he said. What’s more, he said he found that one Long’s Drugs store located in Rolling Hills Estates in Los Angeles is assessed at only $700,000. “The homeowners are paying a great deal more property taxes than the Long’s Drugs in Rolling Hills Estates,” he said.

Sacramento County Assessor Ken Stieger confirmed that there’s a disconnect where commercial property taxes are concerned. He also noted that communication breakdowns pose a huge problem.

“The problem is that counties aren’t always notified of transfers,” Stieger said. “It’s the Board of Equalization who notifies the county tax assessors, and some property transfers fall between the cracks.”

Stieger also said that there is no mechanism for the Board of Equalization to track property transfers annually.

Jon Coupal, president of the Howard Jarvis Taxpayers Association, says Prop 13 opponents like Goldberg are pushing for a split roll, which his organization opposes. The California Taxpayers Association has also come out strongly against the split roll.

“A split-roll property tax comes in two versions: one attempts to reassess non-homeowner property to reflect fair market value when no change in ownership has occurred,” states the CalTax website. “The other seeks to apply a higher rate to the current acquisitions value of non-owner occupied property.”

CalTax reported in a recent study, “Even the most limited split roll will increase taxes by billions of dollars annually. The Legislative Analyst Office estimated that a 2005 measure that would have changed assessment of business property to reflect fair market value (a ‘split roll’ initiative) would have resulted in a $3.5 billion gross increase in property tax revenues.”

Dr. William Hamm, former head of the Legislative Analyst’s Office, co-wrote a study in 2008, which found that a one percent increase in business property tax rates would lead to the loss of 43,000 jobs in the state. “The Constitution does not distinguish between residential property (where Californians live) and commercial property (where Californians work),” Hamm wrote. “Using data obtained from the California Board of Equalization, we calculated the disparity between assessed value and market value for two classes of property: owner-occupied residential, and commercial/industrial. We found that the assessed-value-to-market -value ratio for owner-occupied residential property in the 2006-2007 roll was 53 percent, while the ratio for commercial and industrial property was nearly 60 percent. In other words, commercial and industrial property is being assessed for tax purposes at values that are closer to market values than is the case for owner-occupied residential property.”

Goldberg disagreed with this finding.

“The Hamm study is propaganda,” he said. “What we need is to stop taxing improvements, and just tax the land. We might get lower land values, but we will get more overall, with more landowners paying fair property taxes. Most people don’t know that business owners must pay an annual property tax on the equipment they already own. If we removed these kinds of business taxes, and instead tax land ownership equally and fairly, we are no longer impeding business growth. I am not offering solutions, but trying to get all of the information into the open. Only then can we start discussing solutions.”

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  1. Richard Rider
    Richard Rider 11 November, 2010, 13:20

    Sadly, this article fails to note that the “California Tax Reform Association” was formed years ago by the Democrats to act as their bogus “taxpayer association.” The outfit is frequently trotted out to sign ballot arguments for higher taxes and for any repeal of taxpayer safeguards, fooling too many into believing they have taxpayer interests at heart.

    I think we’d find that a historical review would find that CTRA has favored EVERY statewide tax increase — and opposed any tax cut. Indeed, their listed motto on their website is “Fair taxation for a healthy public sector”!

    One core assertion of CTRA is that California businesses are undertaxed, especially compared to the other states — reality notwithstanding. And they could not have picked no more doctrinaire spokesperson than Lenny Goldberg, an old-time left wing socialist who runs his own lobbying firm representing a cabal of progressive groups and causes. Indeed, Lenny IS CTRA!

    There IS room for discussing reform of Prop 13 to reduce inequities, but sadly no such discussion is suggested by liberals and CTRA without including massive net tax increases — and especially to load more government costs on businesses.

    The Tax Foundation’s new state “business climate index” 2011 study moved CA up to the second worst spot — trailing only NY state. Goldberg ET AL will be content only when we achieve the number one spot.

    Reply this comment
  2. Richard Rider
    Richard Rider 11 November, 2010, 13:24

    Sorry about the double negative. Can’t edit it on this website.

    “. . . they could not have picked no more doctrinaire spokesperson . . .”

    Reply this comment
  3. CalWatchdog
    CalWatchdog Author 12 November, 2010, 08:36

    Part ll of this story will be published on Monday – there’s definitely more to the story!
    -Katy Grimes

    Reply this comment
  4. Erik
    Erik 12 November, 2010, 11:00

    It is too bad that Goldberg is not focusing on the issues that lead this article – that Prop 13 creates very strange and disperate tax treatment AMONG businesses. Ignore the politically attractive saw of homeowners (i.e. voters) v. Businesses. There are reforms aplenty if we start JUST from the perspective of holding total revenue neutral but ensuring that big business doesn’t game the system to impose higher burdens on smaller business competitors. I actually think there could be a bi-partisan coalition to support that – with the proviso that the mill rate be adjusted to ensure revenue neutrality.

    Reply this comment
  5. Jennifer
    Jennifer 12 November, 2010, 15:20

    Most fascinating about the fatally flawed Hamm report is that it never once acknowledges that a large proportion of commercial property owners are ALREADY paying full fare — 45% in Santa Clara County (the only county to publish this data). Instead, it relies upon the average “60% of market value” business property assessment. (If medicine were based on such averages, every adult in the US would have to have both prostate exams and mammograms annually!) Hamm et al never measure the reality — that about 20% of commercial property owners are scooping up 80% of the tax subsidies.

    Add to that Hamm et al’s stated assumption that it this a closed system — any money saved by the commercial landlord is either (a) altruistically passed on to the consumer, (b) productively retained by the tenant business, or (c) reinvested in California commercial real estate — and you see the utter nonsense the report is.

    Nowhere does reality reign — namely, that fortunate (and often out-of-state) landlords charge what the market will bear. Thus, those who pay the least towards local services (schools, roads, police, fire) have the most flexibility to (a) pick-and-choose the best tenants and (b) spend any extra on their own lifestyles. Why would they invest again in California — and pay top dollar towards local services — where they can use the money elsewhere and get a fair deal.

    The Hamm report proves, in fact, the opposite conclusion — that an uneven tax playing field and faltering local services have forced jobs out of California as new and growing businesses have been discouraged from investing here.

    Reply this comment

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