Business Property Not Under-taxed

NOV. 12, 2010

By WAYNE LUSVARDI

A rebuttal is required to Lenny Goldberg of the California Tax Reform Association who contends that small business properties are overtaxed and large corporate and franchise business properties are under taxed by Prop. 13 in California (“Is Prop 13 Hurting Small Business,” Nov. 11).

The mischievous Lenny Goldberg wants you to believe that it is unfair that a small “mom and pop” gas station owner has to pay roughly $30,000 per year in property taxes and a big oil company gas station down the street only pays half of that.  And he also wants you to believe that it is also unfair that a Trader Joe’s Market pays only about $7,500 in property taxes while a Draeger’s Market pays roughly $66,500 in taxes.  Since Goldberg doesn’t cite what actual properties he is referring to we don’t know if he concocted these numbers or not. For the moment, let’s assume the taxes reported by Goldberg are actual.

First, the comparisons Goldberg makes are apples and oranges. As they say in real estate appraisal, all comparables are sales but not all sales are comparables.

Goldberg doesn’t disclose whether the overtaxed “mom and pop” gas station has a retail food store component to the gas station or revenue from a billboard and the big corporate gas station does not.

Neither do we know whether the under-taxed big corporate gas station is encumbered with a ground lease whereby the land owner pays a property tax only on the land rent and the business operator is taxed on the building, gas tanks, pumps and improvements as well as state sales tax, corporate income tax, business tax, utility user’s tax, etc.  What may appear to be a tax inequality may not be when the legal arrangements are better understood. So the alleged $15,000 discrepancy in favor of the big corporate gas station property may not be unequal at all.

Goldberg just finds a tax inequality that works for what he wants to prove and reports it. This works for political advocacy but not for real estate appraisal or for meeting disclosure requirements in a real estate transaction. Neither should it work for sound tax policy.

The Draeger’s market in Danville, Calif., for example, was built in 2006, is 43,000 square feet (an acre) in building size alone and is located in a shopping center with mirror pools and ample parking.  Draeger’s targets upscale shoppers looking for catering, a delicatessen, and high priced custom food– see photo here.

The typical Trader Joe’s store is 10,000 to 15,000 square feet in size, is a stand-alone building, has no specialty service departments, is intentionally located on under-parked leased properties to keep prices low and caters to shoppers looking for modest prices. See photo of a newer Trader Joe’s Store here.

But let’s forget a moment that Goldberg is subtly trying to compare apples and oranges in his examples.   What Goldberg is really trying to do is demonize large commercial property owners in the minds of small business operators as well as in the eyes of a possibly gullible public in order to overthrow the provisions of Proposition 13, which protect against unfair property tax reassessments. Fortunately, he doesn’t do a very good job and most people are probably able to see right through his deviousness.  But for those true believers who are easily convinced that commercial property owners are making out like bandits under Prop. 13 while the state and public schools are going broke and the unemployment insurance fund is running in the red, here is some other information to consider.

Mr. Goldberg failed to tell you that California has the highest gasoline taxes per gallon in the U.S.

The Tax Foundation ranks California 49^th worst in total taxation out of 50 states.  As shown on the table below, California offsets its relatively lower property taxes with higher gas taxes per gallon compared to other high-tax states. California’s high gasoline taxes don’t show up, however, in gas station property sales prices.  Gasoline taxes come out of all drivers’ pocketbooks not only those of property owners of gas stations.

HIGHEST TAXED STATES IN U.S. (50^th = highest taxed)

State	Rank	Sales Tax Rate	Property Tax % of Income	State Corp. Income Tax Rate	Capital Gains Tax Real Estate	Gas Tax Per Gal.	Utility Users Tax Rate	School Parcel Tax (flat tax)
New York	50	4.00%	4.47%	7.1%	6.85&	$0.45	None	None
Calif.	49	8.25%	3.34%	8.84%	9.30%	$0.46	5% to 10%	$50 to $250 Year
New Jersey	48	7.00%	6.00%	9.36%	6.47%	$0.14	None	None
Conn.	47	6.00%	5.07%	7.5%	4.50%	$41.6	None	None
Ohio	46	5.50%	3.70%	2.0 to 3.4%	8.98%	$0.28	None	None
Iowa	45	6.00%	3.63%	6 to 12%	6.98%	$0.22	None	None

Source: The Tax Foundation, 2010

Of the six highest taxed states in the U.S. shown above, California also has the highest sales tax rate, the second highest corporate income tax rate, and is the only state whose cities charge a utility users tax (from 5 percent to 10 percent) on water and power bills which is siphoned off into city General Funds to pay for salaries and pensions.  California also has the highest capital gains tax on real estate of all 50 states.

California is also the only state whose school districts charge a “parcel tax” on top of regular property taxes to pay for school buildings or teacher salaries.  Parcel taxes typically range from $50 to $250 per “parcel” (i.e. lot) per year. In Berkeley, Measure H Parcel Tax imposes a $9.46 per square foot parcel tax for schools on commercial properties, compared to $6.31 for residential properties. This higher tax on commercial properties runs opposite to what Goldberg wants you to believe.

Many California cities also tack on a business tax and a real property transfer tax when the property is sold (from about 0.25 percent to 0.50 percent, which would equate to $6,000 to $12,000 on the gas station property or $11,000 to $22,000 on the Draeger’s Market properties cited above).

Then there is the new 3.8 percent transfer tax on sales of all properties under Obamacare. On a prime Class A gas station site that would be about $50,000 or more just on the land alone not counting the building, pumps, and storage tanks.  The Obamacare surcharge tax on the Draeger’s Market property would be about $168,500.

California Tax Rank (1st best; 50th worst)

Property Tax	Sales Tax	Corporate Income Tax	Capital Gains Tax on Real Estate	Gasoline Tax	Utility User’s Tax	School Parcel Tax	Overall Rank by author
18th	49th	33rd	50th	50th	50th California Only	50th California Only	50th

Source: Tax Foundation and author

California ranks as the worst or next to the worst of all 50 states in five of the seven taxes shown above, despite modest property and corporate taxes.  If we are to believe Goldberg, California should rank last in commercial property taxes too.

There are those for which there is no amount of information that will persuade them that owners, especially of large corporate-owned commercial properties, in California are not under-taxed.  Social psychologists show that if there is a conflict between what you believe (“big corporate real estate is under-taxed”) and verifiable reality (California has highest overall tax rates), people will reconcile the conflict by their beliefs growing stronger and/or strongly denying the reality at hand as well as demonizing one’s opponent.

But for those who are not true believers in an anti-business ideology, the modest property taxes which benefit commercial properties in California under Prop. 13 are more than offset by California’s worst overall tax ranking of all states.  To talk about tax fairness we have to talk about the cumulative tax burden in California not property taxes under Prop. 13 alone.

Wayne Lusvardi is a real estate appraiser in Pasadena, California.  He submitted testimony to the California Commission on the 21^st Century regarding a proposed split commercial/residential property tax roll to amend Proposition 13 – Read here.