Reality could stifle Prop. 13 reform attempts

Housing bubblesDec. 18, 2012

By Wayne Lusvardi and Charles B. Warren

California legislators from San Francisco are “eager to reform Proposition 13 tax policies.”  But public perception is far apart from reality when it comes to the proposed reforming of Prop. 13.  The reality is that San Francisco is the only large urban county to experience no decline in property taxes since the peak of the real estate bubble in 2007.

Which means property price declines in the other areas would bring little added revenue from any proposed reforms of Prop. 13. Gains might only come should another speculative bubble wildly push up prices. But that also would hazard repeating the boom-bust cycle of disaster of the past decade.

The showcase reform that liberal tax reformers and Democratic legislators have sought for decades — the so-called “tax loophole” for commercial property transfers — is now within the grasp of reform by the Democratic supermajority in the Legislature.

But it now has come to light that this controversial tax loophole could have been reformed administratively without having to elect a supermajority to the legislature or putting such a reform on the ballot for voter approval. Even Prop. 13 reform advocate Lenny Goldberg admits in the San Francisco Examiner that changing the rule on when commercial properties are reassessed for ownership transfers is not “technically Prop. 13 at all.”   Jon Coupal of the Howard Jarvis Taxpayer’s Association agrees that a new law is not needed as much as enforcement of the existing law.

The controversial tax loophole involves strategic transfers of less than 50 percent of the ownership interest in commercial real estate.  Ownership transfers of more than 50 percent trigger a property tax reassessment.

An example would be where a large corporation sells more than 50 percent of its stock to another company but fails to alert county recorders of the change by recording a deed. But large corporations are probably more prone to legal record transfers of controlling ownership than small businesses.

Non-disclosure might lead to more recording of deeds

Probably of more concern is the non-recording of ownership transfers in small commercial properties.  According to a former assessor and an appraiser I spoke with, this practice is typical of how businesses are sold in foreign countries from which many immigrant business owners come. Sale documents between buyers and sellers are done privately and never filed with county recorders.  The problem is as much cultural as it is legal.

However, perhaps nondisclosure of real estate sales prices would lead to more recording of deeds. Many states such as Texas, North Dakota, Alaska, Idaho, Kansas, Louisiana, Mississippi, Montana, New Mexico, Utah, Wyoming and Missouri are non-disclosure states where transaction sale prices are not available to the public.

It would be costly to enforce recorded transactions for all 857,167 small businesses in California (as of 2008) and would smack of a police state.  Appraisers told me that business owners who were non-compliant with recording ownership transfer deeds probably made it less likely that they would apply for a tax appeal in a down market lest they draw the assessor’s attention to their ownership status.

Reforming commercial property transfers no budget panacea

Another misperception is that closing the loophole on commercial property transfers would generate enough revenue to rescue social welfare programs, schools and state universities and the public pension system.  Commercial and industrial properties generated $8.91 billion in property taxes in 2011 (see Table A).

Table A — Property Tax Revenues by Property Type (2011)

Property Type Assessed Value in Billions Percent of Total  Taxes @1% of Assessed Value in billions
Single family homes $2,209 53% $22.09
Multi-family & other residential $770 19% $7.70 
Commercial & industrial $891 22% $8.91
Agricultural and other non-residential $272 7% $2.72
Total $4,141
Source: California Legislative Analyst’s Office

Large businesses are only 3 percent of all businesses in California. And changes in ownership reflect only a little more than half of all property assessment changes, as shown in Table B.

Table B — Type of Property Tax Reassessment Increases

Percent of change in ownership transfers Percent of value changes due to Prop. 8 tax appeals and value adjustments in 2011 Percent of value changes due to new construction and Prop. 13 inflation adjustments
55% +/- 25% +/- 20% +/-
Source: California Legislative Analyst’s Office

Thus, we’re talking at most about large commercial properties generating 1.65 percent of the $8.91 billion in property taxes from all commercial and industrial properties in 2011 (assuming all large properties transferred title in the same year).  Again, the reality doesn’t match the public perception.

Progressive political culture may deter tax compliance

The reality is that reforming controlling ownership property transfers would be unpopular, politically incorrect and practically impossible without a police state.  Shifting California to a nondisclosure state might help.   But the public perception is that nondisclosure is not politically Progressive.

The opportunity that Democrats have awaited for decades of reforming commercial property ownership transfers under Prop. 13 may be nothing but a symbolic victory used to justify a supermajority power grab in the Legislature.

If California is going to resolve its longstanding budgetary and tax problems and keep a market-based democracy intact, the supermajority Democrats are going to have to run the state on more than demonization of big business and draconian tax changes.

24 comments

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  1. Val
    Val 18 December, 2012, 11:47

    An interesting point (and which I don’t know if it the details are expanded upon anywhere that’s easily accessible) is the amount generated by multi-family and other residential. Are they classifying property with 4+ units in there? If so this would fall under the same category as commercial property I believe, and therefore fall under the “reform” the legislature is trying to act upon. Its a dangerous downhill slope in my opinion especially in that sector (an increase of just going to a 2% instead of the 1% tax on the current property taxes could be detrimental to a balance sheet bottome line of many just properties).

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  2. Wayne Lusvardi
    Wayne Lusvardi 18 December, 2012, 13:55

    We don’t know the particulars of any Prop 13 reform bill yet

    As I understand it the revisions to Prop 13 on commercial properties would include apartment buildings

    This presents another complicated problem — the percentage of people living in apartments on food stamps is high. Landlords are just going to pass any tax increases to the tenants — those who can least afford it.

    But the image the tax advocates have been using is not apartment landlords who shirk paying taxes but Disneyland, large office towers, and shopping centers. Disneyland has so much new construction and renovation going on all the time and that triggers tax reassessments.

    Opening up commercial and apartment properties for higher taxation won’t yield much money — what they are after is using it as a beachhead to eliminating Prop 13 altogether for all properties.

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  3. Wayne Lusvardi
    Wayne Lusvardi 18 December, 2012, 14:37

    Eliminating Prop 13 for apartments will lead to exemptions and waivers like in Obamacare.

    Low income apartment buildings will be exempted.

    But how will they handle exempting low income renters in inclusionary apartment buildings?

    Once low income apartments are exempted then market rate apartments will be double taxed to make up the difference. So the sticker shock on rents is likely to be large.

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  4. Rex the Wonder Dog!
    Rex the Wonder Dog! 18 December, 2012, 17:15

    Disneyland has so much new construction and renovation going on all the time and that triggers tax reassessments.
    ==
    That is not my understanding Wayne- do you have data backing that claim up?

    Reply this comment
  5. SeeSaw
    SeeSaw 18 December, 2012, 17:24

    If you add a room or other capital renovation to your home, the addition/renovation is added to the assessment. It makes sense that the same would apply to additions on commercial property like Disneyland. (If the improvement is a roof or fence that is fixed/replaced due to wear and tear, there is no reassessment.)

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  6. SeeSaw
    SeeSaw 18 December, 2012, 17:27

    There is no “repeal Prop. 13” Bill in the works that I know about. The “Chicken Little” writers are the ones that are beating the drum on this issue.

    Reply this comment
  7. BobA
    BobA 18 December, 2012, 18:45

    SeeSaw:

    To use the old clique “where there’s smoke, there’s fire”, this story didn’t just materialize out of thin air. There may be no active attempts (that we’re aware of) to repeal Prop. 13 Bill for now but the mere fact that it is being discussed at all is cause for concern. Politicians are creatures of habit and it’s naive and foolish to believe that any promises they make today are the promises they’ll keep tomorrow.

    In light of this article and given the modus operandi of politicians, any official denial of an attempted to reform Prop. 13 can and should be interpreted as meaning that the issue is being quietly mulled over behind closed doors so as not to alarm property/home owners.

    Desperate times calls for desperate measures and the state of California is getting desperate for new sources of revenue. What assurances can you offer that the state legislature isn’t covertly looking for a way to circumvent and/or Prop. 13?

    Reply this comment
  8. Wayne Lusvardi
    Wayne Lusvardi 18 December, 2012, 19:08

    Some commenters still seem to have a reading comprehension problem.

    Thin air found here:

    “Meanwhile, Ammiano plans to introduce legislation to close a loophole that allows companies to avoid reassessment when commercial properties change hands. A similar item he wrote died last session on the floor of the Legislature.
    “When you change ownership and it is 50 percent plus one, then you get reassessed,” Ammiano said. “So what the big guys … have done, they have cleverly come up with ways so that it isn’t 50 percent plus one.” Ammiano said some businesses use a third-party investor or holding company to avoid reassessment.

    “Messing with Prop. 13 for a long time was the third rail,” Ammiano said. “But because of changing economies and also cuts to education, when I go around the state, especially talking with the middle class and above, they’re ready for reform of Prop. 13 in some way that would not hurt seniors but that would be more appropriate for taxes coming from the commercial properties.”

    Read more at the San Francisco Examiner: http://www.sfexaminer.com/local/2012/12/san-francisco-legislators-are-eager-reform-proposition-13-and-related-tax-policies#ixzz2FSnT7oYf

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  9. NTHEOC
    NTHEOC 18 December, 2012, 20:09

    We need to get rid of prop13 once and for all!!!!! Prop13 is the main reason California struggles…..

    Reply this comment
  10. SeeSaw
    SeeSaw 18 December, 2012, 23:18

    There have been no threats that I have ever seen to repeal Prop. 13 for homeowners. The talk about the split roll for commercial properties has been risen several times since before the campaign in 2010, when Brown said he would not recommend touching the Prop. for homeowners, but it might need a look regarding the commercial loop holes. In the meantime, it is the pundit/writers who continue to bring it up. In my mind the Prop. is sancrosanct–I would have to see any details regarding the proposed split-roll before I would know if it would be a wise change or not. Homeowners are not going to accept having their respective property taxes increased six to ten times, which is exactly the amounts they would be at now, if the Prop. had never been passed, and no other type of relief had been passed in the ensuing years since 1978. I say, “hands off”. You can sit around and doubt politicians all you want to Bob. Do you know of any other game in town?

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  11. BobA
    BobA 19 December, 2012, 07:15

    NTHEOC:

    This may come as a shock to you but California struggles because our politicians spend to much and lack the authority to raise taxes to keep up with their spending.

    What you are calling for amounts to no less than giving politicians the authority to taxing people out of their homes and forcing them into rental housing in the ghettos and barrios.

    That mindset is prevalent among people who believe that only the upper classes and wealthy people should own homes since they’re the only people with the income to be taxed at near confiscatory rates and not bat an eye.

    Reply this comment
  12. BobA
    BobA 19 December, 2012, 07:30

    SeeSaw:

    “Do you know of any other game in town?” Yes. Stop spending more than what you take in. The power to tax is not a game. It has real consequences for those who have to pay the taxes. The power to tax is also the power to destroy for which we are witnessing now.

    Secondly, year over year spending keeps going up and never down. At what point do you say no more and set a ceiling on spending? Conversely, how deep a debt hole should the state dig before you say no more? To what extent are you willing to go to fill that hole (i.e., high high are you will to raise taxes)?

    These are the real questions that should be asked and answered before there’s any discussion of raising taxes of any kind.

    Reply this comment
  13. Hondo
    Hondo 19 December, 2012, 07:34

    We need to get more taxes through more ECONOMIC EXPANSION. More businesses mean more jobs mean more taxes. The $850 minimum for corperate taxes is a job killer. California should have an unemployment rate of under 7% but we are stuck at over 10% because of insane tax levels and regulation and lawsuit frenzy. The rest of the country is doing better, much better.
    Go ahead, raise the already high tax rates and see what happens.
    Hondo…

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  14. BobA
    BobA 19 December, 2012, 10:28

    Hondo:

    Unfortunately, most of the people who are in favor of raising taxes have fed at the government trough most of the working lives and thus lack an economic understanding of the consequences of higher taxes. The profit motives of capitalism is as alien to them as job security and a guaranteed retirement income is to us.

    Or, they are fabulously wealthy (e.g., Warren Buffet, Bill Gates, Hollywood actors, etc.) and thus are uneffected by high taxes. At the opposite end of the spectrum, the poor pay no taxes and are heavily subsidized by the government and for the sake of their own welfare, have no interest or stack in keeping taxes low either (btw: an argument can be made that they have an interest in seeing taxes go up).

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  15. Rex the Wonder Dog!
    Rex the Wonder Dog! 19 December, 2012, 18:06

    “Messing with Prop. 13 for a long time was the third rail,” Ammiano said. “But because of changing economies and also cuts to education, when I go around the state, especially talking with the middle class and above, they’re ready for reform of Prop. 13 in some way that would not hurt seniors but that would be more appropriate for taxes coming from the commercial properties.”
    This guy is a tree hugging looney tune. Education gets more money – by far -than any other area of gov.

    Teachers in CA are averageing $80/hour, that is 570% MORE than the states median of hourly wage of $13.92 an hour. And he says that edcation are taking cuts?????

    Reply this comment
  16. Rex the Wonder Dog!
    Rex the Wonder Dog! 19 December, 2012, 18:07

    We need to get more taxes through more ECONOMIC EXPANSION.
    =
    No company is expanding in this state. The ;large manufacturers have all left. The only large manufacturer that is still here is Maglite in Ontario and pretty soon they are going to move.

    Reply this comment
  17. Rex the Wonder Dog!
    Rex the Wonder Dog! 19 December, 2012, 18:08

    Even the hi tech companies are expanding outside CA.

    Reply this comment
  18. SeeSaw
    SeeSaw 19 December, 2012, 20:07

    Rex, how about providing documentation for CA teachers averaging $80/hr. That is about $100,000/yr. more than any teacher I know–and I know many teachers.

    Reply this comment
  19. Rex the Wonder Dog!
    Rex the Wonder Dog! 19 December, 2012, 23:09

    Rex, how about providing documentation for CA teachers averaging $80/hr. That is about $100,000/yr. more than any teacher I know–and I know many teachers.
    ==
    The average- as in the MEAN, is $68K (in 2010- probably $70K+ now) in cash salary, benefits AVERAGE $40K (probably more if you use a REALISTIC ROI). That is on the SacBee website.

    Contracted work year for a teacher is 37 weeks, contracted work week is 36 hours. $108K/37/36= $81.08/hour

    Noww run the numbers at the TOP of the pay scale=$150K salary +$40K benefits= $190K/37/36= $142/hour.

    Reply this comment
  20. SeeSaw
    SeeSaw 20 December, 2012, 02:58

    Name of School District? I cannot access the SacBee’s website, because I am not a paying customer.

    The Salary Schedule for a certified teacher in the Chaffey Joint Union High School District, is $39,966-$94,719, or approximately $19-$45 hr. You don’t add benefits when you talk about salary.

    Reply this comment
  21. Rex the Wonder Dog!
    Rex the Wonder Dog! 20 December, 2012, 22:24

    The Salary Schedule for a certified teacher in the Chaffey Joint Union High School District, is $39,966-$94,719, or approximately $19-$45 hr. You don’t add benefits when you talk about salary.
    =-=
    You add in EVERY cost of the job, that includes benefits.

    When benefits are free and taxpayers don’t pay for them then we will leave them out.

    Reply this comment
  22. SeeSaw
    SeeSaw 20 December, 2012, 23:58

    Rex, a worker does not see the result of benefits in their postition until they separate from service. When a job is advertised, the salary is what is posted–benefits might be listed, but they are not posted in amounts, which vary from job to job and entity to entity. When you see a retail job opening posted, do you see the salary or the salary with benefits added? Of course not!

    Reply this comment
  23. Marten Purdy
    Marten Purdy 23 December, 2012, 11:47

    A proposition in california that was voted in in 1978. it kept the property tax on houses from rising unless it was sold to somone outside the family. property tax in california, and in most other states, is what the education system gets its money from. so when prop 13 went into effect, the entire education system went into dissaray, and now the public shcool system in california has gone from being ranked 5th best in the country before prop 13 to 2nd to last after. it makes it so that there are little pockets of good schools, but the majority of public schools are no where near where they should be to teach the children of california.

    Reply this comment

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