From the U-T:
SACRAMENTO, Calif. — Democratic lawmakers are determined to close tax loopholes they say cost state and local governments hundreds of millions of dollars each year, as they search for ways to trim California’s enormous deficit.
A report by the union-funded California Tax Reform Association found that the share of property tax paid on residential property has increased since two-thirds of voters approved California’s landmark Proposition 13 tax law in 1978, while the share paid on commercial property has decreased.
In Contra Costa County, for example, taxes on residential properties now make up 73 percent of property taxes collected, up from 48 percent in 1978.
Democrats and unions say many corporations are using loopholes when they buy and sell properties to avoid having them reassessed and their property taxes go up.
“The system is an incredible mess,” said the association’s executive director, Lenny Goldberg. “People are constantly changing their share of ownerships, figuring out ways to avoid reassessment.”
Republicans strongly oppose efforts to tinker with the system. They see such moves as an effort to undermine Proposition 13, the initiative that capped property tax increases and remains popular with voters.
Under the current system, when property changes owners, its land value is reassessed and the new owner pays taxes based on the new value, which is often higher.
But it only applies when a person or legal entity obtains more than 50 percent of the property, allowing corporations to structure sales to avoid a reassessment. For example, three new owners can join together to buy a property so none owns more than 50 percent, allowing them to continue paying lower taxes.
A bill by Assemblyman Tom Ammiano, D-San Francisco, AB 2492, would redefine an ownership change to 100 percent of a property being sold, regardless of the number of new owners.
The CTRA report said many major properties have gone without reassessment in the last 30 years, such as when a a group of investors including Goldman Sachs and Bain Capital acquired Burger King in 2002. The group avoided having any of its San Diego County franchises reassessed; one hadn’t been reassessed since 1985.
“We’re leaving millions of dollars on the table every day by these really arcane, inapplicable rules,” Goldberg said. While many homeowners are taxed at a rate of $5 to $6 per square foot of land, corporations pay pennies per square foot, said Assemblyman Pedro Nava, D-Santa Barbara.
But Republicans whose votes are needed to reach the two-thirds legislative approval to pass any tax increase are opposed, along with the California Taxpayers Association. The group says the switch would increase taxes on business owners and that CTRA is relying on false data.
“To imply that Proposition 13 has shifted the tax burden to residential property is an incredible sophistry,” the group wrote in a newsletter.
Seth Unger, a spokesman for Assembly Republican Leader Martin Garrick, R-Carlsbad, said the Democrats’ bill could end up costing the state tax income as property values decline.
“This could actually almost encourage those businesses to create a legal entity to reset their property tax base,” Unger said.
Nava laughed at that idea. He said most of the corporations targeted by the bill haven’t been assessed for decades. “To make the argument that the state of California would lose revenue because commercial property has gone down in value since the passage of Prop. 13 is absurd,” Nava said.
The state needs money, but taxing people while they’re vulnerable hurts the economy. If business costs go up, they’ll get passed along to the consumer – or the businesses will go out of business.
CA sure is in a bit of a pickle.
The state already HAS money–it just needs to learn how to spend it efficiently.
School Districts Matter when Buying a Home?
Dear those planning on reciving California State Pension-retiree benifits:
Here’s a little wake-up call fer ‘ya. Thanks for your lifetime of babysitting the Little Darlings. Here’s your reward. Nothing. Fireman and Cops next.
No money for school district retiree benefits
Tuesday, May 11, 2010
(05-11) 05:50 PDT Sacramento, Calif. (AP) —
A grand jury report shows 12 of 13 Sacramento County school districts don’t have enough money to pay retiree health benefits.
Monday’s grand jury report says those districts have $1 billion in unfunded retiree health benefits and they are not setting aside money for future retirees.
The grand jury says school officials are focused on dealing with current operating deficits and are ignoring the mounting debt.
Only the county Office of Education and Elk Grove Unified School District maintain interest-bearing funds to cover retiree health benefits. But Elk Grove is still about $240 million short.
Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2010/05/11/state/n055008D86.DTL&tsp=1#ixzz0ndGmUdQj
Does the state get any of the mello roos fees basically plagueing new developments?
Throw multi-family residential into this mix also. Apartment building owners can pass (deed) property along to family without a re-assessment. There are a great number of apartment buildings undervalued that probably shouldn’t be under prop 13 protection.
REG:
State does not get Mello-roos. Mello Roos are bonds which get paid back to bondholders. Unless the state is the holder of the bond, no money goes to the state.
http://www.mello-roos.com/pdf/mrpdf.pdf
All:
There is one simple solution to this, a homestead exemption clause to Prop 13. Everything stays the same, but only for an owners’ original homestead, and only for citizens of California.
I used to have a lawyer friend whose entire business was to incorporate a property to avoid reassessment upon sale. That’s a travesty if you ask me. This bill will do nothing until specific rules are set out to close the gaping gap in the law. There is no “loophole” there is a taxation travesty that is welfare for the rich and connected.
Chuck Ponzi
This is a good thread. In the back of my mind I wondered if Prop 13 was sustainable given the stupidity of our politicians but it appears there are many parts that will get axed before it hits the basic, single family, resident homeowner.
If there’s one thing California doesn’t need, it’s more taxes!
Especially on corporations–companies are the ones, after all, who hire people. They won’t hire people if they have to pay more taxes.
NB: I don’t own any property, commercial or otherwise. I just think California needs to live within its means.
-Erica
Chuck-The simple solution is for the Government of California to spend the BILLIONS of dollars that they already have coming in are as if it was their own money–then give the surplus back to the taxpayers! If a household is earning $500K per year (well aboove what they truly need)and still struggling to get by, the solution is NOT for them to go rob a bank for additional money, rather, they should focus on cutting spending and live VERY comfortably off of their $500K–IMHO.
Prop 13 should not apply to commercial properties, period. Problem solved.
Erica,
I appreciate your defense of corporations, but that’s just misguided.
We all get taxed, and we all need to share in the burden of paying for what our state needs. Unfortunately, the poor and the newest often bear the greater portion because they are not equipped to defend their tax basis.
Add in that for corporations (which can live forever), there is no reassessment, and you badly incentivize unprofitable companies to retain holdouts on property that would be better served by a more able company and startups. Our unemployment is WORSE not better because of Prop 13. We are creating economic winners and losers based on longevity. This means that newer startups do not have the same level playing field and therefore you have a weaker, more centralized economy. That’s the economics of our bad decision 30+ years ago.
I agree we need to rein in spending, but that should be built on spending caps not on an unfair and archaic taxation scheme.
Chuck
Prop 13 applied to commercial properties is anti-competitive. Businesses that have been around longer get a government subsidy (i.e. low property tax) that those just starting out don’t receive. That makes it more difficult for better, new businesses to form. Hence, Prop 13 is bad for the economy.
Prop 13 should not apply to owner occupied 1-4 residences only. It would drop the price of all those properties held by deadbeats and free up inventory. No more govt. cheese for owner occupieds.
Problem solved.
I agree with alles_klar. Prop 13 is a gift to the established companies, stifling new competition.
However, I’d only be in favor of abolishing it if every increased dollar of tax revenue was offset by a tax cut elsewhere perhaps in the as the corporate income tax, or personal income taxes, such that overall the change was revenue neutral.
Kingside-Nice sacrasm. Frankly, prop 13 shouldn’t exist at all. But it exists because of a real problem-grandma who lived in the same house for forty years being forced out of her house because it’s now worth ten times what she and her late husband paid for it forty years ago, so her taxes were 10 times as much and she couldn’t afford them on a fixed income. It should be scaled back to solve only that problem.
The Economist recently had an article that shows that, measuring the number of state government employees per 100,000 residents, California has the third smallest number of government employees out of the fifty states (108 vs. the national average of 143). Big government isn’t California’s problem. The problem is the lack of property tax revenues due to prop 13, as well as the two thirds requirment to pass a budget (also due to prop 13).
http://www.economist.com/world/united-states/displaystory.cfm?story_id=16015487
Sure, let’s let the opinion of a European publication dictate what the problems are here in California. Property taxes are to low, no Government spending problem.
It does amaze me a bit that folks who are passionate about housing prices being affected by flippers in the bubble era, are perfectly willing to abolish prop 13 and let their tax bill be determined by what their idiot neighbor pays for their property.
California property prices, residential and commerical, have always been volatile. Prop 13 is right for California. Tax bills that go up and down by huge percentages are not a good thing. Not good for the taxpayer, and not good for governments who overspend in times of plenty and won’t know how to cut back in times of depreciating property values.
One of the little observed beneficial effects of prop 13 is that property taxes have not declined by nearly the amount that values of real estate have fallen over the past few years.
“Unfortunately, the poor and the newest often bear the greater portion because they are not equipped to defend their tax basis.”
What? Back that assertion up with facts.
I had a reported taxable income of ~$6,000 one year, and paid $0 in state taxes.
Now, however, I make a lot more, and just cut a check to CA that would easily pay for Jim to get a brand-new Mercedes.
Your statement is not based in reality. The poor are catered to in CA. When my taxable income was low, things were great. Paid basically no income tax.
I stand by my earlier comment. California’s taxes are absurdly high and California is already a business-unfriendly state. More taxes, especially on businesses, will make that even worse.
We do NOT need more taxes. We need California to stop lavish spending on employee pensions, salaries, etc. We need to end defined benefit pension plans for all state workers. And we need to lower the tax rate for businesses so they are encouraged to relocate into California instead of out of it.
-Erica
Geotpf,
That article is crap. Seriously crap. Someone should get fired for writing crap like that.
Number of employees means nothing because it has nothing to do with anything; many central services are outsourced, so they do not count as employees despite needing to pay for the services.
The real measure is spend per capita. That measures the amount of money needed to be raised by the average person. Guess where California is on that level?
Yeah, I calculated it and we’re #2 at $1,410 per capita spend in 2010. The only higher state is Alaska (which has to maintain much larger area per resident, but has the added benefit of actually having oil revenues which pay much of the state’s bill and does not have a shortfall in FY2010).
No, we all agree that California is broken in so many ways, but to say that spending isn’t the big one simply shows pandering or stupidity. I’m not sure which on that Economist writer is trying for.
Chuck Ponzi
I don’t even understand why the value of property is even a factor in determining (or justifying) how much tax should be paid. If my br3/3ba home has a better view than my neighbor’s and is worth $200K more, why should I pay more in tax? How about we just do it restaurant style; take the bill and divide it evenly by the number of properties?
The word of the day children is Austerity.
Agree that Prop 13 puts too much burden on new purchasers. Just because you got here first doesn’t mean that you deserve a greater subsidy. I think it’s fine if owner occupied dwellings get a break, but beyond that every owner should be taxed the same across the board. It is a flat tax if you think of it like that and most “fiscal conservatives” can appreciate that.
It is really interesting how these tax policy debates get into semantics. One who pays tax, perhaps less than another thinks they should, gets a “subsidy”.
And “fairness”, usually comes down to one person putting another (not themselves)person or class under a microscope and concluding that another person should pay more, never less.
As I have said before–Prop 13 is Great in times like now where values have declined–The last article I read stated that although property values have declined nearly 30% (statewide), tax revenues from property taxes have hardly dropped–can you imagine the screaming that would be going on the the property tax revenues had actually dropped 30%–Where would they go to next for help??? That reminds me, someone recently told me that the State of California is considering a surfboard registration fee, simialr to that of boats–CF numbers–unsure if it is true or not, but I wouldn’t put it past them.
Allowing property taxes to be tied directly to short-term market values is a bad idea because this permits state and local governments to engage in 2nd order land speculation. This results in poor long-term land use. Residential property generates the highest per-acre tax base, so in the Central Valley agricultural land is turned into multi-square mile residential tracts with no office or commercial space for jobs or even a grocery store (can you say Elk Grove?), and in urban areas, industrial and office space is razed for condos and townhomes.
I actually lived in Contra Costa County in 1978, and IMHO, the quoted change in tax revenue is very misleading. East Contra Costa County (Brentwood, Pittsburg, Antioch) underwent a huge residential building boom over the past 20 years. So the shift is the result of massive increase in the number of residential properties rather than any decline in commercial property values.
In other words, the shift in proportion from commercial to residential tax base was the very intent of the politicians making the decisions, because they would get more money. Now that the residential gravy train has moved on, commercial properties are a mouth-watering target.
Ross:
Whoah… you said that “Residential property generates the highest per-acre tax base”.
Care to check your facts on that?
One of the main knocks against Prop 13 is that it encourages retail building because those bring in lots of sales tax which the city and county get credit for… and it’s a lot more than property tax.
To put it in perspective, my wife’s stay-at-home web retail business generated more in sales tax this last year than my landlord paid in property tax. Imagine what Best Buys and Toys R Us pulls in for the city and county!
Chuck
Chuck Ponzi-To really factor in employee salaries into the mix, one needs to factor in cost of living. That is, it is much more expensive to live in much of California than some place like Iowa (mainly due to high real estate prices here), therefore salaries for state government employees have to be higher than in Iowa.
Great idea. Business’s have already left the state in droves – time to accelerate that process so we can go totally Detroit, tear down the cities and start over. Since I’m going to be retired soon I’m down with that.
Prop 13 shifted the taxes from Finance Insurance Real estate (FIRE sector) on to labor and industry, making labor more expensive. Its a transfer of wealth from the poor to the rich. Also instead of paying the state property tax a “homeowner” pays interest and fees to the bank. Property taxes goes to pay for schools, roads, police and fire and yes politicians. California built the best public education system in the world and its been dismantled the past 32 years. Interest payments and fees goes to Llyod Blankfein. I suggest reading michaelhudson.com for a much better analysis.