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CALIFORNIA FOCUS: Property Tax Changes Among Possible Key Propositions

For years, almost everyone in Sacramento has known how to eliminate the endemic state budget deficits that have plagued California for the last five years. This year’s prospective shortfall might amount to as much as $8 billion.

But neither Governor Arnold Schwarzenegger, ex-Gov. Gray Davis nor most legislators have had the courage to do the obvious: Change regulations passed the year after Proposition 13 which allow real estate to change hands without being reassessed upward if the new owner is a partnership where no one person holds more than a 50 percent ownership stake. Some property involved in corporate mergers and acquisitions is also exempt.

Changing these regulations, in effect since 1979, would not do a thing to residential property, which is routinely taxed at 1 percent of the purchase price whenever there’s a new owner. But such a change would produce anywhere from $3 billion to $12 billion per year, enough to solve most of the state’s problems even in the worst of recession years.

It’s pressure from wealthy individual and corporate political donors who benefit from these regulations that keeps them in place even though they are plainly unfair, giving owners of large apartment complexes and commercial property a tax break not enjoyed by anyone else.

But this may change if any one of several initiatives now circulating around the state qualifies for June 2006 primary election ballot.

That would be consistent with the history of the California initiative movement, which has occasionally seen voters rise up to deal with festering problems or inequities when entrenched politicians refuse to act.

The effect of any one of several initiatives now in the signature-gathering phase would be to create a “split roll,” something far more draconian for business than merely giving equal status to corporations, partnerships and individual property owners.

One prospective measure would increase taxes on commercial property to 3 percent of their assessed value, applying the same standard to residential properties assessed at more than $2 million. This would instantly more than double the property tax paid by business, producing far more cash than a mere rule change. One official estimate pegs the increased revenue as high as $20 million.

The same measure would multiply by 10 the current $7,000 homeowners tax exemption, making the first $70,000 of value in any house or condominium tax free.

This would be the ultimate split roll, placing far more onerous taxes on business and the rich than on most individual homeowners.

Another measure would amend Proposition 13 — a political sacred cow since it passed — to immediately assess all commercial and industrial property at current market value. Again, that would amount to a split roll, since residences would be taxed as they are today, based on either their 1975 assessed value or the most recent sales price.

A third proposal now on the street would also require annual tax reassessments of all business property at its full value. But this one would make tax exempt the first $500,000 in personal property owned by any individual or married couple. This one would exclude agricultural property and also provide some tax relief for senior citizens. It would produce a net revenue increase of at least $2.8 billion, according to state officials, even though many homeowners would be paying far lower tax bills than they now do.

So there is no shortage of ideas for solving the budget crisis at the expense of business, without any tax increase for individuals.

The scene is somewhat reminiscent of the early- to mid-1970s, when legislators refused to act to reduce taxes on rapidly inflating real estate that could be reassessed each year. That era’s first attempt at change took the form of a ballot initiative sponsored by then-Gov. Ronald Reagan that was defeated in a 1973 special election.

Anti-tax crusaders like the late Howard Jarvis and Paul Gann did not give up and as lawmakers continued refusing to act, these activists devised Proposition 13, which was far more severe than other alternatives proposed at the time.

The same is true today. Even if this year’s attempts at changing the property tax system fail, their sponsors likely will not give up and eventually the budget crisis will become so desperate that voters will pass something extreme.

The way to head this off is to change the reassessment rules now and level the tax status of corporations, partnerships and individuals. If not, voters are almost certain to pass something a lot more draconian, a lot like the current proposals.That’s the lesson of history. The big question is whether Schwarzenegger and today’s Legislature will learn from it or doom themselves and the business property owners of the state to a repeat.

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