Ho-hum. Another summer, and on other state budget deficit, another impasse in the Legislature, and once again a major part of the solution stares lawmakers in the face and they do nothing about it.
Oops. Wait a minute. This year, for the first time since the early 2000s, a potentially major portion of the solution is actually getting a serious look. Not that it has much chance of becoming reality, but at least this year the much-needed closing of the state’s biggest tax loophole has made it out of one legislative committee.
The needed change involves Proposition 13, the landmark 1978 property tax-cutting initiative that has never been amended and may never be. The change now under discussion would do nothing to the actual Proposition 13 and its formula for setting all property taxes at 1 percent of their 1975 values, or 1 percent of the most recent sales price, and then letting them increase no more than 2 percent per year.
That means it should not need the two-thirds majority that would be required to amend Proposition 13 itself.
Here’s all that needs to be altered: The definition of a change in real estate ownership. The existing definition was not part of the original initiative; rather it was set by the Legislature early in 1979 when a variety of business lobbies determined that simply reassessing property every time it sold wouldn’t suit them.
The current definition is a little obfuscated, but essentially if a property sells and no one person or entity assumes more than a 50 percent ownership interest, there is often no reassessment.
This loophole was created to let limited partnerships and corporations acquire property without triggering property tax increases. When former Democratic state Sen. Martha Escutia of eastern Los Angeles County first proposed fixing the definition in 2004, she and others estimated it would produce between $1.5 billion and $12 billion each year for state and local governments.
Property values have declined since then, but the amounts bandied about would still likely make up much of the projected $20 billion deficit at the root of the ongoing budget wrangling.
The current reform effort is carried by Democratic Assemblyman Tom Ammiano of San Francisco. “There’s a loophole in the law and it’s morally incumbent upon us to close it, so when businesses (and their property) change ownership, there’s no game-playing,” Ammiano said during a press conference where he and several other legislators promoted a package of bills they said would close this and other loopholes.
One bill would impose a 10 percent tax on oil drilled in California, much of which comes from beneath state-owned lands. Another would repeal a provision allowing corporations to choose their own taxation formula each year. But reforming real estate ownership-change definitions is the topper.
Do this, says the corporate lobby, and you’ll drive more and more businesses from California. Don’t do it, say Ammiano and others, and you add more and more each year to the share of taxes paid by homeowners, which has risen since the pre-13 era.
While the change embodied in Ammiano’s bill would not alter homeowner assessments one cent, it would “place another massive burden on California’s struggling businesses…and force employers to lay off workers, close their doors or move…to (other) states,” argues Jon Coupal, the head of the Howard Jarvis Taxpayers Assn.
Coupal also challenges claims that the loophole costs the state very much. “Proposition 13 opponents can only point to a handful of alleged abuses of the law,” he said.
True, the critics usually cite only a few cases. But they contend those demonstrate a large pattern. If fractionalized new ownership involving several individuals or companies can avoid some reassessments – and it indisputably has – there’s every reason to think the practice is as common as Escutia and Ammiano have claimed.
Coupal, like some of his predecessors at the Jarvis organization, claims the reform effort represents the early phase of a drive to kill Proposition 13 altogether. He claims businesses will leave California “in droves” if the change occurs. But he offers no evidence for either claim.
Which leaves this as an issue of simple fairness. If all residential property is reassessed when it’s sold, why not all business property?
But as long as calumnies like Coupal’s are thrown around without being debunked, the needed change won’t happen, the budget problems will persist, and so will the current inequities.
The bottom line is that this change should pass, but chances it won’t — or that if it does, it will be vetoed instantly.