If it’s ever to be fixed, only a ballot proposition can repair the largest and most obvious inequity caused by Proposition 13, the landmark 1978 tax-cutting initiative that causes next-door neighbors in identical homes to pay vastly different sums for property taxes.
But the other big problem area of the tax-cutting measure originally sponsored by the late political gadflies Howard Jarvis and Paul Gann could be solved by a simple vote of the Legislature. That inequity is a loophole allowing some commercial and industrial properties to escape the tax increases that normally come when a building or lot changes hands. Sadly, this loophole will remain in place at least another year, after legislative Democrats in late spring killed a Republican bill to close it.
The essence of the loophole: As with homes and other residential properties, business property is taxed at 1 percent of the latest sales price. But an exception was written into the Prop. 13 rules by legislators a year after Jarvis-Gann passed handily. This one allows the tax bill to remain static after sale unless at least one new owner has more than a one-half interest in the property.
Perhaps the most egregious case of this loophole costing taxpayers money came when former basketball star Earvin “Magic” Johnson and a group of big-money partners bought the Los Angeles Dodgers from parking lot magnate Frank McCourt and his now ex-wife Jamie.
As part of the $2 billion deal, McCourt retained a half-interest in the sprawling parking lots surrounding Dodger Stadium, even though the new owners control parking prices and get all the revenue. That essentially made Johnson & Co. the real owners, but kept the tax bill on the lots (with a book value of $300 million at the time of sale) from more than quadrupling. This has let the new owners save about $2 million yearly starting in 2012.
Theoretically, the same sort of arrangement could have been worked out for the far more valuable Dodger Stadium itself, but that would have led to reams of negative publicity the Dodgers didn’t want.
Other well-publicized examples of the loophole saving big bucks for wealthy new owners came when a Central Valley vineyard changed hands and when a landmark Santa Monica hotel was sold to a new group, later becoming part of the ultra-luxurious Fairmont group.
Almost yearly during this decade, some state legislators have tried to get rid of this egregious injustice. Back when former Democratic state Sen. Martha Escutia of East Los Angeles first proposed closing the loophole, the state’s non-partisan legislative analyst estimated a change could produce between $3 billion and $8 billion in additional property tax revenue.
The latest effort, carried by state Senate Minority Leader Patricia Bates, a Republican from Laguna Niguel, failed on a 3-2 vote of the Senate’s Governance and Finance Committee, with two ostensibly liberal Los Angeles County Democrats – Ed Hernandez and Robert Herzberg – abstaining. Both votes for the Prop. 13 reform came from Orange County Republicans, John Moorlach and Janet Nguyen, while Democrats Jim Beall of San Jose, Richard Lara of East Los Angeles and Mike McGuire of Ukiah all voted no.
The vote was odd because it’s usually Democrats striving to bring more fairness to Prop. 13, while Republicans fight to keep it static.
But over time, the conservative GOP establishment has come to see closing the 50-per-cent-ownership loophole as simple fairness. Some Republicans saw the Democratic no votes as a political ploy aimed at keeping things unfair in order to make passage of a “split roll” initiative in 2020 easier.
That proposal would see business properties taxed at a higher rate than homes, even if no sale is involved.
Said Jon Coupal, head of the Howard Jarvis Taxpayers Assn., which usually fights to maintain Prop. 13’s rules, “Killing this bill shows that progressive tax and spend interests don’t want to fix how Prop. 13 is interpreted, but they’d rather…advocate for a larger split roll tax increase. They would rather play politics.”
The bottom line is that the vote likely means this problem won’t be fixed for at least two more years, as there will be no reason for a change in Democratic tactics next year. Which means this obvious inequity will remain a part of California life and local governments will keep losing out on significant funds they could use for schools and many other causes.