Published on June 2, 2003
By Bob Walter -- Bee Staff Writer
The commercial side of Proposition 13, the ballot measure that became a household name and a symbol of tax rebellion in California and beyond, could find itself back on center stage as the state's $38.2 billion budget shortfall takes over the headlines.
While few observers expect changes on the fiercely emotional homeowner side of Proposition 13, some believe the commercial side of the 25-year-old tax measure is less than sacrosanct.
"Fifteen years ago, it would have been impossible (to change)," said Tim Hodson, a government analyst and former state Senate aide. "Now I'm saying I think it's possible, though it will be very difficult."
Spearheaded by tax reformers Howard Jarvis and Paul Gann, Proposition 13 limited property taxes on homes and commercial property to 1 percent of assessed value and capped annual assessment increases at 2 percent a year. Property is reassessed when it changes hands.
Legislation to tighten commercial reassessment rules already is working its way through the Capitol, along with a proposed constitutional amendment to create a "split-roll" for property taxes and change the rules for assessing commercial property.
At stake could be anywhere from $1 billion to $3.3 billion a year in new tax revenue, according to a study by the Los Angeles County Assessor's Office.
Those who want change say the current system favors older businesses and leaves homeowners paying a disproportionate share of property taxes.
Defenders of Proposition 13 say business pays a fair share of property taxes and changing the measure would worsen the state's woeful business climate.
Commercial property owners come down on both sides of the issue.
Most of those interviewed said Proposition 13 provides important property tax stability that could vanish with annual reassessments. Others said a new system, with some kind of built-in stability, would level the playing field. And some doggedly insist that the tax burden should be shared by homeowners.
Assemblywoman Loni Hancock, D-Berkeley, introduced a constitutional amendment in April that calls for annual reassessment of commercial land and property.
Many insiders say Hancock's measure has no chance of getting the two-thirds support in the Legislature that would send it to the ballot, where it would need a majority vote to change existing law.
But Hancock and others say the time has come for new rules for commercial property.
"In light of this historic and frightening budget crisis ... when the impact of the cuts we have to make is felt in every community in the state, I think people will be prepared to vote for this," she said.
Some observers believe the reformers just might be successful this time.
"For years, Prop. 13 was untouchable. Elected officials risked their careers if they criticized it," said Hodson, who heads the Center for California Studies at California State University, Sacramento.
"But that's not true today," he said, "partly because there literally are millions of Californians for whom Howard Jarvis and Paul Gann are relatively meaningless."
In addition, Hodson said, many of the conditions that spawned Proposition 13 have changed and some of its flaws have become more apparent.
The pro-change side says the current system gives established businesses -- with their lower assessments and lower property taxes -- too much of an advantage over new businesses.
They point to places such as downtown Sacramento, where the owners of the Holiday Inn Capitol Plaza pay one-sixth the property tax on their land that is paid by the owners of the nearby and newer Hyatt Regency and Sheraton Grand hotels. Property taxes on the Holiday Inn building, on a per-square-foot basis, are less than half those of the competing hotels.
Hancock and others -- most prominently the nonprofit California Tax Reform Association -- argue that business property pays less than its share of property taxes because it rarely changes hands and, therefore, rarely is reassessed at market value.
Lenny Goldberg, executive director of the tax reform group, said commercial assessments that rely on change of ownership don't make economic or competitive sense.
For example, he said, land or buildings owned by public companies are reassessed only when more than half the company is sold in a single transaction, such as a merger or acquisition. Even if all the stock in a firm gradually turns over, the property is not reassessed.
And property held by limited partnerships avoids reassessment if less than half is sold at once, even if each partner sells his or her shares one by one, Goldberg said.
The bottom line, he said, is that the current system keeps business property taxes artificially low, thus robbing the state of tax dollars. Property needs to be taxed on its market value -- as determined by assessors -- and not on a historic sales price, he said.
Goldberg said current rules discourage commercial development because of property tax inequities and because newcomers also pay high fees and assessments. Those fees are necessary because property taxes don't generate enough money for adequate infrastructure, he said.
Goldberg's group is focusing on office and hotel properties, he said, because inequities are less severe among industrial properties.
Multifamily residential properties are not a target, either. Homeowners always will have the protections of Proposition 13, Goldberg said, and there is little sentiment for trying to take those protections away from renters.
Sacramento developer David Taylor, an owner of the Sheraton Grand and a major holder of office property in the region, said property tax disparities are not a major issue in the capital's hotel industry. He said hotel revenue is based on location, quality and the overall economics of the travel industry more than overhead costs.
Overall, Taylor and other owners stressed, tax stability is the crucial issue.
While Proposition 13 provides plenty of stability, Taylor said something needs to change to give municipalities enough revenue to provide the kind of infrastructure that spurs economic growth.
"I probably would come down on the side of a system that allows (commercial) property to be reassessed every year ... with some stability built in to avoid wild swings," he said.
Opponents of changing Proposition 13 say annual reassessments would create a logistical nightmare for counties and eliminate predictability that makes the system work.
They also say commercial property taxes should not be used to shore up the state's dysfunctional finances.
"The property tax has proven to be a dependable, stable and growing source of revenue in bad economic times as well as good," said David R. Doerr, a former Assembly consultant who played a key role in implementing Proposition 13.
Doerr, now chief tax consultant at the California Taxpayers' Association, said the system is fair.
"Taxes should be based on facts," he said. "How much you paid for something is objective ... versus speculative value."
In addition, Doerr said, the state eventually cashes in on rising property values when a sale occurs and the seller pays capital gains taxes.
Doerr agrees that homeowners are paying a higher share of the state's property taxes these days because the value of residential property has "gone through the roof," while business property has been relatively stagnant.
"Does that mean the tax system is flawed?" Doerr asked.
"This is not a good state to do business in ... and if Lenny (Goldberg) is successful (at changing reassessment rules), it will be substantially worse," Doerr said. "They are just after the money."
Goldberg and Assemblywoman Hancock counter that their Proposition 13 reforms would strengthen the business climate, especially if combined with broader tax changes that would reward investment or cut taxes on commercial personal property.
Hancock said the state's looming budget cuts will do more damage to the business environment than higher property taxes.
"It's bad for the business climate to be a state with an inadequate public health system ... transportation and public education systems," she said. "Look at the cuts being proposed. What business would want to relocate to California if those cuts become reality?"
Rex Hime, president and CEO of the California Business Properties Association, said the property tax basis established by Proposition 13 has become a key factor in investment decisions by entities such as pension funds.
"They have invested in commercial real estate partly because they can count on stability in property taxes," Hime said. "Real estate is so integrated into the economy of California, to tinker with it on a whim would do incalculable damage ... Public employees and other pension types would lose dramatically."
Anthony R. Giannoni is president of the the Allen Group of Sacramento, which will open the newest office building in town -- the 12-story Meridian Plaza across from Capitol Park -- next month. Giannoni also owns a 15-year-old office building on I Street that pays a fraction of the property tax that Meridian eventually will be charged.
Though a new assessment system might help Meridian compete with some big Capitol Mall complexes that have older valuations, Giannoni doesn't advocate a change.
"I think it balances out," he said. "The older buildings don't have the features and amenities of newer buildings and raising their assessments would put them at a terrible competitive disadvantage."
Meanwhile, Mark Friedman, a commercial developer whose family owns half of Arden Fair, said Proposition 13 makes it impossible for local government to charge homeowners enough in taxes to cover basic infrastructure such as roads, sewers, landscape, lighting and parks.
"These are services that everybody enjoys, but not everybody pays," he said. "Developers pay for them in assessments and fees because it's the only place that local government can pass the cost along."
Such a system is not only unfair but also misleading, Friedman said, because homeowners eventually pay in higher costs for homes, goods and services.
Any chance of changing to a system that allocates those infrastructure costs equitably to homeowners and businesses alike?
"Absolutely not," Friedman said. "For every voter who owns a commercial building, there are 100 voters who live in houses."