Taxing Commercial Property: The huge hole in California’s tax system, and how to change it

1. Taxing Commercial Property: The huge hole in California’s tax system, and how to change it Lenny Goldberg California Tax Reform Association Presentation to CARA, October 22, 2007

2. Questions: • Can the most irrational and unfair part of Proposition 13 ever be changed? • What is wrong with the way non-residential property is taxed? • What are the benefits and costs of changing commercial property taxation? • What is the plan for change?

3. The issue • Failure to reassess commercial property on a regular basis: • Legally irrational—more loophole than tax • Economically indefensible—fails to tax windfalls, taxes new investment • Fiscal failure—fails to capture revenue from land value increases for infrastructure and services, shifts burden to homeowners • Distorts land use—encourages land speculation and sprawl, discourages infill

4. The law: loophole-ridden • Unlike homes, commercial property can change ownership WITHOUT reassessment • Why? Complex ownership (corporations, partnerships, LLC’s, REIT’s, Subchapter S), bad law (50% purchase by one owner), difficult to track changes

5. Examples of legal loopholes • Martini to Gallo, no change, different partners • Virtually all publicly-traded corps: B of A vs. Chevron building in SF (chart) • Change of convenience to lower base year value (e.g. downtown LA in 1990’s). • Full change over time, no one over 50%.

6. Downtown SF: Offices

8. Economically indefensible • Taxes new investment but fails to capture windfalls—the opposite of good economics • Anti-competitive—taxes competitors wildly differently (charts) • Unlike housing, commercial values reflect money to be earned, so no rationale for “lock-in” effect. • Shifts property tax burden to homeowners

13. Fiscal failure • Commercial development—other than big box—does not pay for itself • Virtuous cycle of public infrastructure investment is short circuited—increasing investment in land values brings no public return • Recent rapid growth heavily dependent on home market, now stagnant

14. Distorted land use • Failure to tax leads to speculation and sprawl • Harms in-fill (East Oakland example) • Big box retailing sought by cities, no property tax increment otherwise • Builders overpay for land, pay huge fees for infrastructure, other costs, while others benefit.

15. Policy Solution • Reassess non-residential property to market value, on a periodic basis = $4-5 billion annually (or more). • Allocating the revenue: cities and counties (Prop 1A) and schools (Prop. 98) • Other issues: • Why not statutory change? • Why not apartments? • Farms and open space • Trade-offs with small business: personal property

16. Business impacts • Burden on business as % of land value moves from 49th to 43rd in nation • Lower land costs—land values inversely related to tax burden on land, and increased by market distortions • Lower development costs, better development climate—better land market, potential relief in fees because of on-going tax benefits • Infrastructure investment—local government incentive to improve property values, reinvest • Level playing field w.r.t. taxes among competitors • Costs borne by those with untaxed windfall land values, particularly hotels, retail, offices—not manufacturing • Potential trade-offs on other taxes, other burdens—major, but so far ignored opportunity by business

17. Strategy: building a campaign • GOAL: CREATE INEVITABILITY OF CHANGE IN PUBLIC MIND • Expose the flaws through local research • Highlight cases and stories in the media • Build broad base of constituency support • Enlist public officials at all levels • Enlist and engage opinion leaders

18. Constituencies • Demo clubs • Grassroots: ACORN, PICO, seniors, churches • Civic: LWV, PTA • Labor unions • Advocacy groups (health, education, etc) • Enviros (sprawl and land use) • Question: what level of interest and commitment?

19. Research and media • Major properties, comparisons • The missing $: how much would reassessment bring in, by property and by city, county, school district • Vacant lots, junkyards and parking lots: discouraging in-fill development • Loophole exploitation: avoiding reassessment • Shift to homeowners, by city, county • Steady stream of media interest: enlist reporters as investigators • Question: Will the media be interested?

20. Public officials • Presentations and resolutions from each city council, school board, county board, special districts: based on data and research • Legislators, police and fire chiefs, assessors, mayors

21. Opinion leaders • Editorials: current support for change from SF Chron, LATimes, SacBee, SJMerc, and SD Union-Trib. • Need: TV, internet, ed boards always change • Plus others: civic organizations, business leaders, academics (e.g. no economist can support the current system), non-profit forums

22. San Diego Union-Tribune, April 23, 2003: “Even Proposition 13 must be on the table”: • “While Democrats and Republicans cower before this iconic restriction on property taxes, they should nevertheless be amenable to an annual reassessment of business and commercial properties. There can be no sacred cows in confronting California’s catastrophic budget”.

23. Polling • PPIC, Should commercial property be taxed on the basis of market value? • Yes 60, no 34 • Needed: extensive polling with regard to framing, language, arguments, etc.

24. Possible Timeline • Research: 2008-2009 • Outreach education and organizing: 2008-2009 • Polling, focus groups, legislation: 08-09 • Initiative mode: draft summer 2009, petition-gathering fall and winter 2010 • Campaign: November 2010

25. Feedback • Can it be done? • What work is needed? • What are the obstacles? • What is the level of commitment? • www.caltaxreform.org • info@caltaxreform.org