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Budget Crisis Spurs Talk of Excluding Businesses from Prop. 13 Rules

Audio

Aired 3/30/10

Proposition 13 was meant to stop people from being taxed out of their homes. But advocates for tax reform say commercial property owners have been the prime beneficiaries of Prop. 13. They want legislators to tinker with the 32-year-old law to get businesses to pay higher property taxes.

— Proposition 13 was meant to stop people from being taxed out of their homes. But advocates for tax reform say commercial property owners have been the prime beneficiaries of Prop. 13. They want legislators to tinker with the 32-year-old law to get businesses to pay higher property taxes.

"We used to have the California Dream here," says Donald Cohen, co-founder of the Center for Policy Initiatives. "A world-class infrastructure. The best educational system in the world. A state that everybody was proud to live in and in a way that made our economy boom."

Cohen says that dream is collapsing under the weight of Prop. 13. "We are now at a place where our schools are moving toward the bottom of the list," he says "Our colleges are harder and harder to get into. Our infrastructure is deteriorating."

Restoring California's golden era, Cohen says, would mean tweaking Prop. 13, a move seen as heresy by some.

More on Prop. 13

Watch the KPBS TV documentary "The Legacy of Prop. 13".

Prop. 13 – passed by voters in 1978 – caps annual property tax increases to no more than 2 percent of their assessed value unless there is new construction or ownership changes. But even if ownership changes hands, Cohen says a business's property taxes still might not go up.

"Unfortunately, businesses figured out a loophole in that law when they sell their property, they usually change their corporate structure in a way to avoid even the reassessment, and that's a loophole we can close right away," Cohen states.

Tax reform advocates say lawmakers could make other changes. One is requiring businesses to pay property taxes based on current market value while still taxing homeowners under Prop. 13 rules.

For example, San Diego-based defense contractor SAIC pays $226,000 in annual property taxes on its San Diego headquarters. But if the building were assessed at market value, the company would pay close to $385,000.

Phil Ting is the assessor in San Francisco County. He says right now homeowners in some parts of the state are bearing the brunt of property taxes.

"The question is do we want to continue to subsidize commercial property owners or do we want to fund teachers?" Ting says. "Thirty years ago, 59 percent of the property taxes were paid by commercial property owners here in San Francisco, and that burden has now shifted to the residential property owners because now the residential customers who used to pay 41 percent are now paying 53 percent of the burden."

Ting has started a statewide campaign on Facebook to change the rules on how commercial properties are taxed, a move he says could raise more than $7 billion. But most commercial property owners like David Malcolm say changing the rules would dig California into an even deeper hole.

"Small businesses create 70 to 80 percent of all jobs in the United States," says Malcolm. "And yet here we have Sacramento once again focusing on raising the taxes of small businessmen. It is dumb."

Malcolm owns a six-story commercial building on the corner of El Cajon Boulevard and 30th Street. The building has an H&R Block, a dry cleaner and a restaurant. The top floors have low-cost housing.

"If property taxes are doubled as they're talking about in the state of California, all my leases -- which are typical leases -- the tenants pay the property taxes and that cost gets passed on to them."

For now, the idea of raising commercial property taxes is just that. County assessors across the state are taking a closer look at how much the tax burden has shifted from business owners to homeowners. But San Diego County Assessor David Butler says it's not a simple issue.

"You can't just look at the property tax aspect of it," says Butler. "I think you have to consider what it's going to do economically, if it's going to drive businesses out of California. Is it just going to get passed on to the consumer, so the homeowner instead of paying it as property tax is going to be paying more for his goods and services? It's a big question and I think it needs to be studied pretty thoroughly before it gets moved down this path."

Comments

Avatar for user 'srloren'

srloren | March 29, 2010 at 9:57 p.m. ― 4 years, 6 months ago

We need to step back and realize that we have already lost millions if not billions in revenue because businesses are leaving the state at record numbers. Any increases on Business is a farce because businesses just pass the cost of doing business on to consumers. So we pay anyhow and will lose more job creating businesses to Texas, Arizona and other lower cost states. The number one priority should be to create jobs and the way that happens is to cut taxes.
Politicians have long been used to raising taxes each year and spending more and more money that we no longer have. People have lost their homes and jobs. Politicians don't care about anything but getting re-elected so they can continlue the ride of power that they enjoy. Understand this: a stack of $1000 bills 4 inches high = 1 million dollars. A billion dollars = a stack of $1000 bills 358 feet high. One on top of another. A Trillion dollars is = to a stack of $1000 bills 67.9 miles in the sky.....That is more money than you or I can imagine but it is just pocket change to a politician. Prop 13 saved hundreds of thousands of families from losing their homes and continues to work well. The real problem is spending!

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Avatar for user 'philosopher3000'

philosopher3000 | March 30, 2010 at 9:05 a.m. ― 4 years, 6 months ago

"If property taxes are doubled as they're talking about in the state of California, all my leases -- which are typical leases -- the tenants pay the property taxes and that cost gets passed on to them."

David Malcolm is totally lying, his disingenuous arguments are based in his own greed.

Ask any first year economists and you will learn that the current price for rents and leases are set by the supply and demand curve. If you increase property tax revenue by closing the Prop.13 loophole for commercial property, the merchants will not pass on that cost to their tenants, they can't, because the demand for their "product" doesn't change. Which means the wealthy holding corporation that owns the property, and produces no value, will have to eat the tax cost that they have been avoiding via this loophole.

According to KPBS more than 8% of commercial property in the state of CA, has not "changed hands" since Prop.13 in 1978. That means the property owners, holding corporations, are paying property tax based upon the 1976 property values. Ending this deceitful practice will force corporations to pay their fair share of the 1% property tax. That modest fee will have to come out of their profits.

Now this is tricky because the business community set up the system this way to confuse and deceive and manipulate the common voter. You see, when an investment property owned by a holding company makes money from rent, the owner disguises any profits by paying for "business expenses" like his own salary, bonuses, benefits, or other personal expenses, like the company car, travel, etc.

Thus, the owner of the corporation avoids the appearance of profit, and the subsequent tax burden. When the owners salaries get too high, and their personal income tax burden begins to be cumbersome, they hire family and friends, and write off their salary and benefits as "business expenses", too. When all else fails, they "invest" company profits in new properties, via subsidiary holding corporations, and the process repeats itself.

This is the pattern of wealth in California, a series of slum-lords become "Developers" and use their wealth to corrupt our government. Wake up California!

http://obamaed.blogspot.com

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Avatar for user 'philosopher3000'

philosopher3000 | March 30, 2010 at 9:19 a.m. ― 4 years, 6 months ago

Anyone who thinks real margins on property holding shell corporations is less than 1% the value of the capital investment, is ignorant of the nature of the business.

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Avatar for user 'philosopher3000'

philosopher3000 | March 30, 2010 at 9:31 a.m. ― 4 years, 6 months ago

Let me explain. Say a man buys an eight unit apartment complex for $500,000 using a home equity loan. The $500,000 loan (on his parents home), costs him 7% interest per year, or $35,000.

To pay for that loan he must charge rent. $35,000 / 12 months = $2,916.67/month

But he has 8 units that rent for $500/month each. 8 X $500 = $4,000/month

His profit margin, after paying the bank interest on his loan is $12,999/year ($4000 - $2,916.67 = $1083.33/month)

Now, the real question, who owns the bank?

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Avatar for user 'philosopher3000'

philosopher3000 | March 30, 2010 at 10:07 a.m. ― 4 years, 6 months ago

if the property above is assessed today at $500,000 then the 1% property tax would be $5000/year. (leaving the owner $7,999/year. Not enough for the work of managing the property, and what if their are repairs? If they don't do the repairs then they can get sued.

To protect themselves from personal liability, the businessmen incorporate their holdings ($800/year), and thus are not personally accountable for their business dealings. They lack personal responsibility.

The holding company now technically owns the property, and the businessman owns the corporation. Yet he barely breaks even over ten years, even raising rents from $500 to $800/month.

Lucky for the small businessmen, real-estate values always increase in the long run. When the property value goes up (by 10%/year as it did over the last decade) the owner may want to reap the benefits of that "increase" in value. Over the decade his $500,000 INVESTMENT, becomes valued at $1,296,871. So he sells the corporation, and collects the profit, $796,871.

However the property is still owned by the holding corporation, and technically never changed hands even if the corporation has new owners. So, under Prop.13 the property value is never re-assessed and the property tax remains the same, just $6094/year (after 10 years at 2% annual increase) for the $1.3-million dollar property, or just 0.46% property tax.

Over generations, this process repeats, and ultimately takes tax revenue away from the state to line the pockets of those who own the shell corporations. Which means the tenants paying rent loose public services, like schools and hospitals.

BTW, the answer to the question above (previous post): WE DO (remember the bailouts)

Now here is another question: Who owns the properties? When you don't pay the loan, or taxes, who comes to collect?

If the banks ultimately own the property, why don't they have to pay the majority of the property taxes? They gain 6%-7% interest/year on the value of the loan, so how come they don't have to pay anything?

The lack of economic and social justice in this state is killing public education, and creating unnecessary ignorance via class struggle. They are closing the libraries! Why don't we just return to the feudal systems of ages past? It was simpler.

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Avatar for user 'maxthor'

maxthor | March 30, 2010 at 10:10 a.m. ― 4 years, 6 months ago

How about taypayers stop paying for the education of Illegal Mexicans who broke into the country for free education and free health care. I support Prop 13 and it is not the reason Calif is in the mess it is in now. Over spending for the last 10 years is to blame. The Calif taxpayer is taxed to death and people are leaving and so are businesses. They pay teachers the highest pay in the country with the best benefits. Cut back on all spending or better yet let Calif go into Banckrupcy and start over. Throw all of the Democrates in Sac town out. Calif also has the highest level of welfare people and this also needs to end.

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Avatar for user 'randps'

randps | March 30, 2010 at 4:47 p.m. ― 4 years, 6 months ago

The view that the cost of businesses paying their fair share will be passed on to consumers is too simplistic. There are real advantages to doing business here, given the unique workforce, natural resources, etc. Those who argue that the property tax loophole must be maintained to keep businesses here are really just hiding behind this argument and simply want to protect corporate profits and excessive executive compensation.

All those of us on the other side of the argument want is for businesses to pay their fare share of the tax burden to pay for the essential services they enjoy. Even if we just got rid of the loophole that companies use to avoid reassessment, so that their properties would be reassessed whenever sold, just as homeowners properties are - that adjustment alone would go a long way to helping the state out of it's fiscal crisis, and save our embarrassing public school funding from sinking even lower.

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Avatar for user 'srloren'

srloren | March 31, 2010 at 7:35 p.m. ― 4 years, 6 months ago

Rand/ps states: "The view that the cost of businesses paying their fair share will be passed on to consumers is too simplistic." It may be simplistic but most businesses sell a product or service. Any costs incurred have to be passed on to the consumer in order to profit.....simple but a fact that cannot be ignored.

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Avatar for user 'philosopher3000'

philosopher3000 | April 20, 2010 at 12:23 a.m. ― 4 years, 6 months ago

Comercial Property owners, like David Malcom, directly profit from the loophole at the expense of our kids. He claims that bringing property taxes back to 1% of current assessment will harm the business economy, and that property taxes will be passed on to renters and small businesses. This is not true, it is a lie. Lease rates will remain the same because they are based upon current demand, so the property owner will eat the tax loss to keep his clients, and reduce outrageous profits.

The people who own the corporations that write the laws and bribe our representatives are very clever. They have hidden the profits from their real-estate investments, and passed on the cost of our government to homeowners.

This is sneaky, it is wrong, and unjust. Our public schools, libraries, and hospitals are vastly underfunded because of this loophole. Imagine if you could earn just a fraction of 1% of the value of your local shopping mall each year (Mall=$10,000,000 1%=$100,000 from tax to profit.). Now remember, the mall owner already makes BIG PROFITS off every lease (Average 7%/year of current property value = $700,000), the tax loophole is just a bonus!

It is simple, rent and lease cost are DEMAND DRIVEN, which means that property owners (shell corporations) can't raise rates without loosing customers. If we restore commercial property tax to 1% of current assessed value, the rents will stay the same, only a small amount of the property owner's profits will be sent to fund public infrastructure. The economy will remain unchanged in the short run, and in the long run that pubic investment will reap a better state, a better economy, and a better life for all Californians.

The stakes here are gigantic, we are underfunding public schools to profit corporate tax cheats. We are closing libraries so that commercial property holders can bank a fraction of profits.

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Avatar for user 'proletarian'

proletarian | July 21, 2010 at 10:49 a.m. ― 4 years, 3 months ago

It's not quite true that Proposition 13 "was meant to stop people from being taxed out of their homes." Many people have been taxed out of their homes and Proposition 13 never made ANY effort to stop them from getting taxed out of their homes.

So let's be honest here. If you think my claim is nuts, just THINK about the people Proposition 13 made no effort to protect and it should be clear.

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