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