Confronting the Obvious: Reforming Californias Commercial Property Tax

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Confronting the ObviousReforming Californias
Commercial Property Tax

• Lenny Goldberg
• California Tax Reform Assn. Conference on Local
  Government Finance,
• October 29, 2004

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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 Californias catastrophic budget.

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Current fiscal dilemmas

• Backfill local government for loss of vehicle
  license fees (car tax) 4 billion in 2006
• On-going state structural deficit (education and
  more) 6-8 billion
• Huge infrastructure deficit, no financing
  mechanisms 10s of billions
• Need for local government own-source revenues
• Skewed land use incentives for retail

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Change of Ownership for Commercial Property

• 1. Legally flawed more loophole than tax
• 2. Economically irrational
• taxes investment, not windfalls
• fails to capture tax increments
• 3. Distorted land use speculation and sprawl

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Legally flawed

• 1.Complexity of holdings publicly-traded, LLCs,
  REITs, Partnerships, family trusts make
  re-assessments difficult to track.
• 2. Publicly-traded companies continually change
  ownership, but reassessments are not recorded.
• 3. 100 of the property can sell in one
  transaction, but no one owner takes 50
  percentfor example, 3 owners each take 33
  shares (Martini to Gallo). (Sec 64, et seq)
• 4. 100 of the company, whether publicly-traded
  or private, can change ownership over time but no
  reassessment is recorded because ownership is
  dispersed.
• 5. Two partnerseven a husband and wifecan buy
  50 each, with no reassessment.

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Legal morass, cont.

• 6. Business can be sold, but a long-term
  land-lease can be held by the owner, with no
  reassessment.
• 7. Change of ownership can be effectuated when
  property goes down in value, thereby preventing
  reassessment when property values recover. Sec 62
  (a)(2)
• 8. Limited information requirements for reporting
  changes in ownershipuntrackable by assessor.
• 9. Property Owned by Real Estate Investment
  Trusts never changes ownership although the
  shareholders/partners in REITs change
  continually.
• 10. New loopholes can be discovered as needed

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Irrational economics

• Taxes new investment, fails to capture windfall
  land rentsthe opposite of good economics
• Anti-competitive competitors pay widely varying
  property tax per square foot (see data)
• Does not capture tax increments from rising land
  values, short-circuits virtuous cycle of public
  investment
• Over-burdens new development with fees --only
  leverage point for local government

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Irrational economics, cont.

• Unlike housing, investment property values are
  function of stream of incomethus no rationale
  for lock-in effect
• Double taxation of manufacturing equipment,
  vs.failure to tax land value increases
• Job-generating office, commercial, industrial do
  not pay for themselvesagain, land value
  increments not captured

9
Distorted land use

• Dysfunctional land market rewards speculation and
  raises land values
• Maintains low value in-fill uses no tax on
  underutilized land (Oakland example)
• No penalty for holding land off market on urban
  fringe (sprawl and leapfrog development).
• Unable for fund infrastructure, amenities out of
  tax increments from new development (no-growth
  politics)

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Land use implications, cont

• Fiscalization of land use over-reliance on
  sales tax generating uses
• Big-box retailingthe most attractive to local
  government--is worst land use
• Excessively high land costsland value inversely
  related to tax burden.

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The Data

• 1. Shift in burden to homeowners
• 2. Assessment disparities in land are vast
  structures are less disparate
• 3. No rational relationship between assessments
  and land rents
• 4. Competitors paying widely varying taxes/sq. ft

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Shift to residential Data
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LA burden shift
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Santa Clara burden shift
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San Francisco burden shift
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Disparities in commercial a.v SF Hotels
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SF downtown office buildings
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Santa Clara High tech
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Downtown LA office buildings
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Sacramento across the street
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West L.A. hotels
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San Diego Bio-tech firms
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San Diego hotels
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Solution

• Reassess non-residential property to market
  valueconstitutional amendment in 2006 or 2008
  (ACA 16, Hancock)
• 3.3 billion in current revenues, 4 billion by
  2006
• (Amend change of ownership statute-SB 17,
  Escutia)
• (Why not apartments?)

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Business friendly impacts?

• Burden on business as of land value moves from
  49th to 43rd in nation
• Lower land costsland values inversely related to
  tax burden on land, and increased by market
  distortions
• Lower development costs, better development
  climatebetter land market, potential relief in
  fees because of on-going tax benefits
• Infrastructure investmentlocal 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, officesnot
  manufacturing
• Potential trade-offs on other taxes, other
  burdensmajor, but so far ignored opportunity by
  business

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Moving ahead

• Local research and education on local, regional
  impacts (numbers, examples)
• Engage local governmentsthey must advocate for
  real solutions
• Engage organizations (education, public sector,
  community organizations)
• Engage business community, particularly
• Developers
• High tech and manufacturing
• Engage environmentalists re sprawl

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Why hasnt this happened?

• Cant change Prop. 13
• Cant take on business
• Business climate

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Is a consensus possible?

• Bay Area Council/business interest in
  infrastructure finance
• Trade-off for double-taxation of manufacturing
  equipment
• Pressing need for real dollars in light of Prop
  1A (i.e. billions), structural deficit
• Land use and planning benefits
• Multiple benefits in a single stroke economic
  efficiency, billions in revenue, better land use