Opinion Columns & Blogs

Peter Schrag: Our cockamamie commercial property tax system

If the California Legislature were peanut butter, most voters still would be looking for another brand. An approval-disapproval margin of 40-44 is nothing to shout about.

But combined with Gov. Jerry Brown’s consistently high approval numbers, the Legislature’s 40 percent approval rating in the latest Field Poll, the highest it’s been in a dozen years – in 2010 the margin was 10-80 – could help open some major, and long-overdue, opportunities for reform.

Maybe the biggest item on that list – and certainly the one with the best chance – is a major cleanup of the state’s misbegotten, uneconomic and unfair system of commercial property taxation.

In the 35 years since Proposition 13 created it, that system has opened the door to multimillion-dollar finagling by some of the state’s biggest landholders, penalized small and startup businesses, unduly taxed innovation and new equipment, and shifted an ever-greater share of the property tax load to homeowners.

In 1977, just before Proposition 13 was passed, the property tax load was divided roughly evenly between residential and commercial property. Some estimates now show that homeowners carry nearly 70 percent of the load. And because the largest properties – power plants, refineries, oil fields – are almost never re-assessed, they probably pay an obscenely small percentage of their real value.

Lenny Goldberg, who heads the California Tax Reform Association, and who’s worked on this issue almost since the day Proposition 13 spawned it, no longer talks about creating a “split roll” – in essence taxing commercial property on the same basis as residential property.

We already have split rolls, he said in a talk last month – rolls split in many ways that, in combination, make no economic sense. When a corporation erects a plant on leased land, the building is assessed at the cost of construction, and all the equipment inside (“personal property”) is assessed at full value, but the land is assessed at the value for which it last sold, even though the new building greatly increases its value and the value of its neighbors.

In effect, as Goldberg says, “We tax new investment heavily and fail to tax windfall land rents – the opposite of sound economics.” And because the law is so loophole-ridden, it’s easy for large corporations to avoid the re-assessment that routinely falls on homes when they’re sold.

When a piece of commercial property, say a hotel, is sold to several entities, none of whom holds a majority of the shares, as was the case with the luxury Fairmont Miramar Hotel in Santa Monica, the property can’t be re-assessed.

That provision saves the two largest (technically separate) owners, in this case Michael Dell and wife, Susan, who together own more than 90 percent of the property, more than $1 million a year in property taxes. Something similar is true for the Santa Clara Marriott whose ownership is evenly divided between the Marriott Corporation and another entity.

As Goldberg and many others see it, the way we tax commercial property turns good economics on its head. It fails to fund infrastructure. And by imposing no cost on keeping valuable land off the market, it discourages the best use of that land and promotes speculation and sprawl. It taxes innovation and enterprise and rewards inertia. Of all the job killers, the commercial property tax system may be the biggest of all.

There’s been growing interest and engagement across the state in commercial property tax reform that leaves the residential tax structure – which, of course, was the purpose of Proposition 13 – unchanged.

The polls seem to support that. This year, the Public Policy Institute of California again found that, by a 58-33 percent margin, Californians favor “having commercial properties taxed according to their current market value.”

Goldberg told me he’s looking to the election of 2016 – not next year – for commercial property tax reform. A lot of research and a lot of groundwork, he says, have to be done. In the meantime, he wants to start a “conversation” about the creation of a “smart roll” that taxes windfalls, not new investment – a basic principle, he says, of economics, conservative or liberal. It would reassess commercial land on a periodic basis; and eliminate the business equipment tax (aka personal property tax).

Every economist, Goldberg says, would agree that the best tax is a tax on land value only and, to the extent possible, doesn’t tax new investment. Such a system, he says, would be easy to implement, it’s good economics, it captures the benefits of growth and finances infrastructure.

No fiddling with Proposition 13, no matter how unaffected it would leave homeowners, is likely to be an easy sell. A lot of big money rides on the preservation of the inefficiencies the current system protects.

But the distrust of government that’s long blocked major reform seems to be waning. In allowing the Legislature to pass budgets by a simple majority, we’ve already taken one step toward common sense. Maybe by 2016 we’ll be ready for another.