It’s Time to Close the Corporate Loopholes in Prop 13

As California faces a severe fiscal crisis at the state and local level, my Republican colleagues in the Legislature have suggested a range of “solutions” for California’s budget crisis including instituting a spending cap, repealing environment regulations and reforming our pension system. 
   To no one’s surprise, none of their solutions dealt with closing any of the egregious tax loopholes that benefit corporations and cost the state millions of dollars each year. Given our economic situation, all aspects of our tax system, including the property tax, must be examined and closing corporate loopholes should be first on the list. 
   In fact, one of the loopholes is so huge you could drive a truck through it – the assessment of commercial property. Our current property tax assessment system is so confusing, contradictory and difficult to administer that it cries out for change in the name of tax fairness as well as for addressing the fiscal health of our cities, counties and schools.
   I have introduced AB 448 to continue the effort of changing this system. The bill will address only the most egregious methods of tax avoidance, but even addressing these problems generates enormous resistance from the Chamber of Commerce and other business interests. Why? Because the defenders of the status quo know that if we were ever to have a rational discussion about creating an equitable tax system, the loopholes that corporations have been benefiting from for decades would quickly disappear.
   A recent report from the California Tax Reform Association shows clear examples of what’s going on with our dysfunctional tax system. In virtually every county in the state since the passage of Proposition 13, the property tax burden has shifted from commercial property onto the backs of residential property. Some examples: in Contra Costa County, the residential share of the property tax went from 48% to 73%. In Santa Clara, the residential share went from 50% to 64%, despite massive industrial/commercial growth. In Los Angeles, it went from 53% to 69%. In Orange, it went from 59% to 72%.
   But not only are corporations paying less of a share of the property tax, corporations are exploiting loopholes in the law to avoid reassessment upon change in ownership. The report also shows dozens of examples of major corporations changing hands without being reassessed, demonstrating the loophole-ridden nature of current law and the need for AB 448.
   How do they do it? Properties are supposed to be reassessed upon “a change in ownership”. For example, CVS pharmacies bought out Longs Drugs in 2007, but the properties are still owned by “Longs Drugs LLC”, a subsidiary of CVS, and in most of the state these large commercial properties are still assessed at 1980’s values. The result? Multi-million dollar CVS properties are still assessed at $700,000 and paying $7000 in property tax, less than many homes.
   Another example of this ownership shell game is when the Blackstone Group, a private equity firm, bought the entire Hilton Hotel chain, which includes Doubletree, Embassy Suites and others. Yet very few of their properties throughout the state have been reassessed, because there is often an underlying land lease held in another name. So, did the Hilton hotels change ownership or didn’t they? AB 448 will provide transparency and disclosure about the ownership patterns of many thousands of properties, so we can determine whether they should actually be reassessed. If they have failed to report real changes, then stiff penalties should be enacted and back taxes collected.
   Simply put, our tax system makes no sense and we are all suffering as a result of it.  In the big picture, the complexity of property ownership patterns for commercial property will require a constitutional change and that raises the issue of changing Proposition 13, long considered the “third rail” of California politics. If the fear of changing Proposition 13 is all the opposition can muster, so be it because the facts speak for themselves. 
   Homeowners are paying more than corporations in property tax and we are leaving millions of dollars on the table that should be going to public safety, schools, parks, libraries and health services at the local level.  I for one can no longer sit idly by as we make drastic cuts to our core services without addressing the need for new revenue and an equitable tax system – the future of California depends on it. AB 448 will help expose how bad the system is, provide millions in revenue, and move us forward to when we can enact major constitutional reform.
   Note: AB 448 will be heard in the Assembly Revenue and Taxation Committee on May 16, 2011