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Los Angeles Daily News: Prop. 13 loopholes require an honest discussion about fairness

Originally printed in the Los Angeles Daily News

By Lenny Goldberg

Finally! Business groups admit that our system for assessing commercial property is loophole-ridden.

They did so in a recent op-ed on the future of Proposition 13, and admitted to that last year in the state Legislature.

Is this a small or obscure issue? Not at all. Actually fixing this loophole-ridden system will generate up to $9 billion in property tax revenue for cities, counties and schools. Instead of a shift in the property tax burden to residential property, which is what has happened in the past 35 years, homeowners and renters would see commercial property owners once again paying their fair share of property taxes.

And it would only be a minority of large property owners who would bear this cost. In fact, a majority of business are already assessed on their property at levels at or close to market value on their businesses.

The minority have either manipulated the loophole-ridden system to their advantage, or just passively benefited by the fact that, unlike most every other state in the country, their commercial properties have not been reassessed to fair market value for decades.

Here’s how our absurd system works under Prop. 13: For homeowners, when a property is sold, a new name is put on the deed and the property is reassessed. But for commercial properties with complex ownership patterns — publicly-traded corporations, real estate investment trusts, limited liability companies, partnerships and trusts — change of ownership is difficult to define in law, nearly impossible to enforce in practice, and subject to endless manipulation.

In this system, one purchaser has to take more than 50 percent of a property to change ownership. In a high-profile case that reflects common practice by many commercial property owners, entrepreneur Michael Dell bought the Fairmont-Miramar Hotel in Santa Monica, and divided it up with his wife and business partners to avoid $1.1 million in additional property tax.

For corporations, every day and every year the stock of corporations like Chevron and Intel changes hands, but much of their land is still at 1975 values, under the protection of Prop. 13 forever.

Because the tax avoidance by Dell was so high-profile, business groups ended their years of stone-walling the issue and last year decided to support a minimal tweak to the system which would touch only the most blatant loophole, not the failed system itself.

My organization, the California Tax Reform Association, which has been trying to bring this issue to the attention of the Legislature and public for years, had sponsored the bill and was pleased to open the discussion, so that we can really examine this failed system.

Instead, the industry lobby refused to consider changes that would make this legislation any more effective than putting lipstick on a pig. So we ultimately opposed the effort and it failed, with the expectation that the discussion would continue in the Legislature this year.

But commercial property owners have not come back with any serious proposals to make the system work. And there’s a very good reason why: In order to pick up the Prop. 13-protected property of corporations, LLCs and other types of investor-owned commercial property ownership, the reforms have to be complex, intrusive upon businesses, bureaucratic to administer, and would still be subject to manipulation.

So, California taxpayers should be pleased that commercial property owners finally admit their assessment system is full of loopholes. Now, if we can have an honest discussion of how to fix the system, it will turn out that regular and fair reassessment of commercial and industrial property to market value is the way to close those loopholes. Let the discussion continue!

Lenny Goldberg is executive director of the California Tax Reform Association.

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