This article was posted on Sunday, Dec 01, 2013

Efforts to increase taxes on business property put homeowners in peril; here’s why.

Sacramento can never get enough tax money to satisfy the political class. AlthoughCalifornia has the highest state sales tax, highest marginal income tax rates, and highest gas tax in all 50 states, we rank only 14th highest in per capita property taxes. The politicians, government employee unions, and the special interest pleaders see this as an area of potential revenue growth — higher taxes, that is.

Several years ago, Senate leader Darrell Steinberg outlined a plan to incrementally diminish taxpayer protections to allow for the ratcheting up of taxes. The first step was to eliminate the two-thirds vote to pass a state budget — a law that dated back to 1933 — and then move on to targeting Proposition 13’s two-thirds vote requirement for increases in state taxes as well as for the passage of local per-parcel property taxes on homeowners. Steinberg’s step one was accomplished in 2010, with the passage of Proposition 25.
In addition to their efforts to destroy Proposition 13’s two-thirds vote protections for taxpayers, tax raisers have opened up a second front against Proposition 13. They want to divide commercial and residential property to allow for higher property taxes on businesses. This is known as a “split roll.”

To gain public support, the tax grabbers maintain that Proposition 13 unfairly benefits business. Fomenting discontent, they falsely claim that Proposition 13 has shifted the tax burden away from business and onto residential property. However, a recently released study by the California Taxpayers Association shows that property tax assessments for non-homeowner occupied property accounted for 60.26 percent of all assessments in 2011-12, compared to 58.16 percent in 1979-80. This means that assessments on homeowner-occupied property accounted for 39.74 percent of all assessments in 2011-12 compared to 41.84 percent earlier.

To correct a non-existent problem, they advocate two solutions. First, they want to force commercial property to be reassessed more frequently and, second, they want a higher rate to be charged to business property.

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Those pushing split roll argue that Prop 13 creates loopholes allowing commercial property to escape reassessment, even when it changes hands. For example, they point to a Santa Monica hotel owner who attempted to avoid reassessment of his property by structuring a complicated real estate deal using LLCs (Limited Liability Corporations). What they don’t say is that the case is still being litigated in court by the Los Angeles County Assessor’s Office. Obviously, HJTA fully supports all efforts to reassess property to full market value when there has been a true change of ownership. This is mandated by both the letter and intent of Proposition 13.

As for a higher property tax rate on business property, they say that income producing property should be charged more, and ignore that this revenue is taxed under California’s high income tax rates.
It is important to note that California has always taxed residential and business property at the same rate. Proposition 13 made no changes to this aspect of the law.

What is happening is that politicians want more money and to get it, they are trying to drive a wedge between supporters of Proposition 13 in the business community and homeowners.
The Sacramento politicians are not just going after major corporations — if this were the case, they could raise the corporate income tax rate, already the highest west of the Mississippi. They are also targeting residential rental property – apartment buildings – and small businesses like dry cleaners, barbershops, hair salons, restaurants — including small franchise operations like Subway – small bakeries and flower shops. Under plans being promoted by the tax grabbers, these businesses would pay more, even if they do not own property, because of the requirement in their lease agreements that increased costs be passed on to the renter. The impact this could have on hundreds of thousands of small business is clear. A Pepperdine University study shows that a split roll could cost our state nearly 400,000 jobs. Of course, those businesses that survive would need to raise prices, which would be a further drag on the economy as well as a burden on consumers.

However, for the average homeowner, the most threatening aspect of the split roll would be the loss of support for Proposition 13. Businesses would be out of the picture and homeowners would be totally on their own. Once the politicians and their big spending allies get the idea that the coalition that supports Proposition 13 has been broken, they will be ready to pounce, and homeownership for many, just like in the late 1970s before the passage of Proposition 13, would be put in jeopardy.

Prop 13: Who’s the Fairest of Them All?
Almost twenty years ago, Money Magazine sponsored a debate and panel discussion at UCLA on Proposition 13. When one of the panelists, with ties to the public sector, began to assert vigorously that the tax cutting measure was unfair, he was challenged by Craig Stubblebine, Professor of Political Economy atClaremontMcKennaCollege. Stubblebine said he would be happy to discuss fairness, but charged that the critic’s true motivation was simply the desire for more revenue. The Proposition 13 critic sheepishly conceded the point.

I thought of this last week when we of the Howard Jarvis Taxpayers Association caucused with about a hundred Southern California taxpayer advocates and activists to discuss attacks on Proposition 13. After the event, a longtime homeowner approached me and told me that he had had words with a new neighbor over the fact that he was paying less in property taxes and the recent homebuyer thought this was unfair.

While Professor Stubblebine’s opponent refused to continue the fairness debate, knowledgeable taxpayers are always glad to address the issue.
Because Proposition 13 uses acquisition value (usually the purchase price) as a basis of taxation and not current market value, it is possible for owners of identical side-by-side properties to have significantly different tax bills. Critics claim that this is an “inherent flaw.” But this criticism flows from a mind-set accustomed to market-value-based taxation.

To understand why Proposition 13 is fair one must understand how it works. Proposition 13 limits property taxes by limiting the maximum rate to one percent and, more importantly, by limiting increases in assessed valuation to two percent annually. With the latter provision, it is easy to see how, during a real estate market upswing, a property’s market value can greatly exceed its taxable value over the span of just a few years.

This difference between a property’s actual value and its taxable value disappears when the property changes hands because then county assessors reassess the property to market value. Thus, recent purchasers derive no immediate benefit from the limitation on annual increases in taxable value.

So is Proposition 13 fair, even to recent property owners? Yes. It treats equally those who purchase property of similar value at the same time. Unlike any other tax system in the country, it provides absolute certainty to homeowners and businesses as to what their tax bills will be in all future years. It prevents property owners’ tax liability from being determined by the vagaries of the real estate market — something over which they have no control. Instead, the amount of property tax liability will depend almost exclusively on the voluntary act of purchase.
The California Supreme Court recognized Proposition 13’s inherent fairness shortly after its adoption by the voters in saying “an acquisition value system … may operate on a fairer basis than a current value approach.”

Critics might concede that Proposition 13 provides absolute tax certainty and yet still assert that the system is flawed because owners of similar property may be paying different tax amounts. (We call this the “nosy neighbor” complaint). The response to this is that it should be no concern whatsoever to a new resident what his neighbor’s tax is as long as his or her own tax is reasonable. The absolute cap of 1% imposed by Proposition 13 makes everyone’s tax reasonable.

Critics also complain that owners of similar properties are paying different amounts for the same public services. However, this is no more unfair than the traditional method of taxation under which owners of more valuable property pay more for the same services. This entire argument ignores the nature of taxes. If we were that concerned with proportionality between the amount of tax and the level of service, we would resort to a system of nothing but user fees. Because proportionality between tax liability and services has never been an attribute of property taxes, it is unfair to level this charge against Proposition 13 alone.  Most important of all, Proposition 13 recognizes the human element. Taxes are based on what the home buyer could afford at the time of purchase, not on what someone else is willing to pay for it years later.

Before Proposition 13, homeowners would shudder in fear when their tax bill arrived after a home down the street sold for a record high price. The Proposition 13 tax system makes taxes predictable for all property owners and allows them to budget for their taxes. This tax certainty makes Proposition 13 fair to all, no matter when they bought their homes.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

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