Firms’ Prop. 13 Savings Are Coveted

SACRAMENTO -- It’s no wonder Disneyland’s owners call their amusement park the “happiest place on Earth.” For much of its land, Disney pays only a nickel per square foot in property taxes.

In Hollywood, Capitol Records pays a dime per square foot in taxes on the land beneath its famous tower, which resembles a stack of records on a hi-fi. In downtown Los Angeles, owners of the Wells Fargo Center pay about $1.77 a square foot.

These longtime landowners are beneficiaries of Proposition 13, the landmark 1978 ballot initiative that slashed California property taxes. Other property holders aren’t quite so lucky, tax records show.

Owners of the SunAmerica Center in Century City pay more than $5 a square foot for their land; the Beverly Wilshire Hotel’s owners pay more than $6 a square foot. In San Francisco, the insurance giant that owns the Transamerica Pyramid pays almost $10 a square foot on that plot.

Such disparities, some lawmakers and tax experts say, show that some businesses do not pay their fair share, depriving government of billions of dollars in much-needed revenue.

Critics say the tax structure shelters older businesses; commercial properties change hands less often than homes, putting a larger burden on newer businesses.

In addition, the system gives publicly traded companies a break that other businesses and homeowners don’t get. The result of all this is that homeowners bear an increasing share of the overall tax burden, they say.

Many legislators are casting covetous eyes toward commercial property as a source of tax revenue as they struggle to fill California’s $38-billion budget hole.

“This is like the rhinoceros in the living room,” said Assemblywoman Loni Hancock (D-Berkeley). “It is one of the major loopholes in our tax structure.”

Business interests point to the high cost of land, electricity and insurance in California, and say relatively low property taxes are one of their few breaks. A jump in property taxes could force them out of the state or into bankruptcy, they say.

“Folks who don’t want to reduce the cost of government are looking everywhere they can to increase costs on business,” said Jack Stewart, president of the California Manufacturers and Technology Assn., one of the state’s main business lobby groups. “We ought to be looking at ways to lower all the taxes, not raise them.”

Proposition 13 won in a landslide 25 years ago when homeowners revolted against property taxes that were spiraling up so fast that people were being forced to sell their residences. Homeowners led the charge, but business benefited, too.

The law makes no distinction between residential property and commercial property. The state generally taxes property at 1% of its assessed value, and the tax can rise no more than 2% a year. Property is reassessed when it is sold, and its value -- and taxes -- generally increase with reappraisal.

Because homes change hands more often than businesses, they are reassessed more frequently. Homeowners’ portion of the $25 billion a year raised by property taxes in California has grown to 38%, from 32% a decade ago, while business’ share has fallen, according to a report issued earlier this month by the state Senate’s Office of Research.

One of the most vocal proponents of higher commercial property taxes is Lenny Goldberg, a lobbyist whose organization, the California Tax Reform Assn., consists of unions that represent government employees. He and an associate, David Kersten, compiled tax records for offices, hotels and other properties across the state.

They found that Walt Disney Co. pays as little as 2 and 3 cents per square foot for some of the parcels that make up the original Disneyland, with the average being about a nickel. Under Proposition 13 rules, Disney’s taxes on that land are based on the assessed value from the late 1970s, when Proposition 13 kicked in.

On more recently purchased land, the conglomerate pays up to 36 cents per square foot. If all Disney’s Anaheim land were assessed at 36 cents, Goldberg and Kersten say, the company would pay $4 million more a year in property taxes.

In San Francisco, the Shorenstein Co., among the state’s largest owners of commercial real estate, pays nearly $16 a square foot on the land under the 52-story Bank of America building on California Street.

Of course, an overall property tax bill includes more than land. Taxes are also paid on buildings and fixtures, which are reassessed -- and can increase in value -- as improvements are made.

Capitol Records, for example, pays roughly $11,000 for its land on Vine Street, but its overall property tax bill is about $147,000 a year. Shorenstein pays nearly $10 million a year on its California Street site. The Disneyland resort has a total annual property tax bill of $28 million, according to Orange County Treasurer-Tax Collector John M. W. Moorlach. Disney, the second-largest property taxpayer in Orange County, puts that figure at $34 million.

Disney representatives said the company is taking no position on the property tax issue. Shorenstein representatives declined to discuss their company’s situation. And Jeanne Meyer, a spokeswoman for Capitol Records’ parent company, EMI, would say only that Capitol’s taxes are “fully within the framework of Proposition 13.”

In its report, the Senate Office of Research focused on “loopholes” that allow business ownership to change without triggering a reassessment. A change of ownership on a home is easy to determine, but it can be murkier for businesses. Does a publicly traded company change hands, for example, when a majority of its stock turns over? And if stock turnover equals ownership change, how can assessors keep track of it?

The report cited a hypothetical deal: A business owner who bought a commercial property in 1983 for $1 million would be paying about $15,000 a year in property taxes in 2002. If the owner sold it for $5 million, the new owner’s tax bill would be $50,000, or 1% of the market value.

But the higher taxes can be avoided. If the original owner doesn’t hold the property directly, but rather through a partnership or limited liability corporation, and the buyers also are a partnership, the new owners would continue to pay $15,000 in annual property taxes.

It is unclear exactly how much more money the state could raise by taxing all businesses at market value. Economist Terri A. Sexton of Cal State Sacramento and Steven N. Sheffrin, dean of the Division of Social Sciences at UC Davis, estimated the figure at $3.3 billion in a study released in February. They based their findings on Los Angeles County land records.

Los Angeles County Assessor Rick Auerbach, an elected official who endorses the current system as fair, disputed their conclusions and conducted his own more detailed study. Using Sexton and Sheffrin’s methodology, but applying it to all commercial property in Los Angeles County, he concluded that businesses statewide would owe $1.9 billion more if their taxes were based on market value.

“We had more information than they had,” Auerbach said.

The Senate Office of Research called both findings “significant,” whichever number is correct. The conclusions “suggest that California’s local governments lose -- and business taxpayers save -- several billion dollars in commercial property tax revenues each year.”

The studies have helped frame the debate in the Capitol, where Goldberg plies his trade.”You cannot do structural [tax] reform without looking at the absurdity of commercial property taxes,” said Goldberg, who advocates an initiative, possibly for the ballot in November 2004, to create a two-tier, or “split roll,” tax system for California.

Businesses would fiercely oppose such an initiative, said California Chamber of Commerce general counsel Fred Main. Depending on how the measure is written, a split roll tax hike could cost business between $1 billion and $5 billion a year, he said.

“We are willing to pay our fair share,” Main said. “We don’t think we should be the target.”

One split roll measure being considered in the Legislature would generate an additional $2.9 billion in annual revenue, according to an analysis by the state Board of Equalization, which oversees the state’s property tax system. The measure is scheduled for a hearing today.

Mark McQueen, a property tax expert at the Ernst & Young accounting firm, said imposing higher tax rates on commercial properties would amount to “repealing Proposition 13.”

“It is not going to encourage growth,” McQueen said. “It is just another form of tax increase. It makes owning property more expensive, and the costs will come out in other ways.”

The concept of taxing residential and commercial property differently is not new. At least 15 states impose lower taxes on homes than on property used for offices, utilities, mining, manufacturing and other kinds of enterprises, according to a recent survey by the National Conference of State Legislatures.

In some states, counties use varying rates to tax commercial property. The reasoning is that people buy houses primarily for shelter, while business property is for producing income.

California homeowners support the property tax system spawned by Proposition 13, polls have shown, and politicians believe that trying to change it is a recipe for defeat. But a survey released this month by the nonpartisan Public Policy Institute of California suggests that voters might embrace higher property taxes for business: 57% favored lifting limits on commercial property tax assessments.

At the organization named after the late Howard Jarvis, one of two leading public proponents of Proposition 13, Jon Coupal recalled a piece of history: Businesses generally opposed the initiative 25 years ago even though they benefited, like all property owners, once it passed.

“We have not ruled out the possibility of supporting a split roll under certain circumstances,” said Coupal, president of the Howard Jarvis Taxpayers Assn., adding that his organization is neutral on the concept of higher commercial property taxes. The key to winning his group’s support would be to cut what homeowners pay -- an idea with some currency among conservatives in the Legislature.

Sen. Tom McClintock (R-Thousand Oaks), who has built his career around opposition to taxes, said he might support higher commercial property taxes if there were a corresponding cut in -- or abolition of -- homeowners’ taxes. Therein lies the catch, as he sees it.

McClintock said businesses simply pass on higher taxes to individuals through higher consumer costs or lower wages for employees. “If you raise commercial property taxes without lowering residential property taxes by at least that amount,” he said, “homeowners end up getting doubly harmed.”

But for the most part, Sacramento’s ruling Democrats, trying to avoid cuts to government services, are not looking for “revenue-neutral” options.

Sen. Martha Escutia (D-Whittier) has introduced a bill to require that commercial property be reassessed every three years (the measure is SBX 3).

And Assemblywoman Hancock has the bill headed for a committee vote today. Her measure, ACA 16, would place before voters a constitutional amendment authorizing a split roll.