35 Years after Prop. 13 Passage, Critics Decry Its Windfall Business Loophole

Wednesday, May 15, 2013

Democrats have been agitating about the landmark Proposition 13 tax initiative since California voters enshrined it in the pantheon of conservative economic governance in 1978.

Prop. 13 has been impervious to these machinations, and continues to freeze tax assessments at 1% of a property’s value and put a tight clamp on annual increases. But November’s sweeping victory in state elections gave Democrats a two-thirds majority in both houses of the Legislature and emboldened lawmakers to talk about, at least, tweaking some of its more inequitable features.

Assembly Bill 188, introduced in January by Assemblyman Tom Ammiano (D-San Francisco), takes a shot at one of the law’s more questionable ramifications. In addition to slamming the brakes on tax increases for homeowners, Prop. 13 also extended those benefits to commercial properties.

And it did it with a twist that is only now coming under scrutiny.

Under Proposition 13, property is reassessed for taxes when it changes hands. So two owners of properties with the same value could have wildly different tax liabilities if one of them had bought their property after years of appreciating value. That can be vexing for homeowners, but Prop. 13’s history provides a modicum of solace for some.

The proposition was passed when wildly escalating home valuations were resulting in wildly escalating property tax bills that were especially hard on people with fixed incomes. State officials dithered at addressing the issue and conservative anti-tax crusaders embraced Prop. 13 as the answer.

But the law also extended these benefits to owners of commercial property, who have taken advantage of a loophole that allows them to dodge a higher tax assessment even when the property changes hands.

Commercial property owners have known about the loophole for years, but it didn’t get much publicity until the Los Angeles Times wrote about the sweet deal billionaire Michael Dell received in 2006 when he purchased the Fairmont Miramar Hotel in Santa Monica. By including his wife and two investment advisors as partners, the deal avoided having a majority owner, which would have triggered a reassessment under Prop. 13.   

Los Angeles County assessors deemed it a tax dodge and raised the property tax anyway. Last December, a Superior Court judge ruled in Dell’s favor. Dell saves, and the state loses, about $1 million a year on the deal.

Ammiano’s bill would close the loophole by redefining what constitutes a change of ownership, but its prospects in the Legislature are clouded as Democrats seem reluctant to forcefully pursue changes in Prop 13. Dan Walters at the Sacramento Bee said on Monday that the bill looked like it might be stalled in the Assembly Revenue and Taxation Committee.   

California Democrats passed a resolution (pdf) at their convention in April called “Close the Corporate Loophole,” in which they decried the “chronic budget crises” largely precipitated by Prop. 13. The resolution blames the law for forcing “the state to rely on more volatile revenue sources than the property tax, like income taxes and sales taxes paid by working families that move in tandem with economic cycles, causing deficits and requiring cuts to vital services that grow our economy and thereby worsening economic downturns.”

But Lenny Goldberg, who helped write the grammatically challenged resolution, told Reuters that he expects it to take a two-year campaign to win over voters on the issue.

“Elected officials . . . will definitely be paying attention in 2015,” Goldberg said.

–Ken Broder


To Learn More:

Bill to Hike Taxes on Commercial Property Stalls in Assembly (by Dan Walters, Sacramento Bee)

Prop. 13 Loophole Gives Edge to Big Players (by Jason Felch and Jack Dolan, Los Angeles Times)

“Dell Tax Maneuver” Could Galvanize Efforts to Tweak Prop. 13 (by Robin Abcarian, Los Angeles Times)

California Democrats Hesitant after Call to Unwind Prop 13 Tax Curb (by Sharon Bernstein, Reuters)

Prop. 13 Still Undefeated Champion after 34 Years (by Ken Broder, AllGov California)

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