Monday Dec 01 2008
Budget solutions staring state in face
By: Thomas Elias
The panic in Sacramento this fall has been every bit as severe as that on Wall Street. But in a way it’s all unnecessary, because the solution to much of the state’s financial problem has been staring lawmakers in the face for years. Here’s what’s happening: A governor who swore a “no new taxes” pledge now appears ready to OK just about any tax increase, no matter how regressive, to help close a huge budget gap sitting at $11 billion, en route up to $28 billion within two years by some estimates. That same governor, who has spent years cultivating a green image, proposes weakening the state’s most hallowed and vital environmental law, the California Environmental Quality Act, by trying to speed up the environmental impact review process for new state infrastructure projects in order to create some new jobs and tax revenue. Legislators who have long resisted cuts to education appear ready to accept 10 percent increases in state college and university tuition and fees, while cutting public school funding. Public schools, of course, have long been a sacred cow. But not, apparently, as sacred as the regulations adopted in 1979, the year after Proposition 13, regulations that are not actually part of the landmark property tax-cutting initiative, but merely methods for administering its provisions. Change some of those rules and the state could reap billions of dollars in new property taxes without hurting a single homeowner. Here’s all it would take: Revise regulations that now permit real estate to change hands without being reassessed upward if the new owner is a partnership where no one person holds more than a 50 percent ownership stake. Some property involved in corporate mergers and acquisitions is also exempt. These rules were adopted by legislators in 1979 and strongly influenced by the commercial real estate lobby and the state Chamber of Commerce. Under today’s financial conditions, they are plainly obsolete. The last time legislators seriously considered a change in these rules, in early 2006, sponsors of the change estimated a revision could produce between $3 billion and $12 billion per year. Many more properties have changed hands since then without paying the same property tax increases normally charged when homes and condominiums get new owners. But changes in these rules have never gotten far when proposed because of claims they’d be bad for business. And yet, the vast new revenues produced could eventually allow reductions in sales and income taxes, while still tiding the state over these threatening times. In the long run, then, they’d be good for business. Remember, Proposition 13 calls for all real estate to be taxed at 1 percent of its 1975 value, with a maximum 2 percent yearly increase in the tax — unless it changes hands. When ownership changes, the property tax resets to 1 percent of the latest purchase price. But that rule has not applied to the many thousands of office buildings, shopping centers of all sizes, apartment complexes and industrial buildings that have been bought and sold — multiple times in some cases — since 1975, as long as no one individual or corporation held more than a 50 percent interest in them. That exempts many limited partnerships, real estate investment trusts and other entities which own myriad properties around California. And no, the real estate bust of the last 16 months has not brought values down anywhere near the levels at which these properties are now taxed. If this simple change can’t fill the entire budget gap, there’s always the possibility of a “split roll,” where commercial and industrial properties are taxed at a different rate than residences. This would be a change to the actual Proposition 13, but it would not affect residences, either. Rather, it would see higher taxes coming from large, money-making properties than from homes, which are, after all, primarily intended for shelter, even if they can sometimes be profitable. All that’s required is open eyes, and the ability to stand up to the business lobbies that have fought so hard to keep Proposition 13 what it is today — a form of corporate and investor welfare subsidized by every individual property owner and renter in California. Thomas Elias can be reached at email@example.com.