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Tax study shows higher burden on residential property

Across California, businesses are paying a far smaller share of property tax than homeowners since Proposition 13 was approved because of legal loopholes that allow companies to avoid a reassessment upon a change of ownership, a new study says.

The disparity exists in virtually all of California’s 58 counties, according to the 122-page report by the California Tax Reform Association and the Alliance of Californians for Community Empowerment.  The complete report can be seen here.

In some counties, residential property is shouldering two-thirds of the property tax load, sharply higher than when tax-cutting Proposition 13 was approved more than 30 years ago.

“The data is consistent throughout the state: In virtually every county in the state, the share of the property tax borne by residential property has increased since the passage of Proposition 13 in 1978, while the share of the property tax borne by non-residential property has increased,” reported the study, written by CTRA’s Lenny Goldberg and David Kersten of Kersten Communications.

“The system by which commercial property is assessed is irrational, loophole-ridden, complex, increases assessments on some properties while allowing others to escape reassessment, and generally is in capable of being defended as rational public policy,” the report said. It noted that reassessments are triggered by changes in ownership that are relatively straightforward in residential properties, but far more complex in changes involving commercial properties.

A leading anti-tax advocate was critical of the report, saying the number of business properties has declined while residential properties have increased, skewing the numbers. The disparities, if any, are actually much smaller, he added.

“This was the slam against Proposition 13 when it was on the ballot, that over time residential would be paying a higher proportion than commercial,” said Jon Coupal of the Howard Jarvis Taxpayers Association. “But for about 25 years, this just proved not to be the case. Recently there has been slightly higher proportion paid by residential, but that’s because of the nature of property in California. There is a higher proportion of residential properties.”

But the study said data collected from county assessors and the state Board of Equalization showed a steady increase in the residential burden since Proposition 13’s approval.

That increase occurred despite business and employment expansion. The burden “still shifted away from nonresidential property, as it did in San Francisco (56 percent to 67 percent, despite limited population growth and substantial employment growth),” the study noted.

In Santa Clara County, for example, the division of the burden between residential and non-residential property was about even for the 1977-78 fiscal year, according to the report. But during the past three decades the split deepened. In the 2009-10 fiscal year, non-residential property owners carried about 35 percent of the burden, and 65 percent was handled by residential property.

In Los Angeles County, which has a nearly a fourth of the assessed value of all the state’s property, residential property carries about 70 percent of the tax burden.

Proposition 13, spearheaded by the late anti-tax activists Howard Jarvis and Paul Gann, was approved by California voters in 1978. Among other things, it cut property taxes by an estimated 57 percent, rolled back assessed values to 1975 levels and limited future reassessments to 2 percent annually, absent a change of ownership. Under Proposition 13, property is taxed at a statewide base rate of 1 percent, applied equally to residential and business property.

The measure, although publicly touted as offering tax relief and equity to the homeowner, actually has proven to be a boon for businesses that have been able to exploit loopholes in the measure, according to the report.

There are “many properties, particularly the banks and other commercial properties, which should have been assessed but have not been, and (we) found that some counties have assessed these properties while others have not,” Goldberg and Kersten wrote.

The report recommended those counties “should right now be reassessing many properties, in order to avoid basic cuts in services and programs. There appears to be many millions of dollars in tax revenue which is going uncollected.”

The study also proposed that “the law should be changed at least to make sure that obvious changes of ownership, such as private equity buyouts and corporate takeovers, trigger a reassessment. AB 2942 (by Assemblyman Tom Ammiano, D-San Francisco) would accomplish this modest change.”


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