Watch out, biz, if taxes lose in June
Targeting commercial properties could be next
Business leaders on the fence on whether to push Republicans to join Democrats in putting tax extensions on the June ballot should consider what might happen if the measures fail. Democratic Sen. Joe Simitian is telling them they’ll probably face voter-led tax initiatives in November they’ll find far less palatable – an oil severance tax or even a challenge to Proposition 13 that raises property taxes on commercial property; it’s known as a split roll tax.
Simitian offered that pragmatic advice during an education forum for his constituents earlier this week in Palo Alto and then in a video interview with me. “I think there is common cause. Folks who are anxious about seeing targeted tax measures should be inclined to support this sort of broader-based approach that has all of us doing our share to make sure we fund things, like public education, that we all care about,” he said. (Update: Gov. Jerry Brown is reaching out to key business leaders; they may want regulatory reform in exchange.)
Brown is proposing to solve a $25.5 billion state budget shortfall by cutting state programs by $12.5 billion and extending taxes and by raising revenue for the other half. The biggest piece would be to extend three temporary taxes for five years, on sales, income, and vehicle licenses, to raise $8.8 billion each year. The governor needs five legislators to agree to put it on the ballot, but so far none has.
Though California is the nation’s third-largest oil producer, it’s the only significant oil-producing state not to tax oil as it comes out of the ground. In 2006, in a different economy, voters said no. An oil tax could raise about $1 billion in California.
A split roll tax would recognize that many owners of commercial property have sold their properties without paying any taxes. That’s a reason why in some counties, residential properties have borne a significantly higher share of taxes than at the time of Proposition 13.
Simitian said the consequences on K-12 schools if the ballot measure fails would be calamitous. The Brown administration is saying only that schools would lose at least $2 billion, what it would take to fund the minimum for Prop 98 during good years. But Simitian predicts the final cuts would be more like $5 billion. That’s based on the assumption that Brown would cut programs proportionally; K-12 consumes about 40 percent of the state budget.
A cut of $5 billion would be about $800 per student, and come after three years of budget cuts.
Simitian will be back with an alternative he has failed to get through the Legislature several times over the past decade: a constitutional amendment making it easier for school districts to pass a parcel tax, by lowering the threshold needed to pass from a two-thirds majority to 55 percent. Here again he has not found enough Republican support to put the question before voters.
“If we are not able or willing to fund public education on an adequate level ona statewide basis,” he said, “the least we can do is give local school districts a tool they can do to get it done themselves.”
Simitian said he remained “cautiously optimistic” that Brown will find enough votes to put the tax extension on the ballot.
Some years ago, I suggested to the Legislature that they consider revising the statutes that implement Prop 13 to define a commercial property as having “changed ownership” when more than half of of the stock of a company has been traded, in cumulative terms, over time. This suggestion, along with my suggestion to raid redevelopment agencies, were never implemented (though the redevelopment part was tweaked a bit)–and then Senate President Pro Tem Roberti got beat-up pretty bad by the silk-stockinged redevelopment and chamber lobbyists for even floating the ideas.
This amendment to the definition of “change in ownership” would trigger much more frequent assessment of commercial properties and substantially increase property tax receipts. Doing so is also, arguably, more equitable vis-a-vis how residential properties are re-assessed–particularly given that most residential property “owners” don’t really “own” their homes until they’ve paid-off their mortgages. This approach is a bit different from a split roll wherein, as I understand it, commercial properties are taxed at a higher rate relative to their assessed value.
According to informal opinions by the legislature’s legal counsel when I floated the idea years ago, the California Constitution doesn’t clearly define the term “change in ownership,” except to exempt certain types of within-family transfers. As such, they informally opined that the change could be implemented without an amendment to the state’s constitution, but would likely require a two-thirds vote of the legislature.
I’d be curious to hear (1) which of the above approaches are under discussion (split roll versus amending the definition of “change of ownership” that triggers re-assessment), (2) what do legal gurus claim to know regarding whether constitutional versus statutory changes are needed to implement either approach, and (3) do any of the approaches have any political “legs” than when I suggested them as a wet-behind-the-ears legislative staffer?
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I am all for the proposed oil and property tax changes and was as surprised as anyone when they didn’t go anywhere but the anti-tax argument will focus on perceived inequities in how tax money is spent. It is all one puzzle and people don’t look at single pieces individually. The scandal about Bell salaries, the upcoming shortfalls in the teacher pensions, cops getting $200K in overtime – it all produces an impression that those spending the tax money at every level don’t care about voters and treat tax money as something to shower on their friends and union lobbies.
Good luck with the tax changes. I will vote for them but I doubt you will get enough others to do so.
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@ Eric, the redefinition of change of ownership is an interesting one, but the tax and ownership structures of most large property-owning companies is far more complicated than that. And some mature land-owning companies, like regulated utilities, are long past the M&A days of pre-WWII California. (PG&E as an example is the merged child of over 500 companies but probably unlikely to change hands anytime soon.) In recent years, Bank of America/Nations Bank was technically a reverse merger (the acquiring company took on the name, same as Norwest buying Wells Fargo), but I’ll bet that the part of the company that OWNS the buildings is a few layers down from the holding company whose stock is traded.
I’m not an attorney, but the whole point of the different entities is that they are detached from the “stock company” on top. Such a rule could only apply to the holding company that is traded, not the subsidiaries that own the property anyway. Furthermore as companies merged or acquire others, all the actual per share ownership would be a mess to track. And would that turnover rule of half the stock traded in cumulative terms count the daily volume of shares, or would companies have to monitor the share register and ownership of each and every share? Apple Inc has 921.28 MILLION shares outstanding. AAPL share volume averages over 16 million shares a day; so in about 28 trading days, “half” of the shares have traded hands. Would that mean the assessor’s office has to go re-assess their California property every 6 weeks?
When I worked in Corporate Treasury at Agilent Technologies, we spent millions of dollars a day on a stock buyback program. How would those fit in?
A simple “split roll” property tax scheme would nail rental residential property owners as well, both big time property trusts, who will pass on the costs to lessees and renters, and small timers like me. We bought two houses on one lot in 2009. We live in the back house and rent out the front house. Last year I had to have someone prepare my income taxes for the first time: we had to allocate mortgage interest deductions based on square footage to our personal part of the return and then treat the rental house separately. And do depreciation on the appliances and improvements done to the rental. Some were on 7 years, some on 26 and a half years (if I recall.) Anyway, previously I did my own returns on Turbo Tax for under $100. Last year it cost me $550 to have a professional do it. Now imagine if my property tax bill worked like that too? I should note that the two houses are on the same parcel so I just get one bill.
The point is, I see lots of clever little tricks and nudges to existing policies, but I would be thrilled to see the Governor propose a clean overhaul in the entire tax system in this state, from property to sales to income taxes.
Hey, I would even be willing to pay more if it was simple and reduced the costs of compliance. How much more corporate money would be available to schools if companies and individuals did not have to spend so much on accounting? Maybe the excess accountants could get certificated and reborn as math teachers.
Lastly, Sen Simitian’s repeated attempt to reduce parcel tax thresholds to 55% is a nice bow to the principles of local control, but in practice that will mean school districts like his in Palo Alto will continue to bring in millions. Poor and conservative districts in the Central Valley will (continue to) starve their schools. Hardly equitable for poor migrant children living in the fields, as my own father was 60 years ago in Delano, Santa Maria, Napa, etc. He means well but it doesn’t always work out so great in practice.
And our sham meritocracy marches on! Happy Friday!
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Eric: You’re right. The ownership issue is different from the split-roll (higher rate) question. The get conflated because legal tricks dealing with changes of ownership (not talking publicly traded companies, as John Leyba points out) have contributed to the disproportionate burden on owners of residential properties, which, I believe, change hands an average of every seven years in California.
John: I imagine your computer would crash if you ever moved from the cottage to the front house and had to refigure the taxes. Good thing you are happy where you are.
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Extending the tax rates another five years is an unreasonable request in light of the fact taxpayers only approved these rates for three years. So, lets have a special election in June 2011 and extend the rates for one year while taxpayers have an opportunity to see if the legislature and the Governor can deliver a workable solution. If they give California’s a reasonable budget that combines cuts with the tax extensions and begins to get us out of this annual rut put the tax extensions on the ballot in June of 2012 for another two years. If the legislature continues to be fiscally responsible and not resort to gimmicks and borrowing to balance the budget put the tax extensions on the ballot in 2014 for an additional two years.
I’m willing to continue paying the higher rates if I see some evidence that the legislature and the Governor can learn to live within our means. How about separating the revenue projection authority from the legislature and the Department of Finance. No more phony revenue forecasts to “balance” the budget. Have the State Controller and the State Treasurer forecast revenues for a two year period. Limit the Governor and legislature to a budget that doesn’t exceed their projections. Quarterly updates can allow for adjustments and if there is a surplus, a portion can go to a rainy day fund and a portion to one time capital expenditures. As the economy grows and recovers there will be higher revenues. Then and only then should the legislature and Governor increase funding to ongoing programs.
While we’re having a special election lets get rid of the lifetime ban and modify term limits. Imagine how our schools would be if the most experienced teachers were banned from teaching for life after several years of learning their craft, or think about going to your doctor who you trust and has taken care of you for many years and he says, I’m no longer a doctor I’ve been banned for life from practicing. Most legislators are hard working, responsible people who want to do their best and represent their constituents. Just when they have gotten the experience and knowledge to do the job we fire them. How can that make any sense.
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