Taxing commercial property was the focus of the Commission on the 21st Century Economy in its fourth meeting, this one held at UC Davis yesterday. Commercial property and residential property are taxed the same under the provisions of Proposition 13. However, some advocates want to see the property tax roll “split” into at least two categories with residential and commercial property treated differently.
What a split roll would mean to the California economy and how business and commercial property have faired since the passage of Proposition 13 in 1978 depended how one reads the economic landscape. CSU Professor Terri Sexton said that residential property has taken on a greater share of the property tax burden in the last thirty years, although she admitted that could simply be the product of more residential home building or homes turning over during that time.
On the other hand, former Legislative Analyst William Hamm said there was no evidence of a property tax shift to homeowners. He argued that the ratio of assessed value to market value was higher for business property meaning that business properties are assessed closer to the full market value than residential properties.
Hamm said that he was taking no position on the split roll concept but had studied the potential economic impact on what might happen if a split roll was adopted in California. Using a couple of different economic models Hamm projected that bringing business property to full market value could result in the loss of 100,000 to 150,000 jobs.
He emphasized that small business could take a big hit because of property tax increases because the small business property leases often require the business to pay the increased property tax. Hamm said small businesses live on economic margins and are less prepared to take the shock of a property tax increase.
Steven Frates of the Rose Institute of State and Local Government completed a study that concluded many of the small businesses that would be most affected by a property tax increase were minority owned. (Full disclosure: I was involved in establishing both the Hamm and Frates studies.)
Lenny Goldberg of the California Tax Reform Association, which has campaigned for a split roll for many years, argued for periodic reassessment of property claiming that a split roll could produce 6-8 billion dollars for government coffers.
Commissioner Michael Boskin suggested the revenue under a split roll would not be as much as anticipated because a change in the tax law would immediately create land prices to fall.
However, implementing a split roll would not be easy. Santa Clara County Assessor Lawrence Stone told the commission assessors do not have the staff with necessary skill sets to handle the work load if the law is changed. Stone also dismissed the idea that many business change of ownerships are missed by the assessors.
However, Commissioner Richard Pomp said he has heard from attorneys who employ an abundance of tax avoidance strategies for their business clients.
Commissioner Fred Keeley argued that the way to thwart tax avoidance was to enforce criminal penalties against commercial property owners who try to escape reassessment when it is required by law.
Unfortunately, the law is not always clear on what constitutes a change in ownership and the innocent property owner could be subject to criminal penalties. Keely said clear definitions could be created by statute.
The residential property tax under Proposition 13 didn’t escape notice at the hearing. Commissioner Chris Edley suggested the commission look at increased homeowner exemptions or other methods to make the residential property tax more progressive.
The tax commission will be back at work in June to begin the process of formatting proposals to bring to the governor and legislature.