After all these years since California voters passed Proposition 13, what will it take to have a rational discussion about amending the way commercial property is assessed?
For years, political organizations representing business have deemed Prop. 13 off the table. I believe this avoidance has occurred because a data-driven, factually-based discussion would reveal how unfair, irrational and counter-productive our current system is — even for business.
The good news is that the California Chamber finally decided to admit the obvious in the legislature this year: Yes, there are loopholes in the law. And yes, it may be to business benefit to provide for the most minimal of changes to this dysfunctional “change-of-ownership” law in order to put the issue to rest.
But the issue wont be put to rest, nor should it be.
The time has come for examination of the facts. In many years of discussion, I have never heard anyone argue that the loophole-ridden, change-of-ownership system makes any legal or policy sense. Nor, given the data weve examined, can Prop. 13 be defended on economic, fiscal or tax policy grounds. Perhaps most significant, our commercial property tax system is bad for economic growth and new development.
Since this seems counter-intuitive, lets break it down: First, the failure to reassess land to current market value allows valuable urban property to be held off the market with low-grade uses, leading to inflated land prices, speculation and sprawl. High land costs are one of the least attractive parts of Californias business climate. Investors want to put their money into buildings, equipment and labor, not sink it into inflated property values.
Second, those inflated land values are assessed and taxed at full market price, while competitors may be taxed at far less. Newly-constructed buildings are also assessed at full market value, as is business equipment. The business personal property tax — i.e., the annual property tax on all business equipment — is one of the most inefficient and troublesome taxes affecting business. In short, our commercial property tax system loads taxes onto new investments while failing to tax the windfall benefits to current property owners. That’s bad economics.
Third, one of the biggest complaints about California’s business climate is the convoluted regulatory process. Thats not just because of environmental regulations. Local government has to squeeze every last dollar out of the new investor/developer in the form of fees, exactions, mitigations and easements because the benefits of new development are not captured by our current property tax system. Plus, local citizens see the costs of growth but not the benefits, increasing anti-growth attitudes.
Finally, the current system short-circuits infrastructure finance. Infrastructure improvements are one of the most important things a local government can provide for business. Infrastructure is fundamentally a public investment in the carrying capacity of the land and should be financed by capturing revenue from increasing land values, as redevelopment did.
We have been researching the data, which is all publicly available. Assessed land values on comparable land in Silicon Valley range from less than $2 per square foot to more than $100 per square foot. In Los Angeles, it is not uncommon to find assessed land values in some areas ranging from $40 per square foot to nearly $600 per square foot. Chevron, for example, has owned many of its service stations since 1975, and is often assessed on its land at one-tenth its competitors’ rates. We have mapped assessments throughout the state, and in virtually every neighborhood you can see an inexplicable patchwork of benefits and burdens, irrational inequities that represent losses for our cities, counties and schools.
What kind of change might make sense? It turns out that the largest disparities are in land, not buildings, because buildings are reassessed upon improvement or have otherwise been allowed to depreciate. As a thought experiment, consider a “smart roll.” Bring those very old land values up to market rate, and reassess the land regularly while eliminating the business personal property tax for small businesses. At our 1 percent rate, cities, counties and schools would capture a small share of that revenue, reflecting the improvement in the local economy. That would be a good economic growth policy easily implementable by assessors and would eliminate the use of loopholes that keep assessed land values at absurdly low levels. Such a trade-off would relieve 95 percent of businesses as well as the assessors who have to value business equipment in every office, restaurant, store and small industrial property in the state.
Change after 40 years inevitably requires a discussion of how to make the transition, looking at what difficulties and hardships might occur and what other related policy changes might be appropriate. But first we have to decide to take up the discussion and examine the system in depth. Are there some business folks out there willing to engage the issue? If so, lets begin that now.
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