04/12/23 1
Confronting the Obvious:Reforming California’s Commercial Property Tax Lenny Goldberg
California Tax Reform Assn. Conference on Local Government Finance,
October 29, 2004
04/12/23 2
San Diego Union-Tribune, April 23, 2003: “Even Proposition 13 must be on the table”:
“While Democrats and Republicans cower before this iconic restriction on property taxes, they should nevertheless be amenable to an annual reassessment of business and commercial properties. There can be no sacred cows in confronting California’s catastrophic budget”.
04/12/23 3
Current fiscal dilemmas Backfill local government for loss of vehicle
license fees (“car tax”): $4 billion in 2006 On-going state structural deficit (education
and more): $ 6-8 billion Huge infrastructure deficit, no financing
mechanisms: $10’s of billions Need for local government own-source
revenues Skewed land use incentives for retail
04/12/23 4
Change of Ownership for Commercial Property:
1. Legally flawed: more loophole than tax
2. Economically irrational:
* taxes investment, not windfalls
* fails to capture tax increments
3. Distorted land use: speculation and sprawl
04/12/23 5
Legally flawed1.Complexity of holdings: publicly-traded, LLC’s,
REIT’s, Partnerships, family trusts make re-assessments difficult to track.
2. Publicly-traded companies continually change ownership, but reassessments are not recorded.
3. 100% of the property can sell in one transaction, but no one owner takes 50+ percent—for example, 3 owners each take 33% shares (Martini to Gallo). (Sec 64, et seq)
4. 100% of the company, whether publicly-traded or private, can change ownership over time but no reassessment is recorded because ownership is dispersed.
5. Two partners—even a husband and wife—can buy 50% each, with no reassessment.
04/12/23 6
Legal morass, cont.6. Business can be sold, but a long-term land-lease can be
held by the owner, with no reassessment.
7. Change of ownership can be effectuated when property goes down in value, thereby preventing reassessment when property values recover. Sec 62 (a)(2)
8. Limited information requirements for reporting changes in ownership—untrackable by assessor.
9. Property Owned by Real Estate Investment Trusts never changes ownership although the shareholders/partners in REIT’s change continually.
10. New loopholes can be discovered as needed
04/12/23 7
Irrational economics
Taxes new investment, fails to capture windfall land rents—the opposite of good economics
Anti-competitive: competitors pay widely varying property tax per square foot (see data)
Does not capture tax increments from rising land values, short-circuits virtuous cycle of public investment
Over-burdens new development with fees --only leverage point for local government
04/12/23 8
Irrational economics, cont. Unlike housing, investment property values are
function of stream of income—thus no rationale for “lock-in” effect
Double taxation of manufacturing equipment, vs.failure to tax land value increases
Job-generating office, commercial, industrial do not pay for themselves—again, land value increments not captured
04/12/23 9
Distorted land use
Dysfunctional land market rewards speculation and raises land values
Maintains low value in-fill uses: no tax on underutilized land (Oakland example)
No penalty for holding land off market on urban fringe (sprawl and leapfrog development).
Unable for fund infrastructure, amenities out of tax increments from new development (no-growth politics)
04/12/23 10
Land use implications, cont “Fiscalization of land use”: over-reliance on
sales tax generating uses Big-box retailing—the most attractive to
local government--is worst land use Excessively high land costs—land value
inversely related to tax burden.
04/12/23 11
The Data
1. Shift in burden to homeowners 2. Assessment disparities in land are vast;
structures are less disparate 3. No rational relationship between assessments
and land rents 4. Competitors paying widely varying taxes/sq. ft
04/12/23 12
Shift to residential: Data
Statewide Assessed Value of Homeowners' Exempt Properties as a % of All Properties
30.0
32.0
34.0
36.0
38.0
40.0
42.0
Year
Per
cen
tag
e
Assessed Value ofHomeowners' ExemptProperties as a % ofAll Properties
Source: Board of Equalization
04/12/23 13
LA: burden shiftHistorical Trend of Property Tax Burden in Los
Angeles County
40%
48% 47% 49%52% 54% 55%
14% 15% 13% 14% 13% 12% 12%
47%
37%40% 38%
35% 34% 33%
0%
10%
20%
30%
40%
50%
60%
1975 1980 1985 1990 1995 2000 2001
Per
cen
tag
e o
f th
e R
oll Single-Family
Residential
ResidentialIncome
Commercial-Industrial
Source: Los Angeles County Assessor's Office
04/12/23 14
Santa Clara: burden shift
Historical Trend in Property Tax Burden for Santa Clara County
52%56%
60% 60%
48%44%
40% 40%37.5%
49.8%
62.5%
50.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
1977-78 1985-86 1990-91 1995-96 2000-01 2003-04
Per
cent
age
of th
e R
oll
Residential (SingleFamily and Multi-family)
All other realproperty(Commercial andIndustrial)
Source: Santa Clara County Assessor's Office
04/12/23 15
San Francisco: burden shift
Historical Trend of Property Tax Burden in San Francisco County
60%64%
57% 58.5%64% 65%
40%36%
43% 41.5%36% 35%
0%
10%
20%
30%
40%
50%
60%
70%
1975 1980 1985 1990 1995 2000
Per
cen
tag
e o
f th
e R
oll
Residential
All other Real Property(Commercial andIndustrial)
Source: San Francisco County Assessor's Office
04/12/23 16
Disparities in commercial a.v: SF HotelsDisparities in Property Taxes Paid for Select San Francisco Hotels
$0.80$1.37
$2.75
$5.98
$10.53
$16.55
$1.62 $1.78$1.17
$3.27
$1.76 $1.66
$150
$245$270
$325
$180$200
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
Est
imat
ed T
ax P
aid
Per
Sq.
Ft.
$0
$50
$100
$150
$200
$250
$300
$350
Hot
el R
oom
Rat
es
2002-03 EstimatedTax Paid Per Sq.Ft. of Land2002-03 EstimatedTax Paid Per Sq.Ft. of StructureHotel Room Rates(per weeknight for 1person)
04/12/23 17
SF: downtown office buildingsDisparities in Property Taxes Paid for Select San Francisco
Office Buildings
$1.48
$3.19
$9.72$11.16
$15.90
$2.92 $3.14$1.71
$3.60
$0.15$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
Est
imat
ed T
ax P
aid
Per
Sq
. Ft. 2002-03
Estimated TaxPer Sq. Ft. ofLand
2002-03Estimated TaxPer Sq. Ft. ofStructure
04/12/23 18
Santa Clara: High tech
Disparities in Property Taxes Paid for Select Santa Clara County Properties
$0.004 $0.02
$0.17
$0.35
$0.67
$0.83
$0.58
$1.00$0.96
$0.75
$0.000
$0.200
$0.400
$0.600
$0.800
$1.000
$1.200
IBM (555 Bailey Ave.)
Philips Electronics (811 E Arques Ave.)
Mitsubishi Electronics (1050 E Arques Ave.)
Microsoft (1065 La Avendia Ave.)
Applied Signal Tech. (400 W California Ave.)
Est
imat
ed T
ax P
aid
Per
Sq
. F
t. 2003-04EstimatedTax Paid PerSq. Ft. ofLand
2003-04EstimatedTax Paid PerSq. Ft. ofStructure
04/12/23 19
Downtown LA office buildingsDisparities in Property Taxes Paid for Select Los
Angeles Office Buildings
$0.83
$1.77
$5.20
$7.02$7.37
$1.05
$1.75
$1.02 $1.06$1.46
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Union Plaza Bank (445 S Figueroa St.)
Wells Fargo Center (333 S Grand Ave.)
KPMG Tower (355 S Grand Ave.)
777 Tower (777 S Figueroa St.)
Gas Company Tower (555 W 5th St.)
Es
tim
ate
d T
ax
Pa
id P
er
Sq
. Ft.
2002-03Estimated TaxPer Sq. Ft. ofLand
2002-03Estimated TaxPer Sq. Ft. ofStructure
04/12/23 20
Sacramento: across the street
Disparties in Property Taxes Paid for Buildings Located on Capitol Mall in Downtown Sacramento
$1.47$1.70
$0.27 $0.31
$1.61
$2.56
$0.59 $0.68
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
300 CapitolMall
400 CapitolMall
455 CapitolMall
555 CapitolMall
Est
imat
ed T
ax P
aid
Per
Sq
. Ft.
2002-03Estimated TaxPaid Per Sq. Ft.of Land
2002-03Estimated TaxPaid Per Sq. Ft.of Structure
04/12/23 21
West L.A. hotelsDisparities in Property Taxes Paid for Select West Los Angeles Hotels
$0.22$0.79
$1.35$1.90
$6.15
$7.46
$1.31
$3.36
$0.90
$2.42$1.94
$3.35$169
$345
$225
$169
$310
$190
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Est
imat
ed T
ax P
aid
Per
Sq
. Ft.
$0
$50
$100
$150
$200
$250
$300
$350
$400
Ho
tel R
oo
m R
ates
2002-03 EstimatedTax Paid Per Sq. Ft.of Land2002-03 EstimatedTax Paid Per Sq. Ft.of StructureHotel Room Rates(per weeknight for 1person)
04/12/23 22
San Diego Bio-tech firmsDisparities in Property Taxes Paid for Select San Diego
Pharmaceutical Companies
$0.01 $0.03
$0.16$0.21
$0.33 $0.35
$0.00$0.05
$0.10$0.15
$0.20$0.25
$0.30$0.35
$0.40
Dubin Medical (5080 Santa Fe St.)
Arena Pharmaceuticals (6166 Nancy Ridge Dr.)
Pfizer La Jolla (10777 Science Center Dr.)
Alliance Pharmaceutical (6175 Lusk Blvd.)
IDEC Pharmaceutical (3030 Callan Rd.)
Amylin Pharmaceuticals (9373 Towne Centre Dr.)
20
03
-04
Es
tim
ate
d T
ax
Pa
id P
er
Sq
. Ft.
La
nd
04/12/23 23
San Diego hotelsDisparities in Property Taxes Paid for Select San Diego Hotels
$0.33$0.48 $0.60
$0.96
$2.00
$3.14
$229
$280
$160
$229
$109
$229
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Est
imat
ed T
ax P
aid
Per
Sq.
Ft.
$0
$50
$100
$150
$200
$250
$300
Hot
el R
oom
Rat
es
2003-04Estimated TaxPer Sq. Ft. ofLand
Hotel RoomRates (perweeknight for1 person)
04/12/23 24
Solution
Reassess non-residential property to market value—constitutional amendment in 2006 or 2008 (ACA 16, Hancock)
$3.3 billion in current revenues, $4 billion by 2006
(Amend change of ownership statute-SB 17, Escutia)
(Why not apartments?)
04/12/23 25
Business friendly impacts? Burden on business as % of land value moves from 49th to
43rd in nation Lower land costs—land values inversely related to tax
burden on land, and increased by market distortions Lower development costs, better development climate—
better land market, potential relief in fees because of on-going tax benefits
Infrastructure investment—local government incentive to improve property values, reinvest
Level playing field w.r.t. taxes among competitors Costs borne by those with untaxed windfall land values,
particularly hotels, retail, offices—not manufacturing Potential trade-offs on other taxes, other burdens—major,
but so far ignored opportunity by business
04/12/23 26
Moving ahead
Local research and education on local, regional impacts (numbers, examples)
Engage local governments—they must advocate for real solutions
Engage organizations (education, public sector, community organizations)
Engage business community, particularly: Developers High tech and manufacturing
Engage environmentalists re: sprawl
04/12/23 27
Why hasn’t this happened?
“Can’t change Prop. 13” “Can’t take on business” “Business climate”
04/12/23 28
Is a consensus possible? Bay Area Council/business interest in
infrastructure finance Trade-off for double-taxation of
manufacturing equipment Pressing need for real dollars in light of Prop
1A (i.e. billions), structural deficit Land use and planning benefits Multiple benefits in a single stroke:
economic efficiency, billions in revenue, better land use