It's Time for a New Tax System for Commercial Property

November 18, 2010

by: Conway Collis

With the elections over, the first challenge facing the new governor and Legislature will be to actually govern California. And if you thought the elections were hard fought, get ready for the battle of the budget.

The state's fiscal crisis has forced $40 billion in budget cuts over the past two years and still left a deficit of $25 billion. The problem is not limited to tough economic times. California has suffered from a revenue problem for decades, resulting in a continued deterioration in the quality of life here.

In California, death and taxes are linked by more than just their mutual certainty: A flawed tax system is killing the state.

We see the deadly toll every time we sit on a freeway that is more like a parking lot, when students can't get classes at state colleges and universities, and when another study shows California last in health care funding for the poor and near last in high school per-pupil spending.

The bottom line is that we have a revenue problem. It is time to implement the voters' intent in passing Proposition 13 by re-examining how it applies to commercial properties.

There is a way to keep all the Proposition 13 protections for homeowners and at the same time restore needed funding for crucial services. It's called the "split roll."

Proposition 13 was intended to protect residential taxpayers by limiting the property tax rate and future increases. It was assumed that commercial properties would continue to pay a larger share of state property tax revenues than residential properties. But now, residential properties are footing three-quarters of the entire state property tax bill.

Businesses gain this advantage by using a loophole in the law. Ownership transfer, the basis for reassessment, occurs only if 50 percent or more of a property is purchased by a single owner. Business structures such as limited partnerships, publicly traded corporations and lease-back sales make it easy to avoid the 50 percent test. Meanwhile, homeowners continue to pay their fair share every time they move into a new home.

Under the split roll concept, the value of commercial and industrial properties would be periodically reassessed to current market value to close these loopholes. This would result in a revenue gain of $6 billion to $8 billion annually. Individual homes, apartments and agricultural property would continue to be protected under existing Proposition 13 rules.

Even without a constitutional amendment necessary to separate residential from commercial property under Proposition 13, a revenue gain of $1 billion to $2 billion annually could be realized by modifying the statutory rules governing a change of ownership.

As with any change, there are concerns. Any additional tax may discourage business and development. But there is currently a disincentive for new businesses to locate in California because they are paying more in taxes than the business across the street and subsidizing the services received by their competitor.

Increasing the amount of tax paid on commercial land may lead to increased rents and/or increased prices for consumers. But whether or not costs are passed on is a result of many factors in a competitive environment. Research by UC Davis professor Steven Sheffrin indicates that taxes on land holdings cannot easily be passed along to renters and will be borne by generally high-income landholders.

Establishing a more equitable system of taxation would mean $6 billion to $8 billion more for roads, police, firefighters, schools, parks and other services. By making the tax system fairer for businesses and residences, we can help the ailing state of California to cheat a premature death.

CONWAY COLLIS, former chair of the the State Board of Equalization (1982-1990), is senior counselor and chief government affairs officer for Daughters of Charity Health System and a member of the California State Commission on Children and Families. He wrote this article for this newspaper.