Commercial property tax reform by Ca Tax Reform Asso.

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06/26/22 1 Confronting the Obvious: Reforming California’s Commercial Property Tax Lenny Goldberg California Tax Reform Assn. Conference on Local Government Finance, October 29, 2004

description

This study sought to examine the inequalities in property taxes paid by commercial property ownersacross the state in a post-Proposition 13 world. The results show that huge disparities exist across the state among substantially similar properties and these disparities are likely to increase in the years ahead if Proposition 13, as it applies to commercial properties, remainsunchanged. by Ca Tax Reform Asso. -- thanks http://caltaxreform.org/?p=9

Transcript of Commercial property tax reform by Ca Tax Reform Asso.

Page 1: Commercial property tax reform by Ca Tax Reform Asso.

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

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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”.

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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

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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

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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.

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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

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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

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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

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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)

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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.

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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)

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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

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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)

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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?)

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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

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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

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Why hasn’t this happened?

“Can’t change Prop. 13” “Can’t take on business” “Business climate”

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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