Will Californians Finally Reform Property Tax Loopholes for Corporations?

On June 6, 1978, Proposition 13 passed in California with 65 percent of the vote. Proposition 13, the brainchild of the late anti-tax Republican Howard Jarvis, radically slashed property taxes by rolling them back to 1975 levels, limiting increases to no more than two percent a year and requiring reassessments only when a change in ownership occurs. When a change of ownership does occur, corporations are able to avoid property tax hikes because reassessments only apply if a single entity acquires more than 50 percent of the asset.

One of the most well-known examples involves E&J Gallo’s purchase of the Louis M. Martini Winery in 2002. The second largest winery in the world, with annual sales of approximately $2 billion, E&J Gallo acquired over 1,300 acres of some of the most beautiful vineyards in Sonoma and Napa counties, worth an estimated $75 million. Because Gallo split the purchase among 12 families members – no one person obtained more than 50 percent of the Martini property – it wasn’t reassessed for tax purposes.

Napa County tax assessor John Tuteur told The Bay Citizen that he “realized from the beginning how smart they were. They used [a] loophole in the law to manage to avoid reassessment,” which would have been in the “tens of millions of dollars.”

Other examples are cited in “System Failure,” a new report by the California Tax Reform Association, an organization that advocates for fair taxation. In 2007, the Blackstone Group, a private equity firm, purchased the vast Hilton Hotel chain, which includes Doubletree, Hampton Inn and Embassy Suites. According to the report, many of those hotels are assessed at very low values compared to their competitors and have not been reassessed. “We found that some have been reassessed and others have not been, because many are owned by the franchisees and not the corporation. Separate property holdings, often in “family trusts” or in real estate investment groups, essentially insulate property owners against reassessment, even when the underlying company has been sold.”

Before Proposition 13, cities raised money for infrastructure, schools, social programs and basic services by raising property taxes. Proposition 13 ended that immediately.

Since the passage of Proposition 13, in virtually every county in the state, the share of the property tax borne by residential property has increased, while the share of the property tax borne by nonresidential property has decreased, according to the report. In Contra Costa County, for example, the residential share of the property tax went from 48 percent to 73 percent. In Santa Clara, the residential share went from 50 percent to 64 percent, despite massive industrial and commercial growth. In Los Angeles, it went from 53 percent to 69 percent.

In addition to causing a fiscal and social crisis, Proposition 13 has destroyed California’s public education system, once considered to be the best in the country. Before Proposition 13 passed, more than half of school budgets came from local property taxes. Today, only 20 percent of funding comes from local property taxes. The majority comes from state income, sales and corporate taxes.

As a result, California’s education spending is at its lowest level in 40 years compared to the rest of the US, according to a new report by the California Budget Project, an organization whose mission is to improve public policies affecting the economic and social well-being of low- and middle-income Californians. According to the report, California ranks 44th among the 50 states in K-12 spending per student; it ranks 50th in the nation with respect to the number of students per teacher; and ranks 50th in the nation with respect to the number of students per librarian.

The majority of the state’s largest school districts are reducing the number of days in the academic year, according to a survey by California Watch, an investigative news organization. Superintendent of Public Instruction Jack O’Connell told California Watch’s Louis Freedberg that he fears a 170-day school year and 40 students per class may soon replace the 175-day school year and K-3 class sizes of 30 students. “This is not hyperbole,” he said. “Absent additional funding, this may only be the beginning.”

It’s impossible to raise taxes to deal with this and the plethora of other crises facing the state because Proposition 13 also gives the minority veto power over tax increases. Proposition 13 requires a two-thirds vote in the state legislature and on the ballot for any new taxes.

Joe Mathews, co-author of “California Crackup: How Reform Broke the Golden State and How We Can Fix It,” writes, “the minority party – Republicans for 30 of the 32 years since the passage of Proposition 13 – has used its leverage to block the budget until the majority Democrats meet a list of demands. Many of these demands involve cutting taxes or increasing spending for GOP-favored programs, on top of whatever spending Democrats have insisted on. To pay for it all, the Legislature has leaned on questionable borrowing and accounting gimmicks. The result: huge and persistent budget deficits.”

Proposition 13 hasn’t changed since it passed in 1978. Since 1991, state legislators have made six unsuccessful attempts to reform parts of it, thanks to almost unanimous Republican opposition.

In 1992, the California Tax Reform Association took it to the voters, but it lost 42 to 58 percent. In 2004, the California Teachers Association collected signatures to get another measure on the ballot, but dropped it before the election.

The California Tax Reform Association is hoping a ballot initiative in 2012 will pass because of the unprecedented budget crisis. A new group called “Close the Loophole” wants to close the corporate property tax loophole, which they say could generate $7.5 billion for education and vital services. The proposed change, which they also plan to take to the voters in 2012, would not affect homeowner’s property taxes. The big question is, will voters go for it?

Ironically enough, Proposition 13 passed under then-Democratic Gov. and current gubernatorial hopeful Jerry Brown. Even though he called it a “fraud” and a “rip-off,” once it passed, he enthusiastically implemented it. According to the Los Angeles Times’ George Skeleton, Governor Brown was referred to as “Jerry Jarvis,” and even started calling himself a “born-again tax-cutter.” A Times poll found that most Californians actually believed Brown had supported Proposition 13.

Where does Attorney General Jerry Brown stand on Proposition 13 today? His spokesman Clifford Sterling told Truthout that as of right now, he’s not advocating any changes. “Jerry Brown was the first Governor to make Proposition 13 work and he’s confident he’ll be the next Governor to make Proposition 13 work.” Work for whom? He wouldn’t elaborate.

Meg Whitman, the Republican billionaire running for governor, “pledges to uphold Proposition 13 and stand tough against any efforts to weaken it.”

Whitman has already spent $91 million ($500,000 per day) of her personal fortune on her campaign at a time Gov. Arnold Schwarzenegger’s proposed budget would eliminate most child care for the poor, cut mental health services by 60 percent and slash funding for in-home care services for low-income seniors and people with disabilities.

Republican strategist Bill Whalen predicts Whitman could end up spending $200 million. How many clinics that provide low-income women with cervical exams could just some of that money save? Hundreds are fighting to stay open this summer. What about domestic violence shelters? For the second year in a row, Governor Schwarzenegger’s budget doesn’t include funding for shelters, even as demand has increased.

KTVU recently reported that $100 million could be used to prevent the layoffs of 1,700 California teachers. Or it could buy 40 million school lunches for impoverished children.

Whitman argues that by “protecting the things we do right like Proposition 13, California, will be unstoppable.” Tell that to the poor, disabled and unemployed.

The only gubernatorial candidate who supports reforming Proposition 13 is Green Party candidate Laura Wells. It’s one of her signature issues. She opposes property tax cuts for corporations and the two-thirds vote requirement for tax increases. Because she’s neither a billionaire nor part of the establishment, she’s getting very little media coverage.

For more on Proposition 13, listen to my interview with Phil Ting and Thomas Elias. Phil Ting, San Francisco’s Assessor-Recorder, runs the “Close the Loophole” group. Thomas Elias is a syndicated political columnist and author. His latest column is “Proposition 13 fix finally gets serious look.” Tom is the author of two books, including “The Burzynski Breakthrough: The Most Promising Cancer Treatment and the Government’s Campaign to Squelch It.”