Tuesday, June 1, 2010

Prop 13 - Commercial properties pay less

There have been several interesting articles lately that explain an unintended consequnce of Prop 13. The goal of that law was to protect homeowners from increasing property taxes. Interestingly, the biggest beneficiary has been business.

In 1978, when we passed Prop 13, the thinking was that as properties changed hands, they'd get reassessed. The missing links in the chain are this:

1) Commercial property changes hands a lot less often than residential property. Typically homes change hands every 7-10 years. When was the last time a McDonald's moved down the street?

2) Given the high stakes involved, businesses use a number of clever maneuvers to make it look like the property hasn't chnaged hands. For example, if I want to sell you some commercial property and not have it reassessed, I just create a holding company. Then, I just sell you the entire hodling company. You bought the company, not the property. Believe it or not, that doesn't trigger a reassessment. (CVS did exactly this when they bought Long's Drugs).

Anyway, the net effect is that residential property now pays roughly 62% of property taxes compared to the 41% we used to pay 30 years ago. The burden of supporting schools (which benefit businesses, by providing them with educated employees) has shifted increasingly to homeowners.

The proposed solution is a "split roll"- commercial properties could be reassessed periodically, but residences could not.

Lest you think this is unfair, remember that businesses are actively requesting reassessments in record numbers. The city of San Francisco has lost several tens of millions because BofA and a few other large buidling owners have applied for reassessment to LOWER their tax liability during the economic downturn.

Business Week Article
SF Examiner
NY Times

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