Businesses Upset at Prospect of Prop. 13 Reversal : Taxes: Many fear that the U.S. Supreme Court’s decision to review the landmark voter initiative will ultimately result in higher property taxes for companies and homeowners.
California business groups, worried about the possibility of being walloped with an estimated $6 billion in new property taxes, expressed dismay Monday at the U.S. Supreme Court’s decision to consider a challenge to the state’s Proposition 13 initiative.
Officials at the California Chamber of Commerce and other business development organizations predicted gloomy consequences if the high court eventually throws out all or part of the tax initiative.
For some companies that have considered leaving California, such a ruling “could be the final straw,” said Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County. “You have a lot of raiders (other states) out there, and they’ll use this as leverage to get our firms.”
The suit to be heard by the Supreme Court is a challenge by retailer R. H. Macy & Co. to what is derisively called the “Welcome Stranger” feature of the Proposition 13 tax-revolt initiative approved by California voters in 1978.
Under Proposition 13, taxes were limited to 1% of a property’s value on March 1, 1975, with an annual inflation adjustment of no more than 2% as long as the property remained under the same ownership.
But if ownership of a property changes hands, the assessed value is pegged to the sale price, and taxes can skyrocket. Thus, newcomers to the state face property tax bills that can be far higher than those of companies that had been operating here pre-Proposition 13.
When Macy’s went private in a $3.6-billion management buyout in 1986--a transaction ruled a change of ownership by tax officials--property taxes on its department store in the Sun Valley Mall in Concord jumped. Macy’s now pays roughly 2 1/2 times more than its competitors in the shopping center.
“All Macy’s is asking for is fairness,” said a spokesman for the New York-based retailer, which also owns California’s Bullock’s and I. Magnin stores.
Although some firms involved in the merger and acquisition market will probably side with Macy’s, major business interests in California have supported Proposition 13 for making their property taxes predictable.
“It’s one of the few things we can point to and say, ‘Here’s a reason to come to California and expand,’ ” said Fred Main, vice president for legislative affairs at the California Chamber of Commerce.
“We think Macy’s suit is ill-advised and ill-conceived,” he added. “The only real result would be higher taxes, at least for business, if not all property taxpayers,” if Proposition 13 is overturned.
Main predicted that if the Supreme Court strikes down Proposition 13 provisions governing taxes on commercial property, the California Legislature--under pressure to raise revenue--would respond by passing a bill to allow all such property to be appraised at “fair market” values. The chamber estimates that that would result in annual property tax increases of $5 billion to $6 billion on businesses in the state.
If all of Proposition 13 is struck down, homeowners would be hit too, paying an extra $3 billion to $4 billion, the chamber estimates. Property taxes currently bring in about $14 billion every year in California.
Main said even firms considering a move to California would be hurt if Proposition 13 is eliminated or revised.
“When a company is looking to relocate or expand in California, they can calculate the cost of the property tax in their decision and know that the cost of the tax will remain certain over time. That’s a big advantage,” Main said.
Some other major business-backed groups were more restrained in their comments. David Doerr, a tax consultant for the California Taxpayers Assn., strongly backed Proposition 13 against Macy’s challenge. But he allowed that it is unclear “exactly what would happen” if the initiative is invalidated by the high court.
The California Manufacturers Assn. has taken no formal position on the case, but it has consistently supported Proposition 13 and opposed tax measures that would provide breaks for individuals at the expense of business. The California Retailers Assn., of which Macy’s is a member, has also taken no position.
Macy’s “is doing this unilaterally,” said Les Howe, the association’s vice president for government relations.
Even though the Supreme Court has agreed to hear the case, some lawyers following the issue doubt that the jurists will rule in Macy’s favor.
For one thing, the high court generally is reluctant to interfere with a state’s taxing powers. In addition, under the “equal protection” legal arguments advanced by Macy’s, it would have to persuade the court that the current law has “no rational rhyme or reason or method,” said Dennis B. Arnold, a partner with the Los Angeles law firm Gibson, Dunn & Crutcher.
Arnold characterized Macy’s chances as “a long shot.”
Had there been no change of ownership at Macy’s, the company’s 1987 property tax assessment for its store in Contra Costa County’s Sun Valley Mall would have been $4.4 million, or $21.43 per square foot. Because of the change, the assessment jumped to $11.7 million, or $57.50 per square foot.
Propostion 13: The U.S. Supreme Court will review its impact on a new businesses.
