NEWS ANALYSIS : Business Does an About-Face on Property Tax
When the Proposition 13 tax revolt initiative went on the state ballot in 1978, some of California’s leading business groups were aghast.
The influential California Manufacturers Assn. acknowledged that industry would win property tax relief, but warned that the initiative “would be detrimental to the state’s economy, particularly in loss of jobs and decreased services.”
How things have changed.
Today, most of the state’s big business interests, other than a number of real estate developers, stand squarely behind the law. Even retailer R.H. Macy & Co.--which isolated itself from the rest of the business community by challenging Proposition 13 for nearly two years through the courts--announced Friday that it would withdraw its case from consideration by the U.S. Supreme Court.
Why did California business do an about-face over the years?
By and large, big businesses--along with homeowners--have enjoyed a tax break bonanza from the initiative without suffering the once-feared backlash.
“They’re in love with it,” said Jonathan C. Lewis, chief consultant to the California Senate Commission on Property Tax Equity and Revenue. “Proposition 13 was an absolute tax cut.”
Even many of the firms that could have been penalized by Proposition 13 have learned to live with the tax law, sometimes by exploiting its loopholes or by pressing county assessors for lower property appraisals.
Back in 1978, corporate lobbyists were worried that state officials would try to recapture their lost property tax revenue by singling out business for new taxes. After defeating several such challenges--aside from increased local fees on real estate developments and business licenses--many firms now do not want anyone tinkering with the system.
“They saw the light,” said Fred Main, vice president for legislative affairs at the California Chamber of Commerce.
Industries that once feared they could be victims of tax reform, Main said, have recognized that “it hasn’t worked out that way. In fact, the business climate has improved.”
In terms of taxes, businesses appear to have fared far better than consumers in the years since Proposition 13’s adoption.
Business’s share of property taxes paid in California has actually increased slightly--from 32.8%, as the initiative was taking effect, to 33.6% in the current state fiscal year.
But property taxes now account for a much smaller part of the revenue received each year by California’s state and local governments.
In the decade after passage of Proposition 13, business and personal property taxes climbed 43%, to $14.7 billion, while personal income taxes soared 262%, to $16.9 billion, making them the top source of tax revenue in the state, according to figures supplied by the state controller’s office.
Why did Macy’s want to rock the boat by taking its case to the high court?
It claimed to have been hurt significantly by the so-called “welcome stranger” feature of the law, a provision that generally has imposed higher taxes on new property owners than on longtime owners.
Proposition 13 cut property owners’ taxes by reducing all property assessments to 1975 levels, allowing a small yearly increase for inflation and then setting a top annual tax rate of 1% of the official value. When a property is sold, the sale price becomes the parcel’s new assessed value. Until real estate prices were hurt by the current recession, a change of ownership almost always translated into a sizable tax increase on property.
When Macy’s went private in a $3.6-billion leveraged buyout in 1986, most of its property in California--including its 61 Macy’s, Bullock’s and I. Magnin stores in the state--were reappraised. In turn, their property taxes soared.
Macy’s claimed that, on a competitive basis, its hardest hit store is in Concord’s Sun Valley Mall. That store now pays taxes roughly 2 1/2 times more than the J.C. Penney and Sears, Roebuck & Co. locations in the shopping center.
Other firms have found themselves at similar competitive disadvantages under Proposition 13. However, most “still figure they’re paying a heck of a lot less in taxes than they would have pre-Proposition 13,” Lewis said. “So, while it may not be fair, they’re more interested in paying as little in taxes as they can.”
Macy’s, just four days after the Supreme Court agreed to hear its case, on Friday still maintained that it is being treated unfairly. The retailer said it withdrew its suit out of concern for the impact it could have on homeowners. Despite the company’s denials, political observers speculated that a threatened consumer boycott and pressure from business leaders were responsible for the flip-flop.
In any case, Macy’s is right in observing that Proposition 13 has created severe anomalies in other business property appraisals, just as it has with appraisals on single-family homes.
Vast chunks of southern Orange County are owned by a handful of landholders, and how their land and buildings are taxed varies greatly based on whether they bought their holdings before or after passage of the initiative.
Consider what happened in 1983, when Newport Beach billionaire Donald L. Bren bought control of the Irvine Co., which owns one-sixth of the land in the county.
The Orange County assessor proceeded to revalue the company’s 68,000 acres and its raft of office buildings, factories, shopping centers and apartments at $3.6 billion, up from the old appraisal of $1.1 billion. The company fought the assessment through the courts and settled at a valuation of $2.95 billion in 1985.
Since then, inflation allowances have allowed the appraisal to rise to nearly $3.5 billion, although about one-seventh of that is property leased to others who pay their share of taxes. The company’s own property tax bill, the highest in Orange County, came to $42 million this year.
On the other hand, the wealthy O’Neill family, which holds about 40,000 mostly empty acres in southern Orange County, has owned its land since the 19th Century and has not been reappraised since Proposition 13 passed. The family’s property tax bill--charged to numerous parcels--has not been added up, but the O’Neills do not show up on the list of the county’s top 10 property taxpayers.
Unlike Macy’s or Irvine Co., the majority of companies involved in corporate buyouts and reorganizations appear to have decided against fighting reappraisals.
Take, for example, Ralphs Grocery Co., which became an independent unit of Campeau Corp. in 1988.
The company looked into ways to structure the deal to avoid triggering property reappraisals under Proposition 13, only to conclude that it would not be proper. Ralphs also determined that a legal challenge would not be worth the expense, said Senior Vice President Jan Charles Gray.
“There’s only so many ways you can out-Philadelphia-lawyer the tax fellows without being guilty of fraud,” Gray quipped. “Our main job,” he added later, “is selling groceries, not filing lawsuits.”
Other firms have tried to artfully structure deals to avoid or modify new property appraisals.
The most celebrated case involves a Japanese firm’s purchase of Atlantic Richfield Co.’s twin 53-story towers in downtown Los Angeles five years ago for more than $600 million.
The buyer, Shuwa Investment Corp., acquired Arco Plaza in a complex, three-step transaction that it argues should have resulted in a reappraisal of only 50% of the property. The county instead revalued the entire property--a position the courts, so far, have favored.
To avoid triggering a high reassessment, buyers and some sellers resort to a number of other tricks, said Edward Trudersheim, senior vice president of San Diego-based Property Tax Consultants:
* A real estate transaction might be structured to transfer only a partial interest in a property.
* A buyer might try to show that the sale price for a building also includes personal or business items such as equipment, computers or automobiles whose value should be subtracted from the sale price for tax appraisal purposes.
* Some companies, such as Security Pacific Bank, have crafted deals that allow them to sell property and lease it back without prompting a full reappraisal of the real estate. Los Angeles County is appealing a lower court ruling in Security Pacific’s favor in hopes of winning the right to reappraise the bank’s downtown headquarters.
On the other hand, because of the way property prices have fallen over the past year amid the weak real estate market, some deals are being arranged to trigger appraisals. In these cases, property owners hope the new valuations will be lower, reducing their taxes.
All told, business has had little reason to protest its property taxes in the Proposition 13 era. Deals designed to avoid new property appraisals are the exception rather than the rule, according to Los Angeles real estate attorney Michael A. Brand.
“In maybe 5% of transactions will Proposition 13 be a major driving force,” Brand said.
Times staff writers Jube Shiver in Los Angeles, Michael Flagg in Orange County, Chris Kraul in San Diego and John Medearis in the San Fernando Valley contributed to this story.
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Tax Increases Since Prop. 13
The following figures show the increases in categories of tax revenue raised by state and local governments since Proposition 13 was approved by California voters in 1978. After falling initially, property taxes have risen since 1978 because of inflation and new construction. But other levies, particularly personal income taxes, have risen faster.
Dollars Percent raised in increase from Tax fiscal 1989-90 fiscal 1977-78 Personal Income $16.9 billion 262% Property $14.7 billion 43% Sales $13.9 billion 177% Banking and Corporate $5.0 billion 138%
SOURCE: State Controller’s Office
