Segment | Politics

Budget Buster

UPDATED DECEMBER 13, 2012

Prop 13 was a game changer when it was passed by voters in 1978. Capping property taxes at 1 percent of assessed value, the initiative has protected homeowners, but, say advocates, it has done an even greater job protecting commercial property. Brian Rooney investigates whether legislation intended to help families has instead proven a boon for some businesses which, thanks to Prop 13, are paying property taxes on values far below their market rates.

Brian Rooney: If you were to make a political commercial praising the success of Proposition 13 for California homeowners, the perfect couple to feature just might be Pam and Wayne Thomas. They bought their historic Pasadena Craftsman for just $47,000 in 1976. Then property values rocketed upward.

Wayne Thomas: Before Proposition 13 and they reassessed us, I think our property tax went from about $500 or $600 a year to around $1800 or $1900 a year.

Brian Rooney: Increases like that spawned the California taxpayers' revolt and passage of the wildly popular Proposition 13 which protected homeowners like the Thomases from dramatically rising assessments in taxes. The words of the revolt's leader echo even today.

Howard Jarvis: "The message of Proposition 13 is simple and clear. Government must be limited."

Brian Rooney: Proposition 13 froze values at 1975 levels, set taxes at about one percent of value, limits increases to two percent a year, and resets the base value only when the property is sold. The Thomases now pay just $1700 a year in property tax.

Pam Thomas: We've often thought of moving somewhere else and we keep looking at ourselves and going, "Yeah, but look at our tax."

Brian Rooney: And Proposition 13 provided a haven for business, particularly small businesses that had struggled with rising taxes just like homeowners. But now more than 30 years later, there are some enormous disparities in commercial property tax bills. We toured with Lenny Goldberg, director of the union-funded California Reform Association, who showed us how commercial tax anomalies happen in a variety of ways.

Lenny Goldberg: We're on Wilshire Boulevard right now and identical properties are paying hugely different amounts of tax for reasons that really can't be explained in any rational way.

Brian Rooney: For instance, this Whole Foods Market in Santa Monica pays just $.47 a square foot in property tax on its land, but the gas station right across the street pays $2.39 a square foot. If the two were taxed at the same rate, the Whole Foods would pay four times as much on its land alone. And Goldberg says this is exactly the sort of thing that shows the flaws in Proposition 13.

Lenny Goldberg: What we have on Wilshire Boulevard right here is, you know, a completely irrational way of taxing properties.

Brian Rooney: Both the gas station and the market were sold in 2008, but the Whole Foods Market which refused to be part of the Wild Oats chain was not reassessed because the land underneath did not change hands. It's owned by a trust; not Whole Foods. We looked up the records in the assessor's office. It stills says Wild Oats Markets, although they are now all Whole Foods, and the basis for tax assessment is 1975.

Lenny Goldberg: Whole Foods buys 110 Wild Oats stores and, as far as we can tell, at least in this case and probably in others, you know, there's no change of ownership. There's no reassessment. How is this system supposed to work?

Brian Rooney: A significant number of businesses and commercial properties, even country clubs, have remained stuck in time because they were never sold or the sale was obscured by corporate or fractional ownership, not recognized as a change of ownership by Proposition 13.

That's the way it works for the exclusive member-owned Brentwood Country Club, 127 acres of pristine golf course. There's the swimming pool, luxury clubhouse, and paying only $178,000 a year in property taxes on an assessment of just $12 million dollars. We found ten single-family homes in the neighborhood listed for sale at more than the entire golf course.

Lenny Goldberg: You buy and sell your house, the deed changes, you're reassessed, it goes to market value.

Brian Rooney: But not at the country club where membership and ownership change gradually. Membership could change by 50 percent; it could change by 100 percent several times over, but under Proposition 13, it's not really changing ownership.

Lenny Goldberg: It never changes ownership and it's assessed back at 1975 values.

Brian Rooney: By comparison, just down the road, the Riviera Country Club was sold 20 years ago to a Japanese company; now assessed at $90 million dollars and paying nearly $1.2 million in taxes, nearly seven times more than the Brentwood.

Lenny Goldberg: "Proposition 13 fundamentally protects homeowners from..."

Brian Rooney: Goldberg recently spoke to an urban policy class at Occidental College along with Jennifer Bestor, another advocate of changing Proposition 13.

Bestor is a former business executive and now a stay-at-home mother from Menlo Park near San Francisco who began to wonder why there was never enough money for her local schools. So she bought a copy of the local tax records herself and did a detailed computer analysis.

Jennifer Bestor: For example, in Santa Clara County, 45 percent of business properties have turned over in the last ten years. 45 percent of business properties are paying full bore. 23 percent of business properties are getting the super-discounted senior fare.

Brian Rooney: But that's Proposition 13.

Jennifer Bestor: That is Proposition 13 and that's wrong with Proposition 13 and that's actually hurting business and our business climate in California.

Brian Rooney: She pointed out a local example. This gas station in Pasadena reassessed in 2008, now paying about $31,000 in property taxes. And this one on a larger lot just down the street last assessed in 1975, paying less than $7,000. Bestor describes herself as a fifth generation Republican, but she says Proposition 13 is due for an overhaul.

Jennifer Bestor: I have been startled by the amount of attention I got when I simply published data in my local paper. People are very, very interested because everyone is looking for a solution to this problem and everyone is looking for the solution that gets us out the other end better and richer, not more miserable.

Brian Rooney: Goldberg agrees. He points to the chain of Longs Drugstores. Remember them?

[Film Clip]

Brian Rooney: Bought out by CVS. But in the assessor's records, it says their stores are owned by Longs Drugstores, Inc. c/o CVS Stores. That's a sign that you'll see on the stores now. Tax basis? 1975. The state took a second look at the Longs deal and ruled that it was a buy-out that should have triggered a reassessment and that's being done now all over the state.

There are plenty of other examples, but in Los Angeles County alone, 17.5 percent of the commercial properties have an assessment based in 1975. Local assessors can go after the cheaters -- and there are some -- but most of the time, these low assessments are legal under Proposition 13.

Brian Rooney: The answer suggested by some reformers could be what's called a "split roll", separate assessments for commercial and residential, or just periodic reassessment of business properties regardless of ownership.

But any change in Proposition 13 will have to step over the diehard opposition of Jon Coupal, president of the Howard Jarvis Taxpayers Association, where the offices are a shrine to the co-creator of Proposition 13.

Jon Coupal: We have the highest corporate income tax west of the Mississippi. We have the highest state sales tax in America. We have the highest gas tax in America. All these things are taxes on individuals, but businesses as well. Why would we want to try to get more money from businesses when we've already had substantial amounts of business ride out of the state of California?

Brian Rooney: Coupal says that, if Proposition 13 was just enforced as written, it would iron out most of the inequities and he's happy to live with the rest.

Jon Coupal: The charge that business properties get an unfair break is not borne out by the statistics and, quite frankly, that argument was made during the Proposition 13 campaign. People argued that commercial properties would get a break. The voters of the state of California considered those arguments and they rejected them.

Brian Rooney: And remember the Thomases who might have been taxed out of their home? They're headed toward retirement now and continue to be the living argument for leaving Proposition 13 just the way it is.

Pam Thomas: We were young and needed that protection and now we're in the same position that people were -- the older generation.

Brian Rooney: Your first encounter with almost anybody over this, they're gonna say, "Oh, no, no, no. Proposition 13 protected me."

Lenny Goldberg: Right. Proposition 13 protected homeowners, but for commercial property, the same makes no sense.

Brian Rooney: The state's financial crisis may force a change, but Proposition 13 is known as the third rail of California politics. Is the crisis big enough for government leaders to step on it? This is Brian Rooney for SoCal Connected.

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