On March 1, students under the banner of Occupy Education came to Sacramento for a day of action, calling on the governor and the Legislature to fully fund education. Since state funding for education has declined by 42 percent over the last decade, the students were angry. With a recent article showing that a freshman at CSU would pay more per year than at Harvard, they have every reason to be. The most direct cause for the loss of education funding is a tax system that makes no sense. As a result we are losing the California that we worked so hard for the last 40 years to create that offered educational opportunities for all of its residents.
In response to this reality, I requested a hearing that was held last week at the Assembly Revenue and Taxation Committee to look into a relatively unknown but gaping hole in the state's tax system: the assessment of commercial property. In the big picture, the complexity of property ownership for commercial property will require a constitutional change and that raises the issue of changing Proposition 13, long considered the "third rail" of California politics, meaning instant defeat for any politician who dared touch it. Behind that fear however, the facts speak for themselves. Namely that homeowners are paying more than corporations in property tax and we are leaving millions of dollars on the table that should be going to public safety, schools, parks, libraries, and health services at the local level.
Joining me for the hearing was Los Angeles Mayor Antonio Villaraigosa, who testified that "Proposition 13 has fallen victim to the law of unintended consequences, what was conceived of as a measure to relieve the tax burden on homeowners has had the effect of benefiting commercial property owners at the expense of homeowners." The current system is actually more loophole than tax, and is so confusing to administer that it cries out for change in the name of tax fairness and it all starts with the sale of commercial property.
Californians know when they buy or sell a house the property is reassessed, and property tax bills are based on the reassessed value. But when a Wall Street investment bank buys a chain of hotels, that property may not be reassessed. Companies with complex ownership structures often avoid reassessment because no one owner acquires more than 50 percent of a property.
This indefensible loophole lets the same Wall Street banks that collapsed the economy walk away with millions of dollars each year. Meanwhile, students can't afford school, teachers are being laid off, public safety cuts hurt our communities, and health care and home care services for seniors and people with disabilities are on the chopping block.
But it's not just banks -- a recent report released by the California Tax Reform Association shows that the richest Silicon Valley corporations, such as Intel, Google, and Apple, pay incredibly low taxes by land leasing and using other techniques for avoidance of change of ownership. Who bears the brunt for these avoided property taxes? California homeowners and our education system.
Since the passage of Prop 13 in 1978, in virtually every county in the state, the property tax burden has shifted from commercial property onto the backs of residential property. Some examples: in Contra Costa County, the residential share of the property tax went from 48 percent to 73 percent. In Santa Clara County, the residential share went from 50 percent to 70 percent, despite massive industrial/commercial growth. In Los Angeles County, for example, from 1975 to 2009, the share of property tax paid by residential taxpayers has increased from 53 percent to 69 percent. But not only are corporations paying less of a share of the property tax, corporations are exploiting loopholes in the law to avoid reassessment upon change in ownership.
What does it all add up to, the loopholes of this third rail of California politics? Hundreds of millions of dollars of lost revenue that could go to our schools, our police, and our communities. As private economist Christopher Thornberg told the committee at the hearing, "California is a 'dumb tax state' and Proposition 13's provisions 'awful.'" By dumb he must mean that not only are we the only state in the nation to not have an oil severance tax (costing billions in revenue each year) but we also allow corporations to benefit from egregious methods of tax avoidance, hidden behind the false rhetoric of protecting homeowners under Prop 13.
Thankfully just because we're dumb doesn't mean we can't learn, but even discussing this issue generates enormous resistance from the corporations that benefit from the current system. Why? Because even raising the issue, and trying to have a rational discussion of the problems in the system, gets the defenders of unfair taxation up in arms. That's because they know if this state were ever to have a rational conversation about taxes, the system would never stand up to the slightest scrutiny. While everyday people continue to pay for the abuses of Wall Street, big banks and other large corporations keep playing by different rules.
Last week's hearing was evidence that there is momentum for touching this mythical third rail and addressing the need for new revenue and an equitable tax system. It's time that we take back the millions in lost revenue and move us forward to when we can enact major constitutional reform-the future of California depends on it.