Thursday, December 29, 2011

2012 Tax Initiatives Chapter 1: California's Property Tax Problem and the Ghost of Howard Jarvis

What I call "The California Teachers Association Initiative to Increase and Equalize Property Tax Values on Non-Residential Non-Farm Properties by Splitting the Property Tax Rolls" provides a good place to begin analyzing the plethora of tax proposals.

It is the only proposal that addresses head-on some of the economic and social impacts of Proposition 13, the underlying problem of California's state and local government revenue structure.

(Yeah, yeah, partisans can argue about government spending as there is plenty to argue about. Nonetheless, Proposition 13 was not a spending control measure so spending discussion is irrelevant.)

Most importantly, what voters need to know is that this measure will not change the way residential and agricultural property is taxed. No matter how the opposition phrases scare ads, this measure has nothing to do with homes and farms. Nor will it change the 1%-of-assessed-value property tax rate in California.

It is an attempt to address the problem that Proposition 13 caused California's government revenue structure to be vulnerable to economic cycles in ways most voters in 1978 did not understand.

It's likely that the arguments over this measure will be phrased in the the form of a fight over California's fictional anti-business tax environment, particularly using the California Teachers Association sponsorship to frame it as a fight between public employee unions and private businesses. So let's look at the measure and that issue.

The proponents amusingly entitled this "Protect Homeowners and Close Corporate Tax Loopholes Act". Actually, it would be a tax increase on most, but not all, business property. I do think it is the one and only ballot measure that would stabilize income for California government and thereby stabilize government. Here's what it would do:
  1. Its only impact on residential property is to double the owner occupied dwelling exemption (from $7,000 to $14,000) in 2015-16 and doubles the renter credit on income tax returns at the same time.
  2. It excludes from the definition of non-residential property real property "used and zoned for producing commercial agricultural commodities."
  3. It requires that non-residential property currently subject to the property tax be reassessed every three years to the fair market value beginning after 2014-15.
  4. It exempts from taxation the first $1,000,000 of tangible personal property (specifically excluding from the exemption boats and airplanes not used in the day-to-day operation of the business), primarily intending to exempt the first $1,000,000 in business equipment and inventory providing a significant relief from the impact of the reassessment of business property to small businesses.
  5. It provides that the additional revenue derived from the reassessment be used to cover the reasonable cost of reassessing commercial property with the balance allocated (a) 90% to the State General Fund and (b) 10% distributed to local entities based on law.
  6. It provides that some of the money placed in the State General Fund be remitted back to the counties to cover the exemptions described in "1." and "3." above.
I should point out that the business community already has an "expert" report The Economic Effects of California Adopting a Split Roll Property Tax explaining how this would just be a disaster for businesses.

The only problem is that these are the same people who hold Texas up as the model for "business friendly." The split roll measure would bring California's property tax on business property up to the Texas level. What could possibly be wrong with that???

What it would do is equalize business property taxation, reducing the Proposition 13 extreme favoritism given old business properties over newly developed business properties.

It would eliminate a multitude of inequity sins resulting from the fact that large numbers of business property are owned by corporations. For instance, many of those properties do not sell in a manner triggering reassessment to the selling price. Therefore existing commercial properties are not being taxed at an amount comparable to homes which sell on average every 7-8 years nor are they being taxed at an amount comparable to new commercial developments.

But what about that California business unfriendly tax structure is discussed in the press so frequently?

A March 2010 study was prepared by the firm Ernst & Young (the accounting firm used by award shows if you don't know them from anywhere else) for their business clients who want unbiased information - Total state and local business taxes. From that study, the first piece of conventional wisdom about California that is debunked is in Table 6 which shows State and local business taxes as a share of private sector economy within the state. What we learn is that California ranks #27 among the 50 states. Here's the list:

Note that Sarah Palin's Alaska takes the highest percentage from businesses. Also note that Texas took a higher percentage from businesses.

The primary difference between Texas and California is how we tax businesses (and oil and gas production at the well which I'll address in a future post). Here's a comparison from Table A-3 of the study:

Note the difference in personal income taxes. Texas is more "over-paid corporate executive friendly" because Texas does not have a personal income tax. It has a much higher property tax plus other taxes that impact heavily on corporations. But it is tax friendly to the highly paid executives who decide where to locate the company offices and, like all people, when taxes are considered it all has to do with how it impacts on them. Keep this fact in mind when we discussion the various proposed income tax increases on millionaires. Anyway....

Essentially we don't collect as much property tax from businesses compared to most states, particularly Texas. Simply, this measure would have us do so. And if we do adopt this measure, it would move us up among the states to somewhere around Rhode Island and New Mexico.

Estimates of the amount of additional revenue this would raise range from $2 to $18 billion depending on who's doing the estimating and the time frame used. It likely would take about three years to derive any significant additional revenue from the reappraisal process. It is also likely that the measure would solve the State General Fund revenue stability problem within five years and on a permanent basis.

Could this measure become law? First, it has to get enough signatures. I don't think it will. But if it does, it likely will be accompanied on the ballot with other tax measures. Given that the measure must fight the ghost of Howard Jarvis and the depressing presence of Jerry Brown, it likely wouldn't pass.

Too bad, because it would correct the worst impacts of Proposition 13.

No comments: