Nine years ago, when the computer magnate Michael Dell was planning to buy the old Miramar Hotel in Santa Monica, his tax lawyers urged him to rethink the purchase. If Dell became the sole owner of that prime beachfront property, its value would be subject to a reassessment that would significantly raise the property taxes. But if he could find a way to buy it so that no single owner could claim more than 50 percent of the property, no reassessment would take place.
Dell’s team urged him to rewrite the contract. In the revised deal, an entity 99 percent owned by Dell bought 42.5 percent of the hotel; an entity run by Dell’s wife, Susan, acquired 49 percent; and a third company, also majority-owned by Dell, bought the remaining 8.5 percent. This preserved the legal fiction that no single person or entity owned more than 50 percent of the hotel, and as a result the Dells were able to avoid paying market-rate property taxes on their $200 million investment. Los Angeles County asked the Assessment Board to take another look, which it did. But Dell challenged the board’s reassessment, and ultimately a Court of Appeals upheld the fiction. The Dells would not have to pay higher taxes on the Miramar Hotel, which, according to an analysis by the Los Angeles Times, would have amounted to about $1 million per year.
The tax-restricting mandates of Proposition 13, adopted by voters in 1978, have created similar absurdities all over the Golden State. Fabulously valuable corporate properties that haven’t changed hands in decades (Disneyland is an obvious example) are taxed at a fraction of their real worth. This amounts to a vast subsidy for older, more established businesses that is effectively paid for by homeowners, whose share of the property-tax burden has soared, according to estimates produced by reformers. That extra burden is also carried by new businesses, which struggle to compete in a marketplace that taxes older companies at a far lower level.
This reality runs directly counter to the rhetoric of Prop 13’s proponents, who sold it in 1978 and still market it today as a way to protect everyday Californians and mom-and-pop businesses from tax-hungry bureaucrats. Pro–Prop 13 organizations argue that increases in the residential property-tax burden primarily reflect the fact that many valuable manufacturing properties have been converted into residential spaces in recent decades, and that home values have shot up. “Every tax system has its inequities,” argues Jon Coupal, the Sacramento-based president of the Howard Jarvis Taxpayers Association, which spearheaded the Prop 13 campaign and remains its most stalwart defender. “But Prop 13 as a property-tax system is superior to [using] market value.” Capping property-tax increases, Coupal adds, tamps down revenue volatility and forces the state to spend its money more carefully.
Coupal and his allies have recently come out in favor of a legislative fix to tackle the sorts of “abuses” embodied in the Dell case. They support a law that defines “ownership change” as having occurred whenever at least 90 percent of a property shifts hands, regardless of whether any one owner ends up with more than 50 percent. But they have drawn a line in the sand against the idea of a “split-roll tax,” which would impose a higher burden on corporations. Coupal accepts that such a tax would easily boost state revenues in the short term by several billion dollars annually. But his organization, the California Chamber of Commerce, and other opponents of change argue that the cost in lost jobs and leakage from businesses relocating out of state would more than cancel out the benefits in the long run. “Our position has always been that if you’re going to have a tax increase, it should be broad-based and universally applicable,” says California Chamber of Commerce policy advocate Jennifer Barrera. “A split-roll tax treats residential property differently from commercial property, so it’s discriminatory.”