Is It Time For The State To Strike A 'Grand Bargain' To Modify Prop. 13?

THE ISSUE: Speaking in Sacramento last week, Los Angeles Mayor Antonio Villaraigosa called for sweeping changes to Prop. 13, the 1978 ballot measure that capped property tax increases and requires a two-thirds legislative vote for tax hikes. “Prop. 13 was never intended to be a corporate tax giveaway, but that is what it has become,” he said. “We need a grand bargain with our business community.”

Is it time for the state to strike a ’grand bargain’ to modify Prop. 13?

Ben Boychuk: No!

To return California to its golden heights, Antonio Villaraigosa says we need “courage” and “plenty of it.”

So raising taxes is courageous now? Please.

What exactly is so courageous about criticizing Prop. 13? Progressives have complained for years that the constitutional amendment capping property taxes at 1 percent of a building’s assessed value distorts government finances and stymies their agenda.

Villaraigosa, who is termed out of the Los Angeles mayor’s office next year and apparently has his sights set on the Governor’s Office, supports some version of the “split roll.” The idea would be to amend the state’s constitution yet again to let the state tax commercial and industrial property differently from residential property. Villaraigosa suggests the split roll would raise between $2 billion and $8 billion a year.

California was never a low-tax haven. But not so long ago, the state was more hospitable to business and to wealth creation.

Today, our sales and gasoline taxes are the highest of any state’s, our income tax rate is the third-highest in the nation, and our capital gains tax is the fourth-highest. At 8.84 percent, the state’s corporate tax rate is the highest in the western half of the country and ninth-highest overall. Even with Prop. 13, our property tax rate is solidly in the middle of the pack.

Yet Villaraigosa insists, “We all know we need significant new revenue.”

To make the evisceration of Prop. 13 less painful, Villaraigosa says he would reduce residential property taxes and perhaps even provide some income and corporate tax relief, while at the same time extending the sales tax to services such as plumbing and accounting. Some bargain! Cutting the business tax only to raise property taxes and expand the reach of the sales tax is folly.

Has it not occurred to Villaraigosa that most businesses aren’t big corporations, but rather small firms operating on thin margins? Small businesses also happen to create the most jobs. In a state with 12 percent unemployment, we could use a few more jobs right now, and I don’t mean on the staff of the Board of Equalization.

Villaraigosa says progressives need “to start thinking - and acting - big again.” But that would require rethinking five decades of dogmatism at the heart of the liberal project, rejecting the more destructive redistributive schemes, and relieving businesses from stifling regulation.

And a little more honesty about the burden of illegal immigration on state and local social services wouldn’t hurt, either.

That would take real courage. And plenty of it.

Pia Lopez: Yes

Puh-lease!

Ben trots out the usual canard about California’s business tax climate. The reality is that California is squarely in the middle of the pack among the states.

Each year Ernst & Young does a study for the Council on State Taxation, a nonprofit representing multistate corporations, on the total effective business tax rate state by state. It compares what businesses actually pay in state and local taxes to the total value of a state’s annual production of goods and services by the private sector.

The July 2011 report found that the average effective tax rate for businesses across all states was 5 percent in 2010. The range was from 3.3 percent in Connecticut to 13.3 percent in Alaska.

So where is California? It’s at 5.2 percent. Texas, often touted as more business-friendly than California, is at 5.1 percent.

Now let’s look at business property taxes.

Businesses ought to be able to enter the California market with a level playing field regarding property taxes. But two business properties, side-by-side, with comparable market values can pay vastly different property taxes because of Proposition 13.

In Sacramento, the California Tax Reform Association looked at property taxes for hotels. The Holiday Inn at 300 J Street, whose property was assessed in 1978, paid 22 cents per square foot in 2003. But the Sheraton Grand at 1200 J Street, which was assessed in 1999, paid $1.45 per square foot. Under Prop. 13, property taxes depend on when you entered the market or if your property changed hands.

Sure, this Prop. 13 tax advantage works well for existing businesses, which is why they’re squawking about change. But it provides a giant disincentive for new businesses to locate in California. They pay more in property taxes than their competitors down the street.

Then there’s another giant market distortion. With Prop. 13 limiting their ability to tap property taxes, local governments since 1978 have sought sales-tax generating businesses. That skews development toward shopping malls, auto malls and “big-box” retail - with their low-paying service jobs - instead of new manufacturing plants and other industry.

San Francisco Assessor Phil Ting is organizing a “split-roll” campaign - reassessing business property values on a regular basis - for the 2012 statewide ballot, based on the split-roll systems in 23 other states.

In addition to removing market distortions and tax inequities created by ever-growing disparities between similar properties, Ting estimates a split-roll system would raise $6 billion to $8 billion annually.

A basic principle is at stake: Similar properties should be taxed similarly.

This piece originally appeared in The Sacramento Bee

This piece originally appeared in The Sacramento Bee