PD Editorial: A new round in battle over Proposition 13

Article XIII A of the California constitution is better known as Proposition 13.

Approved by voters 37 years ago, its best-known provision rolled back property taxes and capped future increases.

For politicians, Prop. 13 is a no-go zone. It might be easier to change the law of gravity.

Yet, as Sacramento Bee columnist Dan Walters reports, a coalition of labor unions and liberal interest groups is preparing an initiative targeting commercial property owners.

They have a point. When it comes to property taxes, commercial property owners get a better deal than homeowners. They can easily avoid reassessments, saving millions on taxes.

That’s an inequity, and it ought to be rectified.

But at what cost? The Make It Fair coalition’s approach - a split roll, in which most commercial property is reassessed at current market value while residential property is left alone - promises a mega-money campaign that almost certainly would end with the status quo.

It may not be too late to avoid a costly political war.

Elements of the labor coalition and commercial property interests pursued a compromise in the Legislature last year. They failed, but it’s worth another try. The compromise effort targeted the definition of a property sale, an aspect of Prop. 13 that isn’t written into the state constitution. It comes from a 1979 law enacted by the Legislature.

For residential property, it’s simple. If you purchase a house, ownership changes when closing papers are signed, money changes hands and a deed is recorded in official county records. The county assessor calculates the annual property tax bill based on the sale price. Except in rare circumstances, the new owner pays more than the previous owner.

The rules are much friendlier to those buying commercial property. There’s no reassessment unless a single buyer acquires a majority interest in a single transaction. Buy less than a majority interest, or split ownership among multiple parties - even spouses - and a new owner can pay taxes based on the purchase price paid by the seller, even if that sale occurred as much as four decades earlier.

One recent example involved the sale of the Fairmont Miramar Hotel in Santa Monica to computer magnate Michael Dell, which was structured to ensure that the tax bill was based on a 1999 valuation of $86 million rather than the sale price of $200 million. The difference in the tax bill is about $1 million. Los Angeles County challenged the mechanism used to avoid a reassessment but lost in the state Court of Appeal

As originally drafted, AB 2372 would have closed that loophole. After the court ruled in Dell’s favor, the strange-bedfellows coalition of labor and business interests broke down as the bill was amended to tighten, but not close the loophole.

An initiative battle over Proposition 13 would enrich political consultants and fill the airwaves with misleading commercials. Because it’s usually easier to defeat an initiative than to pass one, it’s not a big stretch to predict it would fail. Before there’s any more political warfare, we would like to see the opposing sides return to the bargaining table to try to redefine a sale in a way that doesn’t give commercial buyers such a big tax advantage over ordinary homebuyers.