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Third-Rail Man

San Francisco Assessor Embarks on High-Risk, High-Reward Strategy to Change Prop. 13


Thursday, October 14, 2010

Phil Ting is the bravest politician in California. Or maybe just the craziest.

San Francisco’s tax assessor, the 41-year-old Ting spearheads a low-profile but high-import political crusade to dramatically change Proposition 13, the 1978 landmark initiative strictly limiting property taxes in the state. Since its passage, it has been termed “the third rail of politics,” a clear and present danger to the career of politicians who mess with it.

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But Ting says that most people don’t truly understand how the long-popular measure actually works. He argues that what he calls a “Prop. 13 loophole” enables corporations and commercial property owners to avoid their fair share of taxes; at a time of constant deficits in Sacramento, as public education, parks, prisons, and other programs are being cut, he is certain that when voters learn about how it works, they will agree with him on the need for change.

“Prop. 13 was sold to California as a way to keep people in their homes,” he said in Santa Barbara last week. “But today, what has happened is that its primary beneficiaries really aren’t homeowners; they’re commercial property owners and corporations.”

Ting came to town for a public forum called Can California Be Saved?, which was sponsored by the Museum of Natural History, to encourage debate about the intractable and intertwined problems that have led to the virtual dysfunction of state government (full disclosure: I also spoke on the panel). In an interview before the event, he discussed his proposal to “end the subsidy” — a plan to establish a new set of rules for commercial property taxes, while leaving those for homeowners intact.

“It’s so important that homeowners realize that they pay more in taxes and more in fees because they are paying the subsidy for these corporations and commercial property owners,” Ting said, over a chicken parm sandwich and iced tea at the Chase Bar & Grill. “It’s really about, do we subsidize Disneyland versus invest in public schools? Do we subsidize Target or invest in transportation and infrastructure? Do we close the loophole for Trader Joe’s or do we fund public safety?”

PUBLIC POLICY WONKERY ALERT: Proposition 13 is a constitutional amendment overwhelmingly approved by voters more than three decades ago.

It required that property taxes, which finance a substantial portion of government operations in California, at the time be lowered to one percent of the market value of property as of 1975; in the years after, tax increases were limited to 2-percent growth per year — unless a property is bought and sold.

After a sale, assessors recalculate a property’s taxes, based on current market value. As a result, the tax bill for new homeowners spikes over that previously paid by the seller, which was calculated on the value when they bought it (Example: Disneyland pays five cents per square foot in taxes; a Californian who bought an average home last year pays more than $2). And tax increases on commercial property sales can be avoided with transactions structured with legal schemes involving corporate subsidiaries, complex leasing arrangements, real estate investment groups, family trusts, or other techniques.

The result, says Ting, is that many commercial property owners pay taxes pegged to values 10 or 20 times lower than market rate.

THE PROPERTY-TAX SHIFT: Citing state revenue studies, Ting estimates that assessing commercial property at market rate, instead of older, Prop. 13-enabled values, would generate an additional $7.5 billion in tax revenue — a big chunk of recent budget shortfalls.

Before Prop. 13, commercial property owners in San Francisco paid about 60 percent of the city’s property taxes, and homeowners about 40 percent; three decades later, the ratio has been reversed, a trend also seen elsewhere. Reassessing commercial property more often, or allowing annual tax increases even slightly higher than 2 percent, would shift the burden off homeowners, Ting argues.

“We as individual homeowners and individual taxpayers are paying more to subsidize this commercial property loophole,” he said. “With the loophole, what we see is public education has suffered, public health has suffered, public safety has suffered, public fees of every sort have gone up.”

Ting and some other progressives have launched an education effort (closetheloophole.com) with an eye to a future ballot initiative establishing a bifurcated tax system known as a “split roll.” He acknowledges it’s a long shot, given the totemic aura surrounding Prop. 13.

“There’s such a fear factor, statewide,” he said. “The Prop. 13 proponents have been so effective in scaring people from even having a discussion. They know that once people realize that this subsidy exists, they’ll be very vulnerable to a change.”

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