Under Proposition 13, the 1978 initiative that slashed property taxes in California, the sale of property is supposed to trigger a reassessment for tax purposes. Because residential property turns over more frequently than businesses, home property values are reassessed more frequently. But even when a business is sold, new owners often avoid higher taxes.
Under the rules adopted by the Legislature, change of ownership for businesses occurs only after a new entity acquires 50% of the business or more. Over the years, businesses have exploited that rule to avoid reassessments. The Los Angeles Times recently chronicled one of the most egregious examples.
Computer magnate Michael Dell structured his $200 million purchase of the Fairmont Miramar Hotel in Santa Monica so that none of the buyers -- the billionaire, his wife and two other partners -- acquired 50% ownership. Thus the hotel's new owners avoided about $1 million a year in additional property taxes.
Assembly Bill 188 (Tom Ammiano, D-San Francisco) seeks to close this loophole. Under this bill, whenever 100% of a business property is sold within a three-year period, a reassessment would be required. While it addresses one tax dodge, the bill would spawn other schemes. For example, investors could buy 99.9% of a commercial property and wait three years to acquire the remaining slice.
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A better fix is to match all business property tax assessments as close as possible to the property's market value. That would require periodic reassessments for businesses but not for residential properties. If the property reassessments were made revenue neutral -- accompanied by elimination of the business equipment tax, for example, or even a reduction in the tax rate for business properties -- many economists think it would eliminate the unfair burden Prop. 13 imposes on new businesses.
Unlike the Ammiano bill, such a change would require a constitutional amendment and a statewide vote of the people. No such fundamental change to Prop. 13 is in the works, but the discussion is worth having. It's patently unfair when the new owners of the Fairmont Miramar can take advantage of a legal scam to avoid their fair share of taxes.