The Empires New Clothes: The Failure to Assess Commercial Property - - PowerPoint PPT Presentation

The Empire’s New Clothes: The Failure to Assess Commercial Property at Market Value

Lenny Goldberg California Tax Reform Association www.caltaxreform.org Presented to COTCE, 2.12.09

Policy failure at every level

• The opposite of good economics
• Legal morass
• Fiscal policy failure
• Land use distortions

Bad economics: taxing investment not land rents

• New investment: assessed at full market

value, pays fees and exactions, sales and property tax on new equipment, inflated land values

• Land rents untaxed, i.e benefits accruing

from the investment of others, private and public

• Competitors assessed at huge

differentials, mostly on land

SF: downtown office buildings

Disparities in Property Taxes Paid for Select San Francisco Office Buildings

$1.48 $3.19 $9.72 $11.16 $15.90 $2.92 $3.14 $1.71 $3.60 $0.15 $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 Hallidie Building (130-150 Sutter St.) Chevron Building (101 Montgomery St.) Transamerica Pyramid (600 Montgomery St.) First Market Tower (525 Market St.) Bank of America Building (555 California St.) Estimated Tax Paid Per Sq. Ft.

2002-03 Estimated Tax Per Sq. Ft. of Land 2002-03 Estimated Tax Per Sq. Ft. of Structure

Legal morass

• “Change of ownership” inapplicable to

complex ways of holding property: publicly-traded corps, LLCs, Sub S, limited partnerships, REITs, etc.

• Martini to Gallo: 100% sold, partners to

partners, no reassessment

• Changes easy to effectuate when values

are low: downtown LA, early 90’s.

• Can be reformed statutorily but still messy

Fiscal failure

• Economic growth does not pay for itself—

generates land value increases but not local revenue increases=no-growth politics

• Virtuous cycle of infrastructure is short-

circuited: public investment in land capacity gets insufficient return

• Burden shift to residential housing

Environmentally unsound land economics

• No penalty for withholding land from

market, promotes speculation and sprawl

• Land values inversely related to tax

burden, thus land value inflation

• Low-value infill uses maintained
• Big box retailing: best fiscally, worst land-

use

• “Highest and best use” avoided

Simple policy solution

• “Non-residential property shall be

periodically assessed at market value”

• Unlike housing, reflects stream of future

earnings from land

• Allocated currently by Props 1A and 98
• Issues: rental residential, farms

(Williamson Act), transition (assessors)

• Revenues: poor data: $6 billion?

Economic impacts

• Shefrin: “very close to the economists’ ideal of

non-distorting taxes”

• Lower land costs
• Lower development costs, better approval

climate

• Infrastructure finance significantly improved
• Competitors taxed equivalently
• Costs borne by those with locational

advantages: retail, hotels, offices

• Potential trade-off: personal property relief

(small business, relieves assessors)

The Empire’s New Clothes

• SD Union-Trib: “Even Prop. 13 Must be on the

table”: “While Democrats and Republicans cower before

this iconic restriction on property taxes, they should nevertheless be amenable to an annual reassessment of business and commercial

• properties. There can be no sacred cows in confronting

California’s catastrophic budget”.

• PPIC Polling: Should commercial property be

taxed on the basis of market value? Yes 60, no 34