Undermining Prop 13

By Walter F. Conn, President, Charles Dunn Co.: For the past 35 years, Proposition 13 has enjoyed continued support and popularity among Californians. A recently introduced bill, AB 188, would alter one of the underpinnings of Proposition 13 and is one of many changes legislators are concocting as they scramble to rake in more revenue instead of aggressively curbing our state’s spending.

For the past 35 years, Proposition 13 has enjoyed continued support and popularity among Californians. Proposition 13 protects property owners in a variety of ways, allowing small and large business owners alike to maintain operations in the state, generating profits, creating jobs, contributing to local communities and helping our state economy gain traction in the current recession. A recently introduced bill, AB 188, would alter one of the underpinnings of Proposition 13 and is one of many changes legislators are concocting as they scramble to rake in more revenue instead of aggressively curbing our state’s spending.

Under Proposition 13, property tax assessments occur only when there is a change of ownership or an owner sells 51 percent or more. AB 188 would force commercial landowners to reassess their property more frequently, triggering new appraisals if 100 percent of a property’s ownership changes over a three-year period.

While AB 188 might not sound like a big deal, it has deeper implications. Businesses change ownership frequently, selling or granting equity positions to employees or investors. Many businesses attract outside investor capital by selling equity. If they sell enough equity, they would trigger a reappraisal of their property and most likely see a tax increase. Small business drives our economy. When small business owners have to set aside more money for taxes and appraisal costs, there is less for hiring and growing their business. It’s one more way the state of California is hurting small business.

The legislator introducing AB 188, Assemblyman Tom Ammiano (D-San Francisco), was quoted as saying, “This is partly aimed at the big guys, like Chevron and Wells Fargo.” Publicly traded companies trade stock every day, and each of these daily transactions could potentially prompt reappraisals. The business and investment community has opposed this sort of modification to Proposition 13 in the past with good reason. Ammiano’s previous attempts at similar legislation failed to achieve the two-thirds majority of votes needed to succeed.

Additionally, the frequency of reappraisals and tax increases would affect businesses leasing space from publicly traded property owners. Increased costs would pass through to tenants, ultimately placing further pressure on our anemic economy and possibly forcing some tenants out or further reducing cash flow to owners from the property. This in turn could lead to more foreclosures, more sales, more loan defaults, with properties already overleveraged and less leasing activity as businesses slow their hiring and growth. It would also impact new property investors, who must rethink the implications of ever-increasing taxes and diminishing returns on their financial models. Hundreds of thousands of dollars in taxes on large properties could become millions of dollars. Thousands on smaller owner-occupied properties could become tens of thousands.

AB 188 is not the kind of legislation that encourages investment in California real estate, nor does it retain current levels of business and investment activity. California must change its priority to attracting new business and investment instead of pushing investors and businesses to states with more conducive business conditions. Our economic health will continue to decline as long as we allow our state to pursue taxation as a solution for overspending.