A commercial property tax loophole in Prop 13 allows company to keep a lot more money in hand.
Say what? How can it be that one of the world's largest wineries (E&J Gallo of Modesto) based right here in California can skate its way out of paying hundreds of thousands of dollars in annual property taxes or a conglomerate configures a stock purchase of Mammoth Mountain and ends up not paying $4 million a year in property taxes.
If you read the OC Watchdog blog about "Your tax dollars at work," you might get the same reaction depending on whose side of Proposition 13 you're on. The now infamous Prop 13 sailed to victory in the 1970's during a time of inflation when property taxes were costing people especially older people their homes.
But take a read of this:
E & J Gallo bought Louis M. Martini in 2002. Gallo got 1,765 acres of some of the best vineyards in Napa and Sonoma counties, worth an estimated $75 million. But get this: Since Gallo split the purchase among 12 family members so that no one person owned more than 50%, the property was not reassessed for tax purposes.
So, because of how commercial property is assessed according to Prop 13 (also called a loophole by many, defined as a "means of escape"), that $75 million worth of property is still valued at less than $14 million -- which costs the state hundreds of thousands of dollars a year in property taxes. By the way, Gallo's annual sales is estimated at $2 billion.
And Mammoth Mountain. Take Intrawest of Vancouver. It obtained a majority of the stock of the popular ski resort area in 1997. But the deal was structured in a way that there was no "change in control" as far as Prop 13 was concerned, so no reassessment. And that cost Mono County $4 million in annual property taxes.
If you really want more of this, take a look at the recently released report by the California Tax Reform Association (CTRA). It contains a list of "Company Buyouts and Mergers Which Escaped Reassessment." They include properties acquired by Burger King, Washington Mutual, Hilton Hotels and more.
The CTRA says the law should be "changed to make sure that obvious changes of ownership, such as private equity buyouts and corporate takeovers, trigger a reassessment."
There's a bill in the Assembly AB 2492, sponsored by San Francisco Assemblyman Tom Ammiano, which would close the loophole for commercial property owners. It would be put to a vote, but then people generally cringe when they hear of tax increases.
No one, especially seniors, should ever be forced to leave their homes because of escalating property taxes (the reason why Prop 13 was passed in the first place). Perhaps there should be a system of tax credit for senior citizens or a cap for people of a certain age, suggests Professor Steven Gill, San Diego State University accounting professor.
"Anytime you create a rule there will always be a handful of lawyers who will find a way around that. Generally speaking, we should be able to count on our legislature to develop a property tax revenue system that meets the state's revenue needs but also takes into consideration our ability to pay," adds Gill.
But given the dysfunctional state of our legislature it's like talking to a wall.