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Santa Barbara News-Press: Prop 13 in the crosshairs

November 30, 2014

Critics want to close “loophole” that allows commercial properties to avoid reassessment

CMC Rescue

CMC Rescue might not have been able to purchase a Goleta property without protection from Proposition 13, a broker says. Critics of the property-tax initiative want to change how commercial property is reassessed.
Santa Barbara, California – Published 11/30/2014
Santa Barbara News-Press
By Taylor Knopf, News-Press Staff Writer

California voters could face major decisions on a number of tax issues in 2016, including reform of Proposition 13, the state’s 36-year-old landmark property tax initiative.

Many groups want to close a so-called “loophole” in Prop. 13 that allows reassessment of commercial property only when more than 50 percent of ownership changes.

Businesses avoid reassessment by never transferring majority ownership, and critics say that shifts the property-tax burden to homeowners, who pay 72 percent of the property tax in the state.

Goleta Union School District Superintendent Bill Banning said recently that the provision has led to a decline in school funding. California ranks 49th in the nation in per-pupil spending.

In October, the Goleta Union school board passed a resolution in support of changes to “close the loophole” in Prop. 13, joining 70 other school districts, including Solvang School District, and at least 14 city councils across the state.

“Regularly reassessing non-residential property would, according to an analysis of data provided by the California Board of Equalization, generate at least $6 billion in additional revenue for public schools and other public services,” stated the resolution adopted by the board of trustees.

Reform to Prop. 13 would have a far-reaching ripple effect, said Brad Frohling, partner at Radius group commercial real estate in Santa Barbara.

“The intent of the reform is to go after the big guys,” Mr. Frohling said, “but there would be a lot of unintended consequences for small businesses.”

While the government might look at reforming Prop. 13 as a great revenue opportunity, it might just be the added tax that breaks the small mom-and-pop shops, he said.

Mr. Frohling cited the example of some property he recently sold to CMC Rescue, a safety equipment manufacturing company based in Goleta, saying he was not sure it would work without Prop. 13 protection, because CMC is a small manufacturer choosing to keep all employees local.

Many manufacturers are sending work overseas, Mr. Frohling said, but CMC manufactures all products in Goleta with about 80 employees.

Prop. 13 reform would have a large impact in Santa Barbara, where big businesses make up a small portion of commercial ownership, he said.

If property taxes go up, the tenants will pay the expense.

“I don’t see why we need any reform,” Mr. Frohling said. “Our state has incredible revenue. We have a spending problem, not an income problem.”

Joe Armendariz, executive director of Santa Barbara County Taxpayers Association, said he is against any reform of Prop. 13.

“Of course residential pays the majority of property taxes. There are substantially more residential properties than commercial,” Mr. Armendariz said.

“We don’t believe Prop. 13 needs reforming,” he said. “Any attempt at reform would be the proverbial camel’s nose under the tent leading to the dismantling of the taxpayer protection that is Prop. 13.”

He noted that residential property and commercial property owners are not always exclusive, such as the case in Hope Ranch.

The bottom line is that both are overtaxed in California, Mr. Armendariz said.

“If government needs more money to deliver essential services, the way to do that is by growing the private economy while controlling public sector spending,” Mr. Armendariz said.

How possible tax increases shake out over the next two years is unclear, said Lenny Goldberg, president of the California Tax Reform Association and a longtime advocate of changing Prop. 13’s rules for taxation of commercial property.

“We’re hoping to create a forum where politicians will have a discussion,” he said. “But what will end up on the 2016 ballot is completely unknown and unpredictable at this point.”

Rex Hime, president of the California Business Properties Association, said the proposal will meet strong opposition because of its far-reaching effects on businesses.

“It will be Armageddon. It will be a huge, huge battle,” Mr. Hime said.

Tribune News Service contributed to this report.

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