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Two Prop. 13 defenders decry abuse of loophole by corporations

They say they're open to narrow legislation to fix the law, which appears to allow companies to avoid paying additional property taxes when buying real estate in California.

May 07, 2013|By Jason Felch, Los Angeles Times
  • The L.A. Times reported that billionaire computer magnate Michael Dell, shown, had avoided reassessment when he purchased a Santa Monica hotel for $200 million by bringing his wife and two business associates in on the deal.
The L.A. Times reported that billionaire computer magnate Michael Dell,… (AFP/Getty Images )

Two prominent defenders of Proposition 13 spoke out on Tuesday against "gimmicks" used by some companies to avoid paying additional property taxes when buying real estate in California.

Responding to a Los Angeles Times story that ran Sunday, the presidents of the Howard Jarvis Taxpayers Assn. and the Small Business Action Committee said they would be open to narrow legislation to fix the law, which appears to allow such deals.

The statements mark a shift for two organizations that have long led the fight against changes to Proposition 13, the 1978 ballot initiative that transformed property taxes in California and sparked a nationwide tax revolt.

The Times story reported that billionaire computer magnate Michael Dell had avoided reassessment when he purchased a Santa Monica hotel for $200 million by bringing in his wife and two business associates on the deal.

Under Proposition 13, property is reassessed only after a change in ownership. But Dell and his partners technically avoided such a change by keeping each of their ownership stakes in the hotel company below 50%. Majority ownership by a single entity is the trigger for reassessment of business property under the arcane rules adopted shortly after Proposition 13 passed.

A court found the maneuver to be legal, saving Dell and his partners more than $1 million a year in taxes. Los Angeles County is appealing the ruling.

Both groups said Tuesday that if upheld, the Dell deal would indicate that businesses can use the law to evade taxation.

"This is a fairly clear example of someone gaming the system a bit," said Jon Coupal, president of the Howard Jarvis Taxpayers Assn., the organization named for one of Proposition 13's architects. "We have not seen that in the past."

Joel Fox, president of the Small Business Action Committee, which advocates for business groups on taxation and other issues, made a similar point. "It appears to me that there was a change in ownership and it should be recognized as such," he said. "We're not protecting some of these gimmicks."

Real estate and taxation experts say the change-in-ownership loophole has been used in the past and estimate it costs the state tens of millions of dollars a year in revenue. It has contributed to a slow shift in the tax burden from corporations to homeowners in the 35 years since Proposition 13 passed, they say.

Democrats in the California Legislature have tried to close the loophole for several years but have met with strong opposition from business and taxpayer groups, which have labeled the bills "job killers."

Some experts who follow the debate say the shift among pro-Proposition 13 groups may be a calculated risk to avoid a broader fight over the initiative.

Dan Schnur, director of USC's Jesse M. Unruh Institute of Politics and former chief spokesman for Republican Gov. Pete Wilson, saw the groups' new positions as politically "smart."

"You never want to be forced to defend the indefensible," he said. "They're much better off conceding a smaller fight rather than running the risk of losing a much larger fight."

"It still carries some risk," Schnur said. "They may run the risk of giving their opponents some momentum."

A bill by Assemblyman Tom Ammiano, AB 188, targets the change-in-ownership rule that Dell used. Among other things, it would require business property to be reassessed if 100% of a company that owns the real estate changes hands during a three-year period.

Ammiano's bill had been tabled but could be revived by a committee vote Monday. If it is forwarded to the full Legislature, it will require a two-thirds majority to pass.

Fox and Coupal remain opposed to the Ammiano bill, which they say is too broad and a "slippery slope" toward more sweeping change.

Their ultimate fear is adoption of a so-called split roll, which would require the regular reassessment of commercial properties regardless of ownership changes.

A recent poll showed 58% of likely voters support that change to Proposition 13, which is enshrined in the state Constitution but could be amended by a majority vote.

jason.felch@latimes.com

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