BIG PART OF BUDGET SOLUTION STILL STARING STATE IN FACE

CALIFORNIA FOCUS
FOR RELEASE: FRIDAY, JUNE 5, 2009, OR THEREAFTER

BY THOMAS D. ELIAS
"BIG PART OF BUDGET SOLUTION STILL STARING STATE IN FACE"

And so California's seemingly endless budget battles resume, with no convenient end in sight. That's one early result of the voters' Tuesday rejection of Proposition 1-A and several others intended to straighten out the state's balance sheet.

Another possibility - slim, but still present - is that lawmakers and Gov. Arnold Schwarzenegger will finally give serious consideration to one change that could begin to spell the end of all the repeated budget crises. All they need to do is revise the regulations that now permit some real estate to change hands without being reassessed.

For sure, plenty of draconian tactics will be suggested in the coming days and weeks. Schwarzenegger has already called for selling off landmark state lands and buildings, and that might be a fine idea for properties which are useless now and show no promise of ever doing much for citizens. But you can only sell off land or buildings once. When you do it, you are in a sense selling off your patrimony. This makes it a desperation tactic that won't solve the underlying spending and revenue problems behind the repeated budget crises.

There will be calls for cuts to education, where 10 percent increases in state college and university tuition and fees are already coming, while even legislators who have long backed public schools over anything else appear ready to accept reduced public school funding.

Not to mention cuts to state parks, health care for uninsured children and a host of other items that could cause real pain for many Californians.

Meanwhile, sitting out there in the wings is a budget solution first proposed by former Democratic state Sen. Martha Escutia of East Los Angeles as far back as 2003. She's long-since termed out, one reason her sensible proposal hasn't gotten much attention in years. The idea is this:

Amend the rules that allow real estate to change hands without being reassessed if the new owner is a partnership where no one person holds more than a 50 percent ownership stake. Some property involved in corporate mergers and acquisitions is also exempt.

This part of the rules for carrying out the Proposition 13 property tax system was adopted by legislators in 1979 amid strong lobbying by commercial real estate interests and the state Chamber of Commerce. It is plainly obsolete.

In 2006, the last time a legislative committee took a close look at changing the rules, sponsors of the change estimated it could produce between $3 billion and $12 billion per year. All affected properties would be either commercial real estate or apartments, so the change would cost individual owners of residential property nothing. All it would do is put affected land and buildings on an equal footing with houses, condominiums and other commercial and industrial property.

Why has this sensible idea never gotten much traction? Mostly because of claims change would be bad for business, a notion usually accompanied by contentions that Californians are overtaxed. In fact, this state is far from the top of the list in per capita tax collection, according to a springtime U.S. Census report.

California now ranks 12th in taxes paid, at $3,193 per person per year. Alaska is tops at $12,276, followed by the likes of Vermont, Wyoming, Hawaii, Connecticut, New Jersey, New York, Massachusetts and Minnesota. Changing the reassessment rules would not even move California up one notch.

What about the real estate bust of the last 20 months? It has not brought values down to anywhere near the levels at which the affected properties are now taxed.

The key thing here is that this change would not endanger even one provision of Proposition 13. This is not the "split-roll" proposed so often. That would tax commercial and industrial property at different rates from homes. Rather, this change would level the playing field, remove pressure for sales tax and income tax increases like those imposed this spring and still fill much of today's budget hole.

All of which means the defeat of Proposition 1A and its companion measures plus a fresh $8 billion to $9 billion budget problem caused by reduced state tax receipts this spring need not create panic, despite election results leaving the state with a deficit of about $15 billion.

For this could be the very kind of crisis that forces good sense on lawmakers. Making the change Escutia suggested would not be a tax increase, but merely tax equalization. It would not be a burden on homeowners. It would be a permanent source of revenue. It is one key part of the answer, if anyone cares or dares to notice.

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Email Thomas Elias at tdelias@aol.com. For more Elias columns, visit www.californiafocus.net