Saturday, August 1, 2009





And so another California budget agreement is reached, full of program cuts and higher fees, but without the slightest attempt to plug the biggest tax loophole in California history, one that has cost the state at least $90 billion and possibly as much as $300 billion over the last 30 years.

It’s not that Gov. Arnold Schwarzenegger and the lawmakers who were his accomplices in yet another fiscal fiasco didn’t know about this budget solution. This column has been calling it to their attention for years, and some officials have emailed responses to those pieces.

The termed out former Democratic state Sen. Martha Escutia of Eastern Los Angeles County pushed an end to the loophole as long as she held office. The Los Angeles Times has called for a correction. The California Tax Reform Assn. has wanted this fix for more than a decade.

But it has yet to receive serious consideration in Sacramento, even at a time of utter budgetary disaster.

Take a look at the just-enacted budget, the one adopted after politicians refused even to consider plugging this loophole, which creates a privileged class of property owners able to evade the reassessments normally performed under Proposition 13 whenever real estate changes hands.

Their budget includes billions of dollars in cuts to public education, closes some state parks, eliminates health care for many thousands of children and poor adults, and on and on. It calls for selling off many state properties, some of which were bequeathed to the people of California supposedly in perpetuity.

Maybe some of these cuts would still be needed even if the big tax loophole were closed. For sure, all could at least have been reduced.

Here’s the loophole: Whenever partnerships buy a property and no one individual holds a majority stake, the transaction is not considered a change of ownership and the property thus does not get reassessed. When one big vintner recently purchased 1,700 acres in Napa County, for instance, lawyers set up the new ownership as a partnership of several family members rather than part of the family’s company. So taxes on that land are still based on decades-old valuations.

Closing this loophole would not be a new tax; it would only force partnerships like that one to pay the same level of taxes every homeowner or small business pays when buying a home or storefront: 1 percent of the most recent purchase price. What’s more, current definitions of what constitutes a change of ownership are not part of the original 1978 Proposition 13; rather, they are regulations passed by legislators in 1979.

All it takes to equalize taxation in this state, therefore, is a simple majority vote in the Legislature, plus the governor’s signature. No two-thirds vote. No ballot initiative. Certainly no constitutional convention. But none of the state’s so-called leaders has been willing to act.

How much revenue has the cavalier attitude of top officials spurned? When Escutia conducted hearings, the estimates of money lost through this measure ranged from $3 billion per year to $12 billion. At its low end, thus, changing this one regulation would be enough to keep elementary school class sizes at current levels, keep all state parks open and more. Schwarzenegger and the lawmakers would have a full menu of program choices to restore.

Of course, changing a few other Proposition 13-related regulations could produce even more money for the cash-starved state.

One often-cited example came when the Canadian firm Intrawest Corp. bought the popular Mammoth Mountain ski resort in 1997. The deal left management control with the sellers, so there was no reassessment. By some counts, the tax loss over the eight years until the resort was next sold amounted to $20 million. That was about $2.5 million per year in lost revenue from just one property. Other subterfuges involve mergers and acquisitions where properties are controlled by new owners using old company names.

Fixing the regulations that allow these dodges would not be a new tax. It would merely force new corporate owners or partnerships to pay the same taxes as homeowners and owners of commercial property or apartment buildings who have been honest.

The sense that this would be a new tax is one reason it has yet to be taken seriously in Sacramento. Another reason might be the tact that real estate and development interests are among the top three classes of campaign donors to officials of both major parties.But once it dawns on denizens of the Capitol that they are fostering an unequal tax system and condoning a privileged class of property owners, attitudes might change. When they understand how much money is at stake, they might also realize this is one way to lessen or avoid another budget crisis next year.

Call it neglect or incompetence, it is a disgrace that this injustice has lingered for years after lawmakers and the governor became aware of it.
Email Thomas Elias at For more Elias columns, visit

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