Fixing California Through. . . Higher Taxes On Business?

The Los Angles Times today has a headline that declares: "It's time to close a big tax loophole for businesses." That tax "loophole" refers to corporations abusing a tax law created by Proposition 13 in 1978. It prohibits reassessment of property for real estate tax purposes, except at the time of sale. The article claims that businesses have been dodging their real estate taxes by stretching the intent of the law, and that needs to be fixed as soon as possible. I can only ask: really?

Really LA Times? With California suffering 11.5% unemployment in May, and almost certainly higher in June and now in July, now is the time to increases taxes on corporations? I know California has some significant fiscal issues, which higher taxes might help. But I can't be convinced that corporations, which must be depended on to bring unemployment down from its catastrophic levels, need to be taxed more this instant.

The article also has a sort of unclear focus. On one hand, it seems to be arguing against corporations taking advantage of the loophole by shadily dodging reassessment, when they shouldn't be:

Consider the 1997 acquisition of Mammoth Mountain ski resort by Vancouver, Canada-based Intrawest Corp. When the Mono County assessor attempted to reassess the resort, Intrawest argued that although it had acquired a majority of Mammoth's shares, it had left voting control on numerous management issues in the hands of the sellers. Therefore, it claimed, no change in ownership had occurred. That cost the county what the assessor calculated was $20 million in taxes over an eight- or nine-year period.

Okay, point taken. Those actions probably shouldn't be allowed. But in reality, it has a tone that seems to indicate that this statute should never have applied to commercial real estate in the first place:

Disneyland, which hasn't had a reportable change of ownership since, well, forever, is currently taxed at an average of about a nickel per square foot. For comparison, a median California home bought last year out of foreclosure, measuring 1,600 square feet and selling for about $330,000 (these are averages from the California Assn. of Realtors), would incur property tax of about $3,300 per year, or $2.06 per square foot.

So which is it the Times arguing for? Despite what the headline reads, it's actually arguing more for the latter -- for commercial real estate to be taxed differently from residential real estate.

I'd agree, but not in a way the author has in mind. I think commercial real estate should have lower taxes than residential real estate, so that more jobs can be created and corporations' costs savings can be passed on to consumers. I'm not arguing that now is the time for California to increases taxes on anyone, but the idea that taxes should be increased on corporations there, in this climate, is sheer lunacy.

But the article does make a very valid point:

If Gov. Arnold Schwarzenegger really wants to wipe out waste in this state, he ought to think about the millions of dollars squandered over 13 years in chasing down the facts.

That's right. And it's an argument for a clearer tax code -- something pretty much everyone can agree on.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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