There Is No Loophole in Prop. 13

Last week the media was all abuzz about a bill moving through the Legislature that would fix a “loophole” in Proposition 13. If this were a courtroom I would rise to my feet and object saying “Your Honor assumes a fact not in evidence!”

This objection would be sustained immediately because there is no “loophole” in Proposition 13 that needs fixing. The bill at issue Assembly Bill 2372 doesn’t change Proposition 13 because it can’t. The only way Proposition 13 — a part of the California Constitution — can be altered is by a vote of the People. Proposition 13’s overwhelming popularity among Californians especially high propensity voting homeowners makes that very unlikely.

What AB 2372 strives to accomplish is to address a technical tax issue involving fictitious entities such as Limited Liability Corporations and complex partnerships in a way that is wholly consistent with Proposition 13. The bill seeks to change what the legislature did to implement Propostion 13 shortly after it passed in 1978. The proposal is still subject to amendments and indeed must still be passed by the California Senate. In other words taxpayers will have ample opportunity to both monitor and if necessary oppose the legislation. If this bill in its final version does any violence to Proposition 13 is there any doubt that the Howard Jarvis Taxpayers Association would fight to death to defeat it?

We hope that doesn’t happen because the objective of the bill is worthy of support. Specifically under Proposition 13 when you sell your home it is reassessed to the full market value for the new purchaser. Of course the new buyer still enjoys the 1% rate cap and the certainty that the taxable value of their property will not increase more than 2% per year. But for properties that have been under the same ownership for decades the “taxable” value of the property can be much less than the market value. That is why Howard Jarvis and Paul Gann provided in Proposition 13 that upon “change of ownership” property would at least initially be taxed at market value. After purchase it receives the same 2% limitation on annual increases in taxable value as everyone else.

But some clever tax attorneys have advised clients that they can avoid Propostion 13’s intent to treat commercial transactions the same as homeowners by creating fictitious entities which themselves are transferred in an inappropriate attempt to avoid reassessment. In short these lawyers are attempting to hide the actual change of ownership from the county assessor so that no reassessment takes place and there is no subsequent property tax increase. This violates the spirit of Proposition 13 and actually gives its enemies a justification for arguing that all of Proposition 13’s protections should be stripped away for commercial property.

We at HJTA — who represent hundreds of thousands of homeowners desiring to preserve and protect Propositon 13 — are pleased that the business community has recognized this problem and has agreed it should be addressed. Indeed the biggest threat to business interests in California is losing Propostion 13’s protections altogether. By supporting a law that provides that when commercial property is transferred to new owners it should be reassessed the business community is doing their own interests and indeed the interests of all of us fighting to protect Proposition 13 a tremendous service.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.