EE_
6th November 2012, 06:45 AM
I don't think it will get recinded, but it certainly should be a worry.
California has to find money somewhere.
Californians Started the Tax Revolt 34 Years Ago. Will They End it Today?
—By Kevin Drum
| Tue Nov. 6, 2012 1:45 AM PST16.
California Governor Jerry Brown, then and now. State of California; Sacramento BeeThe great American tax revolt got its start in June 1978, when California voters passed Proposition 13, a ballot initiative that cut and capped property taxes and required a two-thirds vote to pass any future tax increases. Jerry Brown was governor back then, and initially he opposed Prop 13. Once it passed, though, he became such a fervent apostle that four months later Howard Jarvis, the father of Prop 13, was cutting campaign commercials for Brown's reelection bid. Today, at age 74, Brown is no longer the Governor Moonbeam that Garry Trudeau famously dubbed him back in the 70s, but he is governor again. And guess what? In a Groundhog Day kind of way, Proposition 13 is back on the ballot again too.
Naturally, there's a backstory here. The Golden State has had a rocky past decade, starting with overoptimistic spending during the dotcom boom; red ink as far as the eye could see during the dotcom bust; and finally, in 2003, a special election that propelled movie star Arnold Schwarzenegger into the governor's mansion. Schwarzenegger won largely because of a second, mini-tax revolt, this time over an increase in the vehicle license fee, which he promised to roll back. He kept his promise, immediately plunging California back into deficit, and then passed a revenue bond that papered things over for a couple of years but, in the long run, just made California's problems worse.
Still, for a couple of years toward the end of Schwarzenegger's second term, the state budget started looking a little better. But it was just a mirage. California's structural deficits had never really been addressed, and when the Great Recession hit in 2008 things went pear shaped fast. And while Republicans may be a fading force in California, they maintain just enough members in the legislature to prevent any tax increases—thanks to Prop 13's two-thirds requirement—something which has left Sacramento with no choice but to slash the budget brutally. In current dollars, California spent $3,100 per resident out of its general fund in 2007. Today that's down to $2,400. (Raw numbers here.)
Because of this, schools have suffered, universities have suffered, and, of course, the poor have suffered. Further cuts this year would cause even more devastation, so Brown is resorting, once again, to California's initiative process to fix things. Ironically, though, this time he's campaigning hard for Proposition 30, a measure that would temporarily increase income taxes on the rich and sales taxes on everyone. The money would mostly be earmarked for K-12 schools and community colleges. If it doesn't pass, automatic triggers in the 2013 budget will take effect, slashing $6 billion in planned spending.
So here's the question: will California voters, who so famously started the tax revolt 34 years ago, agree to Brown's plan to bypass the two-thirds requirement they themselves put in place and raise their own taxes? If Prop 30 passes, it would symbolically mark an end to the tax revolt, and for this reason it's attracted more than just the usual opposition from within California. It's also attracted huge amounts of opposition funding from outside the state. Huge and mysterious: an Arizona outfit called Americans for Responsible Leadership has committed $11 million to the fight against Prop 30 (as well as the fight for Prop 32, a union busting measure), but has steadfastly refused to disclose where the money came from. Under a court order, they finally revealed the source of the money on Monday, but they still had the last laugh: the source they revealed was just another mysterious organization, and it's too late to force that organization to reveal the real source of the money. Andy Kroll has the whole story here.
So will Prop 30 pass? It's on a knife edge. The most recent Field Poll, the gold standard in California polling, shows that all that outside money has had an effect. Support has dropped substantially over the past month, and now stands at 48%-38%. A separate poll from PPP put Prop 30's support at 48%-44%. That may seem like a comfortable lead, but conventional wisdom says that once an initiative drops below 50%, it's in trouble. The undecided voters almost always end up voting No in large numbers.
So that's where we stand. Today, at the behest of the same governor who came to personify the start of the tax revolt in America, Californians will decide whether they've had enough. After watching school funding and basic service funding atrophy for over a decade, is it finally time to call off the tax revolt? In a few hours, we'll find out.
http://www.motherjones.com/kevin-drum/2012/11/californians-started-tax-revolt-34-years-ago-will-they-end-it-today
EE_
6th November 2012, 07:47 AM
Prop 13: The Building-Sized Loopholes Corporations Exploit
January 4, 2012
The towering case of fraud was yet another unforeseen consequence of Proposition 13. Thirty-three years ago, the specter of indigent grandparents being taxed into the streets led Californians to overwhelmingly approve the ballot measure. Prior to 1978, assessors didn't much care who owned a building — property was appraised yearly and taxed based on that valuation. Prop. 13 changed things with the subtlety of a thunderclap. Property values are now essentially frozen at the year the owner obtained the real estate, and only reassessed when it changes hands. Determining ownership — and when it changes — is paramount.
And after all these years, Assessor Phil Ting admits the city is no less vulnerable. "It would be great to review a lot more properties to determine if we're missing changes of ownership," he says. "But it would be very, very difficult to detect."
In the meantime, society's wealthiest and most powerful — "the 1 percent" in the parlance of those who were until recently encamped in the shadow of One Market Plaza — exploit loopholes in Prop. 13 to grow wealthier and more powerful still. Read more.
January 4, 2012
By: Joe Eskenazi
Copper thieves are pilfering copper. Carjackers are jacking cars. Home burglars, however, are not making off with homes. The plot of the recent film Tower Heist did not involve stealing an office tower. It remains challenging to abscond with a building.
But what if you could? Bolt-cutters and a flatbed are always handy, but you wouldn't need them. All it would take is a pen and a sheaf of documents to sign — and the ability to keep the facts away from the county assessor's office. That's how it worked here in San Francisco, where billion-dollar companies conspired to conceal a skyscraper's change of ownership, depriving the city of millions of dollars in tax payments.
The towering case of fraud was yet another unforeseen consequence of Proposition 13. Thirty-three years ago, the specter of indigent grandparents being taxed into the streets led Californians to overwhelmingly approve the ballot measure. Prior to 1978, assessors didn't much care who owned a building — property was appraised yearly and taxed based on that valuation. Prop. 13 changed things with the subtlety of a thunderclap. Property values are now essentially frozen at the year the owner obtained the real estate, and only reassessed when it changes hands. Determining ownership — and when it changes — is paramount.
In most cases, it's relatively straightforward: Gavin Newsom sells his home for $2.75 million, a deed is recorded, and the new owner pays property taxes on a reassessed base. But, under state and federal law, corporations are afforded the same rights enjoyed by individuals; Mitt Romney was artless when he told a crowd "Corporations are people, my friend" — yet he was factually correct. And while it's fairly simple to ascertain when the Newsoms sell their house, determining the ownership of property held by massive conglomerates or intricate partnerships can be maddening. Especially when they want it to be.
Most new buyers are left with little recourse but to grumble that their property taxes are many times higher than those paid by longstanding residents and businesses. Recent buyers in every California city are subsidizing their neighbors. But corporations with no overriding desire to shell out millions in taxes do have options — and access to sharp legal minds. The definition of what constitutes a change of control of corporate property allows for remarkable leeway in avoiding a reassessment, shrinking needy cities' tax hauls by billions. Assessors awaiting deeds as a result of mergers, acquisitions, and other corporate transactions may wait forever.
A business selling 100 percent of its real-estate interest without triggering a reassessment isn't hypothetical — or even an oddity. "These kinds of transactions are being done all the time," says USF law professor Dan Lathrope. "Anyone doing a big real-estate transaction knows what triggers reassessments." It's all perfectly legal — companies can effectively change hands many times over, but never in a way resulting in a deed heading to the assessor's office, and buildings' tax bases remain at levels from the Carter administration.
That's the case even when the line between cunning and devious is breached. In San Francisco, a pair of Fortune 500 companies fraudulently cloaked a change of ownership of One Market Plaza, one of the city's largest office buildings — to prevent a reappraisal that would have upped the structure's value from some $113 million to around $400 million. These firms were caught and made to pay — astoundingly, in retrospect — but not in a manner inspiring hope for nabbing future purveyors of fraud. The scheme was sniffed out not by proactive city employees but private attorneys. Even once the machinations were laid bare, the city repeatedly attempted to go easy on the guilty parties. The case plodded through court for nearly 18 years, spinning such a convoluted web of litigation that, at one point, the city sued itself.
One Market Plaza remains the city's only instance of fraud penalties being levied following a concealed change of ownership; the California Assessors' Association can't recall another case statewide involving commercial property. And after all these years, Assessor Phil Ting admits the city is no less vulnerable. "It would be great to review a lot more properties to determine if we're missing changes of ownership," he says. "But it would be very, very difficult to detect."
In the meantime, society's wealthiest and most powerful — "the 1 percent" in the parlance of those who were until recently encamped in the shadow of One Market Plaza — exploit loopholes in Prop. 13 to grow wealthier and more powerful still.
Loopholes large enough to push a building through.
Attorney Wayne Lesser had been in any number of contentious legal meetings — but usually he knew whom he was meeting with. In a sit-down with One Market Plaza officials, everyone introduced himself — save for one guy at the end of the table. When asked who he was, he responded "That's not important." Then things got weird.
Lesser's client, Joe Abouab, was a Moroccan-born sandwich-maker whom One Market Plaza was evicting in order to install a food court. Abouab had three years left on his lease. All Lesser wanted was "some moving expenses, some juice." It wouldn't have taken much. But the guy without a name wasn't having it. Twenty years have passed, but Lesser recalls exactly what came next. "He looked at me and said 'We're not gonna pay him a dime. We're gonna bury him.'"
That concluded the meeting. But it started so much more. Because when the eviction papers came, Lesser noticed the company name didn't match the registered owner of One Market Plaza. Lesser later learned the man without a name worked for the Yarmouth Group, a property management firm contracted by IBM — also not a registered owner. Even after Abouab went out of business and his proceedings became moot, Lesser and fellow attorney Michael Mendelson continued digging into who owned One Market Plaza.
On paper, One Market Plaza was 90 percent owned by Equitable Life Assurance and 10 percent the property of Southern Pacific, and controlled by a joint venture between the companies. But when Lesser and Mendelson buttonholed building tenants, they claimed the IBM Pension Plan — a subsidiary of the computer giant — was calling the shots. "A friend of mine works for Equitable," says Lesser. "And I said 'Would you do some checking for me? Does Equitable own this building?' He got back to me and said, 'On the QT, no!'"
Federal and state filings Mendelson unearthed corroborated this, indicating Equitable and the IBM Pension Plan (the Plan) had executed an arcane financial transaction, obscuring the true ownership of One Market Plaza. When asked if the assessor could have obtained these documents, Mendelson grins. "Abso-fucking-loutely," he responds.
But that didn't happen. The Office of the Assessor-Recorder received an anonymous tip regarding One Market Plaza in late 1990 or early 1991, per court records. An appraiser asked an Equitable executive if a change of ownership had taken place. He was told no. This was the legal equivalent of shining a flashlight into the hen house and being told "Ain't nobody here but us chickens." But it was good enough for San Francisco's assessor.
After Lesser and Mendelson filed a legal writ in 1992, more substantive work was undertaken. Stephen Dunbar, then the chief assistant assessor for the city, overruled several underlings, who had made a few calls and insisted no change of ownership had occurred. Instead, Dunbar exercised his office's subpoena power; he still recalls the day UPS wheeled 26 boxes of documents from the Plan into his office. "They were hoping somebody who didn't give a damn would pick that case up," he says with a laugh. "Instead they got me." For four months, he waded through the documents in those boxes, connecting the dots Lesser and Mendelson had uncovered. Dunbar pieced together a scheme as brilliant as it was underhanded, which deprived the city of scores of millions of dollars. "I am still blown away," he says, "that someone would do what they did."
Decades later, Lesser and Mendelson still complain the City Attorney's office never truly grasped the complexity of the scheme behind One Market Plaza. Representatives of the City Attorney's office, meanwhile, portray the private lawyers as self-interested money-grubbers angling for a chunk of the millions the city stood to gain. Both points of view are compatible.
The ploy Equitable and the Plan pulled off was Byzantine even by the advanced standards of Prop. 13 property reassessments. The origin of the maneuver was amusingly simple, though. The Plan, looking to add to its real-estate portfolio, asked investment adviser Equitable for advice. Equitable found a solution seemingly beneficial to everyone — why not fob off its own building on the Plan? A simple transaction would have resulted in a giant reassessment. But this is where simplicity ends.
Equitable made its bones selling annuities — contracts providing a distribution of income over time. So it structured the transaction in the form of an annuity, largely backed by one gargantuan asset — One Market Plaza. In exchange for $185 million, Equitable put 90 percent of its 90 percent stake in the building into the annuity. But rather than a guaranteed income stream, the Plan stood to gain or lose based on the fortunes of One Market Plaza. The Plan collected tenants' rents, and assumed day-to-day control of the building. In Dunbar's eyes, this constituted a change of ownership. "What ironclad rights IBM had!" he recalls. "They dotted every I and crossed every T to ensure they had 100 percent complete control of the property, even though there was no deed in their name." As a later Appeals Court ruling quipped, "Apparently, the only right of ownership denied to the Plan was the right to record the deed." The Plan avoided a hefty reassessment, and Equitable could demand a higher "sale" price based on that fact.
Equitable, retaining ownership on paper, placed the annuity within a "separate account" it ostensibly maintained for the Plan. "Separate accounts" are segregated from insurance companies' general accounts; even if Equitable were to founder and be swarmed by creditors, the "assets" held for the Plan would be safe. They were also safe from the eyes of San Francisco's assessor, hidden beneath strata of paperwork in a place no one would have thought to look.
Again and again, Equitable and the Plan took pains to conceal their moves from the city. Equitable claimed no change of ownership had occurred on state tax forms, even after it subsequently sold its remaining interest to the Plan, had no ownership or management involvement whatsoever in the building, and canceled its property insurance coverage of One Market Plaza. The Plan denied it owned the building — to the city. But it represented itself as the owner to the Department of Labor, and also in its contract with the Yarmouth Group — which it brought in to "bury" tenants.
Following Dunbar's four-month archaeological expedition through company files, the skyscraper was reassessed at ranges between $257 million and $400 million for the years 1987 to 1994 — and also hit with a 25 percent fraud penalty. Litigation ensued. Following a nine-year sojourn in federal court, the companies' case against the city was dismissed. The Plan then took the matter before San Francisco's Assessment Appeals Board. The city, however, attempted to settle, twice negotiating deals that would lessen the burden on the Plan — and eliminate fraud penalties. Both times the Assessment Appeals Board (AAB) spurned the settlements. The case went before the AAB in 2001, and the city scored a total victory. The AAB affirmed a change of ownership most definitely took place — and was fraudulently concealed to boot. Litigation recommenced; at one point the assessor's office even took the AAB to court over the appraised value of One Market Plaza's garage.
It wasn't until 2009 that the case ran its course, and San Francisco had just shy of $23 million in additional taxes and fraud payments to show for it. That includes $12.6 million the city refunded the Plan — even after proving it committed fraud — as a concession that the initial assessment was too steep.
So what did it take to nail those intent on defrauding San Francisco? Nearly 20 years, for starters. It also required a series of chance discoveries triggered by the complaints of a disgruntled sandwich-maker and legwork undertaken by private individuals — which city employees blew off. It took a hardheaded deputy assessor willing to overrule his lazy subordinates and spend months rooting through heaps of documents. It required an AAB unwilling to accept lenient settlements. And it took a pair of lawyers who would toil for well over a decade and end up receiving nothing in return.
Absent these random and lucky circumstances, San Francisco will not snare the next One Market Plaza. Yet even when bizarre real-estate transactions do come to the city's attention, often it finds there's nothing to be done about them.
After months spent elbow-deep in financial statements and federal filings, the whistleblower thought he'd assembled an airtight case. In a detailed packet he sent to Assessor Phil Ting, he outlined how the Perini Corporation incrementally transferred shares of the company controlling the sprawling Golden Gateway Center "urban residential community" on the Embarcadero to a consortium of interconnected investors. By 1994, Perini was completely divested — but no deed indicated a change of ownership. Nor was the property, currently appraised at $66.8 million per the assessor's website, reassessed as a result.
Yet the assessor and state Board of Equalization noted nothing amiss. The whistleblower uncovered a textbook example of an element of Prop. 13 allowing corporate-owned properties to turn over repeatedly without triggering reassessments. Even when assessors get wind of such events, they're relegated to referees at a professional wrestling match, approving outrageous move after outrageous move, all of which fall within the purview of the rules.
If the sale of the Golden Gateway Center had been of the land, each transaction may have resulted in a reassessment of that chunk of property and an adjusted tax bill. But it was a deal involving the corporation controlling the land — and that made all the difference. Under state law, only transactions resulting in a single person or body obtaining 50 percent or more of a legal entity qualify as a "change in control." State lawmakers never intended for savvy companies to permanently lock in low property taxes by buying in groups. But that's what's happened, repeatedly, since Prop. 13 took effect. In 2002, for example, wine barons E&J Gallo purchased 1,765 acres of vineyards in Napa and Sonoma from Louis M. Martini. But the deal avoided a reassessment, because 12 Gallo family members individually obtained minority interests. "It's not a loophole that was intended," Board of Equalization Executive Director Kristine Cazadd told the Orange County Register. "It smells like, it looks like an acquisition, but we are scratching our heads." Structuring deals to avoid reassessments isn't a cottage industry — it's a skyscraper industry.
One could question the ethics of engaging in such shenanigans, but lawyers failing to exploit the shortcomings of the law are failing their clients. "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury," wrote former federal appeals court Judge Learned Hand in the 1930s. "There is not even a patriotic duty to increase one's taxes.... Nobody owes any public duty to pay more than the law demands."
What the law demands can be most malleable. There's money in avoiding property reassessments, and in not avoiding one. "How to Permanently Reduce Your Property Taxes" reads the headline in a December article by San Jose attorney Bernard Vogel III in a Southern California legal paper. This is no hyperbole, Vogel says. Companies that bought property at top dollar several years ago could be well served to intentionally rejigger their corporate structure in a manner leading to a reassessment, then lock in today's low property values. Even if the market skyrockets, those companies will be paying property taxes based on a current low-end appraisal. Using this maneuver, Vogel says, he lowered the assessment on a client's Santa Clara property from $80 million to $38 million. It's all perfectly legal.
Ambulance-chasing may have been the stock-in-trade of the legal profession for centuries. But building-chasing is where the money is.
Tracking how many assessable events — how many One Market Plazas — slip past the assessor's office is befuddling; it recalls Donald Rumsfeld's "known unknowns" and "unknown unknowns." Stephen Dunbar knows, though.
"I'm contacted by attorneys quite often asking me to look at a transaction and see if it's something that should result in a reassessment and higher tax bill," says Dunbar, now a private appraiser. "Often I do say there should be a reassessment. But it's their choice whether to report that to the appropriate authority. And quite often they don't." And in that case, the assessor probably doesn't find out. "The assessor is so busy doing the easy, slam-dunk stuff, they don't look at these other events."
Catching the next One Market Plaza without the benefit of a disgruntled sandwich-maker would require a vastly different approach. The assessor "is managing the day-to-day stuff. But is he looking where he should be to make sure people are afraid of them?" asks Ron Chun, a tax lawyer and former deputy assessor. Chun chaired the Assessment Appeals Board that ruled on One Market Plaza and twice ran unsuccessfully for assessor. A former IRS agent, he thinks the assessor should emulate the tax men. "They need troops on the ground. They need people saying 'Hey, we'd like to audit you.' 'What'd I do wrong?' 'Nothing. We'd like to do it anyway.'"
Focus on downtown; it's where the money is, continues Chun. Randomly choose a handful of big buildings. And if you ferreted out even one transaction — well, "that'd indicate how widespread the problem is." Dunbar agrees. "One Market Plaza had no event that brought it to the assessor's attention. There are a lot of properties in San Francisco that are never looked at because they don't have that trigger event. Their bills could be bigger."
In fact, the assessor already audits San Francisco businesses. But "real property" — land and buildings — is not audited. Only "business and personal property" — computers, office equipment, vehicles — is. When asked why real property couldn't be subject to random audits, Ting replies, "that's a great question."
As California's only city-county, San Francisco retains a vastly larger portion of its property taxes than anywhere else, around 65 percent. Most counties only keep between 11 and 29 cents on the dollar; here, it would make unquestionable economic sense to vastly enhance the assessor's office. Ting notes that his department's budget has seen its general fund allocation rise from around $11 million five years ago to some $15 million currently. This growth represents one-tenth of 1 percent of the general fund — for an office generating 39 percent of the fund's revenue.
The reason Ting isn't blessed with more money and manpower is that it might make his office too effective, and, unlike the head of the IRS, the assessor is an elected position — as are the supervisors who approve his budget. Sure, San Francisco is facing down a $263 million budget shortfall, but there would be a different price to pay for empowering city employees to harry taxpayers. "A bumper sticker popular when Prop. 13 was enacted said 'Bring Back the Corrupt Assessors,'" says U.C. Berkeley law professor David Gamage. Assessors had attempted to "modernize, rationalize, and make effective assessment laws. But, on an individual basis, voters don't like having property taxes enforced in a rational, effective manner." Neither do corporations.
"We are not knocking on doors," Ting notes. Instead, he says, his staff diligently peruses the San Francisco Business Times to spot potential reassessment-inducing transactions. They also monitor communications from the Franchise Tax Board and Board of Equalization (BOE). Corporations, in fact, now must report more information to the government than ever before. Those failing to inform the BOE of an ownership change face hefty penalties. The BOE sends twice-monthly Legal Entity Ownership Program (LEOP) reports to all assessors, who may then look into reassessing local holdings.
This program is not infallible. A 2002 merger that should have resulted in reassessments of every Jiffy Lube property in California wasn't caught until David Kersten, a private researcher with the California Tax Reform Association, contacted the BOE in 2010. Meanwhile, multiple sources within San Francisco's assessor's office confirm one dazzlingly inept employee, unable to grasp the substance of the LEOP reports, simply crammed them into his desk — for months. Once a property falls through the cracks, it tends to stay there. Asked if there's a retroactive measure to undo past oversights, Ting responds "There really isn't."
One of the most sought-after experts on Prop. 13 is also a stay-at-home mom from the Peninsula. Jennifer Bestor is a former high-tech executive with an infectious laugh and an insatiable drive for research who systematically crunched the numbers from the assessor's rolls in her hometown Menlo Park and its neighboring environs. A Republican whose ancestors have been GOP members since it truly was the party of Lincoln, she has become one of the most outspoken critics of Prop. 13.
Bestor wanders through the suburb's quaint downtown. By memory, she recites the property tax payments of store after store. Per Prop. 13, they're wildly variant; the hulking Trader Joe's has been owned by one family trust for generations. It's valued in the vicinity of $700,000 — less than many of the nearby houses it dwarfs — and contributes around one-ninth the property taxes of a grocery store around the corner. Property taxes are the lifeblood of local communities — but the savings generated by that piddling assessment are enjoyed by out-of-state heirs. George Carlin used to say that one advantage of living in the past is that it's cheaper. In California, it's the basis for property tax administration.
Bestor's findings have percolated into Ting's stump speech about the iniquities of Prop. 13 — he brought up the Trader Joe's to SF Weekly spontaneously. Ting has met with Bestor at least four times, last year handing her the city's "Land and Improvements" list to pore over.
This data breaks down the percentage of the city's property tax revenue based on the year the real estate was last assessed. Like other municipalities Bestor has researched, San Francisco's is not a pretty picture. Going back to 1995 — older transactions aren't included in the city's database — 53 percent of property has been reassessed. Yet these recent buyers pay 78 percent of the city's overall property tax. Among single-family residential properties, 57 percent of homeowners are paying 81 percent of the taxes. Most San Franciscans are, literally, not getting their money's worth. The winners under Prop. 13, Bestor notes, are "heirs and legacy corporations. We're creating trickle-up wealth."
We're also not going to do much about it. Critics of Prop. 13 like to complain it's been deified by spineless politicians — but We the People like it, too. A September Field Poll revealed 63 percent of state voters would pass Prop. 13 today. Fifty percent of those polled would even oppose raising the tax rate on business and commercial property — down from 68 percent in 1980. Meanwhile, it would require a two-thirds vote in the Legislature to close loopholes regarding corporate "change of control." Good luck with that.
In today's fiscal and political landscape, it seems the will is not there to undertake the labor-intensive, proactive steps required to snare the next One Market Plaza — even before crossing swords with ace corporate lawyers. Provided they set aside a little cheddar for the disgruntled sandwich-makers, don't expect to be reading about the next fat cats busted for concealing a change of ownership anytime soon.
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