It's time to close a big tax loophole for businesses

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The property was initially the subject of a 1986 deal in which the Equitable Life Assurance Co. sold an 81% interest in the property to an IBM pension plan, while formally retaining legal title.

This sale-but-not-a-sale wasn't discovered by the San Francisco assessors until 1993. Straightening out the transaction, an appeals court later remarked, required "an extensive investigation, review of thousands of pages of documents, a federal lawsuit," plus a long assessment hearing and two lawsuits in Superior Court.

Was it worthwhile? The ultimate recovery of taxes and fraud penalties in these high jinks came to $64 million, the appeals court reported.

But 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.

In economic terms, rationalizing the assessments of commercial and industrial property may be the best way to broaden the state's tax base. For one thing, it's close to the “ideal of non-distorting taxes," as UC Davis economist Steven M. Sheffrin recently told a state panel that was considering changes to the state's tax structure.

By this he means that it doesn't skew business decisions on whether to build or buy a structure.

That's because most of the underassessment of business property derives from the valuation not of buildings but the land under them -- any new or acquired structure will be assessed at market value, so a split roll won't affect that aspect of the investment decision.

It would, however, help eliminate the same inconsistent taxation that afflicts the post-Proposition 13 residential market, where two neighboring properties can receive wildly divergent tax bills simply because of when they last changed hands.

San Francisco Assessor Phil Ting, a leading advocate of the split roll, reports that the Neiman-Marcus on Union Square has an assessed value of $761 per square foot, more than twice that of the Macy's next door, simply because the Neiman's property changed hands in 2006 and Macy's in 1995.

The two stores may not address exactly the same clientele, but they're not that different. Similar disparities exist all around the business district, Ting told me.

"Property taxes are supposed to be based on value, but these rates have nothing to do with that," he says.

Anti-tax crusaders will muster a lot of threadbare arguments against the split roll.

They'll say raising rates will burden small businesses that will see the increases in their rent bills. Goldberg proposes moderating that effect by eliminating property taxes on the first $1 million of a business' "personal property," which in practice means its equipment and machinery, tools and furniture, most of which is a pain in the neck to assess anyway.

They'll say the higher tax will be passed on to California consumers, but that's not so easy. The marketplace sets consumer prices -- one Beverly Hills hotel can't charge four times the room rate of another just because it pays four times the property tax per square foot, for example.

They'll say, finally, that higher property taxes will drive businesses out of California. Leaving aside the question of whether Disneyland can be moved to, say, Arizona, the truth is that what's really going to drive businesses and residents out of this state is a crumbling infrastructure and a tax system that doesn't work for anybody. The split roll would be a good place to start getting it to work for everybody.

Michael Hiltzik's column appears Mondays and Thursdays. Read previous columns at hiltzik and follow @latimeshiltzik on Twitter.
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