Why should we change Prop 13 for commercial properties?

Prop 13 has done a great job of protecting seniors from losing their homes in retirement once they settle into a fixed-income lifestyle. It is patently unfair to remove these protections from them, particularly in a dynamic real estate market like the one we have here in California. If we lived in Missouri, where property values change at a fraction of a percent every few years or so, prop 13 would be unnecessary. But we don’t, so prop 13 makes sense for older homeowners.

In the area of commercial property, however, prop 13 has become an unfair tax loophole that allows large, multinational corporations to avoid paying their fair share. There are many ways in which the status quo here creates problems, but the area I see as the most concerning centers on the unfair advantage established corporations have over their younger competitors. Let’s look at tech companies.

Intel has 36 acres of land in Silicon Valley that is taxed at $980 for every acre. Nearby, IBM – established long before Intel – has 200 acres that is taxed at the rate of $202 per acre. Consider that Google, a relative adolescent compared to both Intel and IBM, is charged $58,000 for every acre of land nearby on what is essentially the same piece of property.

Is it fair that Google pays 287 times more in taxes than IBM for their land? I know it’s easy to look at Google as the huge conglomerate that it is with all its cash reserves and astronomical stock value, but think about this from the perspective of job creation and innovation in our economy.

The vast majority of jobs are created within the first 5 years of a firm’s start. In the last 10 years, companies like IBM create very few jobs compared to ones like Google because the hierarchy of older companies is more fixed than new ones like Google while the focus of older companies like IBM tend to be more stable than ones like Google.

Protecting commercial properties owned by firms like IBM provides those stable firms – places where very few jobs are created – with an unfair competitive advantage over younger, less established firms. Most importantly, the status quo makes it harder for the start-ups to provide our economy with the first 5 years of job creation that will lift California out of the economic quagmire with which we currently struggle.

On this, I’m not talking about Google. I’m talking about the start-ups pursuing the innovative ideas that have made California the hub of innovation and an economic engine that once ranked 5th in the world; the next Google – if you will.

So, here’s the problem with prop 13 when you look at commercial properties: it stifles innovation because it is a system that inherently protects older corporations and penalizes new ones. If the highest rate of job creation occurs in the first five years of a company, then we would want to change prop 13 in order to stimulate more job creation.

On this, we have 2 choices. Remove the unfair advantage IBM has by requiring that it eventually pays market-rate taxes for its land. Or, if we wanted to be a really progressive state, we would create a system that shifts the tax breaks away from the IBMs and towards the first 5 years of a new firm.

At the minimum, we need to erase this unfair competitive advantage the IBMs have over the potential innovation and job creation that could occur with a newly formed corporation. At least level the playing field.

For your reference:

http://www.kauffman.org/newsroom/u-s-job-growth-driven-entirely-by-startups.aspx

http://caltaxreform.org/Silicon_Valley_Report_March_2012.pdf