By Melody Gutierrez

San Francisco Assemblyman Phil Ting calls it one of the most vexing issues in the state Capitol, a loophole in California’s Proposition 13 that allows commercial property buyers to wiggle out of paying higher taxes.

It’s a problem, Ting says, that even the staunchest defenders of the 1978 initiative have agreed needs to be fixed. No one, however, has agreed on how.

The law, called the People’s Initiative to Limit Property Taxation, was designed to protect property owners from substantial increases in property taxes due to annual reassessments and rising property values. When it passed, it reduced property taxes by 57 percent and capped annual tax increases at no more than 2 percent of the inflation factor — unless the property changed hands.

Prop. 13 defined a change of ownership as consisting of a single purchaser buying more than 50 percent of a property. The change of ownership triggers a reassessment, and thus higher taxes. However, some commercial property buyers have structured deals to list multiple individuals or entities and avoid the 50 percent ownership rule.

By doing so, commercial property buyers have been able to avoid having properties reassessed for decades, avoiding higher tax bills.

“When Prop. 13 passed in 1978, it helped millions, especially those on fixed incomes, stay in their homes,” said John Kim, executive director of the Advancement Project, a nonprofit that partnered with a coalition to reform Prop. 13 called Make It Fair.

“But the same people it was designed to protect are now being taken advantage of. Because of a structural flaw in Prop. 13, big businesses and wealthy commercial property owners are able to take advantage of the same tax protections that were intended to benefit individuals.”

Ting, a former San Francisco assessor, on Tuesday will introduce AB1040, which is designed to eliminate the loophole by changing the definition of what constitutes a change of property ownership.

“Coming to Sacramento, my biggest frustration is that we all know what the big issues are, but there is a lack of willingness to tackle them,” Ting said. “There is no bigger issue that fits that mold than Prop. 13.

“The challenge is trying to figure out how to bring people together,” he said.

Tom Ammiano, a Democrat from San Francisco who termed out of the Assembly last year, carried a bill to close the commercial ownership loophole in 2014, with the proposal earning rare support from labor and business groups before falling apart. The labor-backed California Tax Reform Association said it pulled support from the bill to focus efforts on more significant changes to Prop. 13.

One such proposal surfaced last month.

State Sens. Loni Hancock, D-Berkeley, and Holly Mitchell, D-Los Angeles, are calling for commercial and industrial properties to be assessed regularly at full market value, while leaving residential and agriculture properties under the existing law that assesses properties only during a change in ownership. The constitutional amendment would need two-thirds approval from the Legislature in order to be put on the ballot for voters to decide in November 2016.

However, the “split roll,” proposal is opposed by business and taxpayer groups, making its chances of earning necessary Republican votes in the Legislature unlikely.

A bill similar to what Ammiano proposed last year was picked up by state Sen. Patricia Bates, R-Laguna Niguel (Orange County), but that too faces major hurdles, this time in earning support from labor and Democrats.

“The complaints of Prop. 13 have continued for 37 years,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, which is named for the man who led the campaign to pass Prop. 13. “Some years there are more than other. This seems to be a more vocal year.”

Coupal said his group plans to support the Bates bill. He said he could not yet comment on the Ting bill because he had not seen it.

Ting said he hopes his bill can begin the necessary discussions to finding a workable solution for all sides. That’s why, he said, the exact formula for what constitutes a change in ownership was left blank in his bill pending those discussions and hearings.

The Assembly Revenue and Tax Committee, of which Ting is chair, scheduled a public informational hearing on Prop. 13 at 10:30 a.m. Friday at Milton Marks Auditorium in San Francisco.

Ting said he knows it may take time to find a workable solution.

“There is time this year, but it may be a two-year bill or a four-year bill,” Ting said. “This issue has been around since 1978. I’m hopeful to get the parties together. My hope is all sides see there is a need to have this dialogue.”

(Originally Posted on SFGate Monday, July 6, 2015)