Assessing blame
As the city grapples with a crushing budget deficit, big downtown businesses are pushing for huge property tax cuts.

By Steven T. Jones

THE SAN FRANCISCO Chamber of Commerce, the Committee on Jobs, and the other representatives of big business love to point fingers when they talk about the city's budget problems. Bloated government payrolls and "antibusiness" policies are their favorite complaints.

What they don't say is that a huge part of the fiscal crisis is directly caused by the biggest companies in town.

In fact, top downtown corporations are responsible for a large chunk of the $352 million budget deficit facing San Francisco, the closing of which is likely to require mass layoffs of city workers and deep cuts to services.

First there was the lawsuit filed by Hearst Corp., Shorenstein Co., the Gap, and 49 other big downtown players that forced the city in 2001 to rescind a gross-receipts tax that was bringing in about $25 million a year from only large businesses.

Then downtown followed up that victory by going after the city's biggest source of revenue: property taxes, which account for about one-quarter of the General Fund budget.

Corporations that own buildings valued at more than $50 million – from Shorenstein and Bank of America to Transamerica Insurance to Boston Properties and the big hotels – have asked the city to give back more than half the property taxes they paid in 2002 and 2003. These 174 appeals alone could cost the city up to $96.4 million.

And that doesn't even include smaller properties, or the big corporations that hold lots of land parcels worth less than $50 million each. Hearst, for example, filed appeals for 27 properties it owns around town. The city says Hearst's properties were worth about $114.4 million in 2002; Hearst, which owns the San Francisco Chronicle, says the properties were worth only $65.8 million. The difference: $491,202 in annual tax payments to the city.

Similarly, U.S. Property said the seven properties it owns should have been valued at $68 million in 2002, rather than their $140 million assessed value. That would cost the city $728,280.

These companies are taking advantage of provisions in state law that allow properties to be reassessed downward during recessionary years but cap annual property tax increases at 2 percent during good times. Under the notorious Proposition 13, buildings can be reassessed at fair market value only when they are sold. So older corporations end up paying far lower tax rates than newer corporations, and companies have an incentive to hide ownership changes.

Total property tax reductions for 2003 alone would equal $91.3 million if all 1,566 appeals are granted in full. For 2002 and 2003, commercial and residential property owners in San Francisco sought reduced taxes totaling a staggering $167.7 million, nearly two-thirds of which – more than $100 million – is for commercial property.

To cover the property tax returns that will be paid out just in the next fiscal year – mostly those from 2002 – the city Controller's Office has set aside $35 million that would otherwise go to city services. Add the hits to local schools and special districts, and the total reaches $60 million (although the $18.68 million hit to San Francisco schools will likely be backfilled by the state). And even these figures, an estimation based on the percentage of appeals granted during the recession of the early '90s, could climb far higher if the city doesn't make it a top priority to vigorously contest the glut of appeals.

Greed rules

Assessor Mabel Teng, a onetime downtown ally who ran on a platform of reform, has been fighting back: Instead of cutting deals, she's contesting all the big tax cuts (see "Assessed Out," page 18). And in February she called for the biggest corporations to drop their assessment appeals.

But the corporate heavies, many if not most of whom have made a fortune in San Francisco during the good times, and will again after the recession ends, are unwilling to help the city out when the going is tough.

When the Bay Guardian asked Shorenstein spokesperson Andrew Neilly, for example, whether his boss would consider Teng's plea, he told us, "I don't think we're going to rise to respond to that." After street protests in March targeted the company, which owns the Bank of America building and is the city's single largest commercial landlord, Neilly complained, "We're being made an example of to a certain extent." But he defended the appeals: "We're going through a legal process that's been approved by the voters of California."

Neilly's grudging comments – made during a one-minute interview, which he said would be followed up by a written statement, until he changed his mind – were more than we got from other downtown representatives. Repeated calls to the Chamber of Commerce over three weeks weren't returned and neither were calls to the Committee on Jobs or faxed inquiries to individual property owners.

Teng said she's had a similarly difficult time getting downtown corporations to answer her calls to drop appeals and to provide financial data that might reveal a change in ownership. With the carrot of good corporate citizenship failing, Teng is now trying the stick: she wants Mayor Gavin Newsom to give her overworked and outgunned department the resources it needs to get tough with downtown – something she said Newsom pledged in exchange for endorsing his bid for mayor. But that isn't working, either.

"Right now we have no support in city hall," Teng told us in a recent interview.

Signs of hope

Yet for all the difficulty in getting political traction on an issue as dense as commercial property tax reform, there are signs of hope. Sup. Chris Daly, who now chairs the San Francisco Board of Supervisors' Finance Committee, has decided to champion some of Teng's reforms in hearings that begin April 14. The People's Budget Collaborative has also been using street protests and lobbying to spotlight the issue, and the group's economic justice message should resonate more once the bleak details of next fiscal year's budget start coming out.

"For these huge corporations, who aren't paying nearly enough taxes already, to say they are paying too much in property tax is just outrageous. It's a slap in the face," said the group's Michael Lyon, who also said forcing the companies to be fair "is going to take a big and angry political movement."

But the real sea change on the issue is likely to come on the state level later this year. In addition to two bills that would require greater disclosure by corporations appealing their property taxes and increase punishment for failing to report ownership changes, there will be two high-profile campaigns taking different tacks on the need for corporate property tax reform.

Actor-activist Rob Reiner is sponsoring a fall ballot measure that would increase the commercial property tax rate from 1 to 1.55 percent while leaving the residential rate where it is. Business groups have said defeating the measure is their top priority. And with an April 6 release of a major study of property tax inequities, Lenny Goldberg and the California Tax Reform Association are launching a campaign to amend the state constitution to require annual reassessments of commercial property.

Teng has been easy to ignore so far, but she sees that changing. "I think this is the biggest political fight in the city," she said.

Budding movement

Teng may not have much support in San Francisco yet, but she has allies in Sacramento, including assembly speaker Fabian Nunez, who authored one of the reform bills. Longtime legislator Carole Migden – who now chairs the Board of Equalization, which sets property tax assessment guidelines for each county – told us she's pleased to see Teng taking a tough stand with downtown.

"She's got grounds for what she's doing, and we're pleased that there's an increased attention on the Assessor's Office," Migden said.

Since Prop. 13 passed in 1978, individual homeowners have taken on an increasingly large share of the property tax burden because the corporate sector can afford high-priced experts to challenge assessments and can sit on property longer to avoid reassessment. And in San Francisco that shifting burden was exacerbated by the corporate challenge to the business tax.

"The city is half bankrupt because of the recision of the business tax," Migden said. "That was an indefensible decision that has had a crippling effect."

There are growing statewide efforts to make corporations pay more property taxes rather than relying on good corporate citizenship. The Reiner measure would increase commercial property taxes, using the $4.5 billion this would generate to fully fund education and universal preschool, as well as setting aside money to help offset the increase for small businesses.

"We are talking about making big business pay their fair share of property taxes, which they haven't done in 25 years," Reiner told us. "And I don't think it's going to be a big challenge to win voters over."

Commercial property tax rates in California are among the lowest in the nation (ranked 43rd), and that's precisely why services on the state and local level are so severely underfunded. Even though the average Californian will benefit from the measure, Reiner said business groups are "going to spend $100 million trying to convince people that we are destroying the business climate in California, and that's an out-and-out lie."

Reiner said the education system and qualify-of-life issues are far more important to creating a healthy climate in California than the right's dogmatic insistence that only deregulation and low taxes can lure job-creating businesses.

"We're fighting for the heart and soul of California here.... It's the right thing to do," Reiner said. "It's a big, bold initiative, and I don't mind taking this on, because at the end of the day, people are going to see the light. We are going to try to wrestle this debate back from the extreme right-wing agenda and emphasize things that we think are important."

Big business fights back

Yet business groups are digging in and repeating the mantra that the public interest is served only by unfettered free markets.

"The issue here is 'Can business really afford the 55 percent property tax increase proposed in the measure?,' and the answer is no," said Sara Lee, vice president for media relations with the California Chamber of Commerce, which is leading the campaign against the initiative.

Lee quickly became indignant when we asked whether it's reasonable to ask the business community to help close the current budget deficit, calling it "a very small view of a very big picture" and saying it wasn't fair that "one sector of society is being asked to shoulder the burden for the budget deficit."

She said the only important issue when discussing commercial property taxes is that "voters are worried about their jobs and the business climate."

Yet Goldberg said the current commercial property tax method creates a horrid business climate by charging new businesses for the fair market value of their land while letting idle capital pay property taxes at far lower rates.

"We turn good economics on its head," he said. "We tax the investment decision but not the windfalls to someone who just holds land.... What we have is a system where we just hammer new investment."

When the sale of property is discouraged, land costs become artificially inflated, making the cost of starting a business and creating jobs that much more expensive. His just-released study graphically illustrates the disparities in California's biggest cities, including San Francisco.

For example, property taxes paid by the Hilton Tower on O'Farrell Street amount to just 80¢ a square foot for the land they've owned since before Prop. 13 was approved in 1978, while the Clift Hotel, built on Geary Street in 1999, pays $16.55 a square foot.

"We estimate that the Hilton Tower alone should be paying $1 million more in taxes each year," Goldberg said. "In downtown San Francisco we're seeing tens of millions of dollars in lost revenue from just a handful of buildings."

He said the only way to both help adequately fund government services and create a level playing field that would foster fair competition among businesses old and new is to reassess commercial property every year. He's embarking on a campaign that will culminate in a state constitutional amendment going before voters as soon as next year. And in the meantime he's supporting state legislation to improve the situation and trying to support local officials like Teng.

Migden said Teng's efforts could help the city in this tough budget year, but only if she finds more support at city hall. "I think the publicity and her sentiments could be successful, but the mayor has to get behind it too," Migden told us.

Newsom's choice

Newsom was elected with the backing of many of the same downtown interests who are now seeking to diminish city revenues, and he was silent on Teng's call for corporate cooperation. But the real test of his allegiance will come from his budget choices and whether he beefs up assessment support.

"That was the bulk of my discussions with him when we talked about my endorsement," Teng said of Newsom. She followed up that discussion by asking for seven new positions and an additional $300,000 in her department's proposed budget, including one investigator to do nothing but look into corporate ownership changes and two appraisers with private-sector assessment experience.

Teng estimates that getting that funding would help her generate an additional $35 million in revenue. Late last year Teng sought and received $250,000 to beef up her assessment-appeals ability (including the purchase of detailed commercial data), which she told us she has already used to leverage $10 million in savings, half of that from recently convincing just two hotels – the Marriott and Ritz-Carlton – to drop multiyear assessment appeals by demonstrating they would lose.

But Newsom has been noncommittal. We asked him about it Feb. 28, and he said, "That's the challenge here. We talk about across-the-board cuts, but there are areas where we need to make investments, even during a recessionary time, and I think you'll see that demonstrated in our budget."

More recently, Newsom spokesperson Peter Ragone told us, "We are going to try to work in a cooperative way with Mabel and the Assessor's Office to get the resources they need, with the understanding it's a tough budget year."

So far Newsom and his allies don't appear to be doing much to find new revenue sources. The Chronicle and the San Francisco Examiner each used bold headlines to tout Newsom's suggestion to a business group that it might have to pay higher taxes, even though his actual comments were tepid and conditional and haven't been repeated since.

There seemed to be some hope that the Revenue Advisory Panel, which convened in December under the leadership of Sup. Fiona Ma, might fulfill its stated purpose of finding cash. In weekly meetings that just wrapped up last month, it brought together business and community leaders to discuss the pros and cons of new revenue sources, including a property parcel tax, a property transfer tax, a local-vehicle license fee, reinstating the gross-receipts tax, increasing franchise and permit fees, increasing the sales tax, creating a utility users tax, or even starting a local lottery.

In the end Ma told us she favors no new revenue measures, "but other members of the board might want to put measures on the ballot." Indeed, progressive supervisors have discussed a range of new tax options for the fall ballot, centered around a transfer tax on properties worth more than $2 million, which Sup. Matt Gonzalez proposed during the mayor's race.

But in the current antitax climate, any new revenue will be a tough sell downtown. Ma spoke to a San Francisco Chamber of Commerce luncheon March 17 about her committee's work. "It's been a good exercise to have everyone at the table," she said. "But whether we can come up with something, I don't know."

Instead, she seemed willing to just accept deep cuts. "It's going to be very painful this year," she said, a statement that seemed to please chamber director Lee Blitch, who decried how much city government grew during the '90s as the overall local economy expanded.

"It's really hard to stomach new taxes when you know there's waste and fat," Blitch said, adding with a hint of a smile, "It's going to be a bloodbath, it really is."

Yet that isn't a fate that Teng, Reiner, Goldberg, Migden, and the progressive majority on the Board of Supervisors seem prepared to accept without trying to make sure the corporate sector is paying its fair share.

"In the '60s and '70s, we fought for social equity," Teng said. "Today we have to look at economic equity."

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