Corporate Welfare, Alive And Well
The Article: Corporate welfare, alive and well by Michael Hiltzik in The Los Angeles Times.
The Text: As a developer of shopping malls, including 22 in California, Westfield Group clearly takes its responsibilities to the consumer economy seriously.
The Australian company’s malls are typically well-designed and anchored by the finest department stores, such as Bloomingdale’s and Nordstrom. The firm spends gobs of money to refurbish its older malls.
As a California taxpayer, you should be proud of Westfield’s efforts. That’s because you’re paying through the nose for them.
Over the years the company has reaped hundreds of millions of dollars in favorable tax assessments, as a recent study documents. That means millions in foregone revenue that could pay for schools and parks.
And this summer, the Los Angeles City Council granted Westfield a special tax break of up to $59 million on a new mall in Woodland Hills it probably would have built anyway.
Westfield’s position is that it receives nothing it’s not legally entitled to. “Westfield has paid all real property taxes that have been assessed in accordance with applicable law, like every other taxpayer,” its spokeswoman, Katy Dickey, told me by email. As for the new tax abatement, “we worked with the city through the review/approval process and followed the rules,” she said.
Yes, they probably did — and that’s the problem.
Westfield is a perfect example of what’s wrong with California’s system of business incentives. Corporate welfare has been baked into the rules for so long that state and municipal leaders don’t think twice about it anymore. No one asks whether these breaks serve their purpose. No one asks for evidence of a compelling need.
“Westfield is a high-profile example,” says Peter Kuhns, the Los Angeles director of the Alliance of Californians for Community Empowerment, one of the community groups that sponsored the property tax study. “But there are thousands of commercial property owners in California” getting a similar break on assessments. “That’s why our schools are falling apart.”
Let’s see how this works for Westfield.
On June 28, the City Council voted to grant an exemption of up to 42% of the net new tax revenue generated over 25 years by Westfield’s planned Village at Topanga mall. The mall will feature a Costco warehouse store, an extended-stay hotel, restaurants and smaller shops, adding up to 1 million square feet.
The giveaway was sponsored by then-Councilman Dennis Zine and was based on a consultant’s report that a “feasibility gap” of $49 million faced the project. That’s the difference between Westfield’s development costs and the value it could pocket over the 25-year period. The city is empowered to cover up to half of that with tax breaks; to reach $25 million in present value you have to exempt $59 million over the whole period.
How much debate did this get from the council? If you guessed “none,” have a cookie. The vote came one week after the deal’s details were unveiled. They weren’t reviewed by a single council committee. Council President Herb Wesson allowed 10 minutes for comments from the floor, pro and con, rudely hastening the speakers along as though he was facing an urgent call of nature. The council approved the deal 10 to 0.
Was there some reason that taxpayers needed to cover the “feasibility gap”? No. The site is located between two existing Westfield malls, so its development is likely to enhance their value too. Westfield already owns the property and had poured $18 million into pre-development costs before coming to the council with upturned palms.
“It was not at all clear that this project would not have happened without the tax subvention,” says City Controller Ron Galperin, who came out against the deal during his successful campaign against Zine for that post.
The firm hardly needs the money. Westfield manages assets worth nearly $60 billion and recorded a profit last year of more than $1.5 billion (U.S.).
The city says it’s making an investment to allow Westfield to build the Village over a shorter time frame, producing more tax revenue faster. But although the city’s consultants projected that the new mall would generate a goodly volume of business, it’s unclear how much would be new business, as opposed to sales cannibalized from other locations. This is important, because cities love to use tax breaks to poach developments from neighboring counties and cities. It’s a vast zero-sum game, except for the taxpayer, who loses.
In this case, the Costco slated for the Village will be relocated from just a few miles up the street. The city’s consultants at Santa Ana-based Rosenow Spevacek Group didn’t count most of the revenue from the Costco in calculating the value of the new mall. But estimating how much other spending will be new is something of a black art.
To be fair, they also cut Westfield’s claim of a $91.4-million feasibility gap nearly by half. “We didn’t agree with everything Westfield said” about potential revenue and development costs, says Jim Simon, a principal at the consulting firm.
Galperin says he’s planning a “holistic” look at how these redevelopment handouts get calculated. “Invariably, these reports involve a not insignificant amount of guesswork,” he says. “The city should find ways to make good projects happen, but shouldn’t give away revenues if it’s not absolutely necessary.”
California has also embedded a huge long-term tax break for commercial property in its tax code, via chronic underassessments of the holdings. That brings us to the property tax study of Westfield’s malls, which was prepared by a group of Australian unions. The study’s authors compared the mall values Westfield reported to its shareholders with the lower property assessments on assessors’ books. The discrepancy is enormous.
Take the Century City mall, the centerpiece of Westfield’s West Coast presence and its most valuable U.S. property. It’s right in the heart of the high-spending Westside, anchored by Bloomingdale’s and filled with such luxe retailers as Tiffany, Louis Vuitton and Rolex.
In its 2012 annual report, Westfield valued Century City at $921 million. But its assessed valuation on L.A. County’s books is only $588 million, or about 63% of the company value.
The property tax report calculates that the discrepancy costs L.A. County $4.4 million a year for Century City alone. Similar mismatches occur for almost all the firm’s Los Angeles malls for a total loss, the report says, of nearly $19 million.
This figure underscores the flaw in our tax system created by Proposition 13. The initiative was sold as a relief plan for overtaxed homeowners, but it’s become a great boon for commercial property owners. The degree to which this shifts the tax burden onto residents can be seen in Los Angeles County, where residential properties went from about 53% of the tax roll in 1975 to nearly 70% in 2009.
One reason for this is that commercial owners have many ways to conceal changes in ownership, which are supposed to trigger reassessments. There’s no evidence that Westfield has exploited that loophole, but county assessors generally find it hard to keep up with changes of value in commercial properties, a much more complicated process than valuing your house.
The best remedy is the “split roll,” which would revise Proposition 13 to treat commercial properly more fairly, say, by linking assessments closely to revenue potential.
But the greater challenge is to wean corporate developers from municipal handouts. Politicians’ default response should be “Make your case, and it better be good.” L.A. can start the new trend by taking back the welfare check it’s written to big, healthy, wealthy Westfield.
