Special Interest May Be Hitching a Ride in State Reform Plan

By Michael Hiltzik

The great thing about a 2,500-page blueprint for the reorganization of state government, if you are an industry lobbyist, is that it presents an infinite number of cubbyholes in which to hide benefits for your clients that you can't secure any other way.

Consider the bright idea embodied in recommendation GG 19 of the California Performance Review, the majestic reorganization plan ordered up by Gov. Arnold Schwarzenegger after his inauguration and unveiled to great fanfare earlier this summer.

On the surface, the recommendation â€" one of a dizzying 1,200 in the plan â€" looks laudable. It would centralize the tax assessment of commercial aircraft, now handled piecemeal by the assessors of about a dozen counties with major airports, under the state Board of Equalization.

This fleet is currently valued for California tax purposes at $9 billion, producing $90 million a year in property taxes, so it shouldn't be a surprise that there's a secret history behind the proposal that makes it seem not so innocent. (That wouldn't be an isolated glitch in the Performance Review, which has been accused by state analysts of overstating its claim of $32 billion in potential state savings by as much as $22 billion.)

To start with, there's the fact that the major forces behind the proposed change are Southwest Airlines Inc., UAL Corp.'s United Airlines and the Air Transport Assn. of America, the airlines' lobbying group.

They say it's all about making state government more efficient. "The main thing is administrative convenience," says James Hultquist, the association's managing director for taxes. "It's better for airlines and the state to have a centralized approach."

Who can argue with that? The county assessors, that's who. Says Lawrence Stone, the assessor of Santa Clara County (home of San Jose International Airport): "This is a back-door tax break for the airlines."

The airlines expect the Board of Equalization to be much more indulgent than the counties, he says, contending that they hope for a reduction of as much as 10% in their combined bills right off the bat. Assessors also question how much red tape the change would actually save. While airplanes represent the bulk of airline assets, plenty of airline property, from ticket kiosks to landing rights at local airports, would still be assessed locally.

It turns out that California assessors and the airlines have been waging a pitched battle over taxes for years. As a class of property exempt from Proposition 13, aircraft are subject to annual reassessments, based on a complex formula involving flight schedules.

State law further requires counties to audit the airlines every four years. The assessors say their audits keep finding millions of dollars in underpayments that the Board of Equalization might miss because it isn't required to conduct such examinations. Los Angeles County Assessor Rick Auerbach notes that L.A., which as the home of LAX levied $32 million in airline property tax last year, found an assessment deficiency of more than $100 million alone (worth $1 million in taxes) in its last audit of one major airline.

The airlines justly grouse that the current system produces too much paperwork and leads absurdly to identical planes being valued differently county by county. A few years ago, the parties agreed to a formula to produce similar numbers for similar planes. The system didn't work perfectly, and the agreement expired this year.

The assessors say that when they offered to work out a new system in 2003, the Air Transport Assn. responded by drafting a bill to shift aircraft assessments to the Board of Equalization, and having Sen. Dick Ackerman (R-Irvine) sponsor it. The bill stalled in the Legislature, but it didn't die: It merely got reincarnated as Recommendation GG 19 of the California Performance Review.

None of this would matter if the Board of Equalization could be trusted to treat the airlines as rigorously as the counties. Although the airlines say they wouldn't expect to pay less in taxes under board jurisdiction, the assessors contend that the board has always been soft-hearted with business. Stone observes that while overall property assessments in his Silicon Valley county soared by 35% during the high-tech boom, the board was reducing its valuation of utility properties in his county by 5%.

More worrisome, he adds, is that on one issue that has brought the assessors and airlines to blows â€" how to tax the software in aircraft navigation equipment â€" there are signs that the board might be willing to accept the airlines' position, which could reduce aircraft valuations statewide by 10% at a stroke.

This brings us to the mystery of how GG 19 got into the reorganization report in the first place. A few clues can be found in the report's footnotes, which list as sources for the recommendation a letter from a Southwest Airlines lobbyist in Sacramento, an interview with a lobbyist for American Airlines and the airline industry, an interview with a Southwest Airlines executive, a memo from the chief executive of the Air Transport Assn. and an e-mail from the association's Hultquist. As for correspondence and consultation with county assessors, there was none.

The result is a one-sided recommendation that simply regurgitates a proposal already killed once by the Legislature.

What's scary about this case is the thought of how many more such questionable proposals may be slumbering in the pages of the reorganization report. Each innocuous provision that turns out to be a possible Trojan horse for a special interest diminishes the reorganization plan a little bit more. Find enough of these, and Californians may simply throw up their hands and conclude that the whole package is just another government fraud.

E-mail Michael Hiltzik at golden.state@latimes.com.

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