California “Split Roll” Tax Initiative Destroys Proposition 13 Protections

A California initiative will be on the 2020 ballot to increase taxes on business properties by instigating what is known as a “Split roll” tax that taxes commercial property differently than residential property.  This represents the first major assault in 41 years on Proposition 13 protections approved overwhelmingly by California voters in 1978 to place limits on property tax increases.

What is “Split Roll” Taxation?

“Split roll” is the term used for a tax structure where taxes are assessed differently on business property than on residential property.  “Roll” refers to the county’s property tax roll of all the taxable real estate in the county.  “Split” refers to splitting the tax roll between business and commercial nonresidential property, splitting it by assessing these differently than homes and residential property.  Currently, for the most part they are taxed the same.

What are Current Proposition 13 Tax Protections for Property Owners?

One of the most landmark ballot initiatives ever approved by California voters was Proposition 13 which passed with a nearly two thirds majority in 1978.  Proposition 13 lowered the property tax rate to 1 percent from what  at the time was a 2.67 percent average, and put limits on annual property tax increases.

California has had a single property tax structure going all the way back to the 1800s.  However, with the sharp increases that were happening with real estate property values in the late 1970’s resulting in startling and unexpected annual property tax increases for homeowners, Proposition 13 mandated that property values for taxation could only occur when the property was sold and there was a “Change in Ownership”.

After change of ownership, the assessed value could rise by no more than 2 percent per year. Modifications to the property like remodels or additions were assessed at fair market value and were also limited to no more than 2 percent per year.

On that same 1978 ballot as Proposition 13 was Proposition 8, which would have created a “split roll” property tax and was defeated by California voters by a 53-47 percent margin.  And while over the years there have been attempts by the State Assembly to initiate a split rate tax, they have usually died in committee without the support needed to have a chance of success – with Proposition 13 often referred to as the “third rail” of California politics with deeply held sentiments too controversial to discuss.

What Will the Split Roll Tax Initiative Actually do?

The split roll tax initiative will amend Proposition 13 and the California State Constitution by treating business and residential property differently and requiring reassessment every three years for commercial properties at current market value – not actual costs at the time of the last sale. This represents the biggest attempt to rollback Proposition 13 protections for property owners in 41 years.

Land used for agricultural purposes would be exempt. Residential property including apartments and condos would also be exempt. So would some business properties whose holding in the State were under $2 Million.

Who is Behind this Initiative and What do They Want?

Schools and Communities First is the campaign leading support for this initiative called the Schools and Local Communities Funding Act. Backers include the League of Women’s Voters and some state and local teacher’s unions.  The California Teachers’ Association however, which is the most powerful union in the state has not endorsed the initiative at the time of this writing.

Supporters say it will raise an additional $6-11 Billion of revenue a year which would go to schools and local governments.

Who Opposes it and Why?

This initiative with its elimination of Proposition 13 protections and the raising of property taxes on commercial property is opposed by most of the California business community, including organizations like the California Chamber of Commerce and anti-tax groups like the Howard Jarvis Taxpayers Association.

Opponents say this bill puts an undue tax burden disproportionately on the backs of businesses based upon the assumption that schools and local governments are underfunded. And while it has a friendly title called the “California Schools and Local Communities Funding Act” the potential impact it can have on the economy is not at all friendly!

What will be the Impact on the Economy?

California already has one of the highest costs of living and costs of doing business in the nation.  The increase in commercial property taxes will make this even worse because it will impact all businesses in the state at approximately the same time.

This will result in higher prices for consumers who will ultimately pay the cost increases, hit small business the hardest who are required by their leases to pay property taxes, kill jobs and deter future growth by causing more businesses to leave California.

In 2012 the Davenport Institute at Pepperdine University’s School of Public Policy released a study that concluded the economic impact would have a “significant and detrimental impact on the state’s economy.” The study estimated that while a split roll tax structure could generate $6 billion in state revenue, it would cost the California economy $71.8 billion of lost output and over 396,000 lost jobs over the first five years.

Annually, ending Proposition 13 protections on business properties would result in losing about $14.4 billion in economic productivity to get about $6 billion a year in new property taxes. This represents more growth in government at the cost of private enterprise.

The nonpartisan California Assessor’s Association recently released a study on the administrative and budgetary impacts of a split roll proposal and came up with similar predictions that could further reduce the actual amount of revenues generated.

“The cost to complete the annual assessment roll would increase between $380 million and $470 million annually, statewide, during the first five to ten years.”

But a major problem is there simply are not that many trained assessors around to quickly fill the ranks of what would be needed.  So add to this the costs of training new employees, upgrading technology and other cost burdens over the three years it would take to set up, and it is estimated that the statewide costs of implementing a split roll tax would range from $517 million to $639 million annually.

Increased Uncertainty

Markets like certainty. The real estate market is no exception.

One of the bedrock principles Proposition 13 is founded upon is that by making the assessment of property taxes based upon the value at the time of sale, it eliminated the gut wrenching and unexpected swings in valuations that made tax bills unpredictable, because they were based upon fluctuating valuations that had not actually been achieved or realized as a result of a sale.

The level of predictability of property taxes is an important element of assessing annual business costs and risks. Proposition 13 standardized and made this clear based upon valuations at the time of the last sale.

Dismantling this protection business owners now have under Proposition 13 of being able to know and predict their annual property tax bill makes their business susceptible to the drastic ups and downs of the real estate market. This is another cost increase that will be passed along to the consumer with the swings and cycles of the larger economy.

Reduce California’s Competitiveness

Removing Proposition 13 protections on commercial property would hurt the state’s competitiveness being able to attract and keep businesses. Opponents predict it will cause more businesses to leave the state.

“Californians are some of the most heavily tax-burdened in the country,” explains Rex Hime, President and CEO of the California Business Properties Association and coalition co-leader to preserve Proposition 13.  “A split roll property tax increase isn’t needed and will just make it more difficult to do business in California.”

“A split roll property tax is an $11 billion tax increase that will increase costs for everyone at a time when the high cost of living is already driving companies and residents out of the state,” says Jon Coupal, president of the Howard Jarvis Taxpayers Association.

The split roll tax initiative would destroy key protections of Proposition 13 against property tax increases passed overwhelmingly by California voters in 1978. This initiative aimed at raising business property taxes would result in higher prices for all California consumers, not just business owners.