Split Tax Roll Proposition Threatens Property Owners and Local Businesses

Photo Courtesy of  Anton Foltin  via  Shutterstock

Photo Courtesy of Anton Foltin via Shutterstock

Split Tax Roll Proposition Threatens Property Owners and Local Businesses

For over 40 years all California property owners have enjoyed the protection of Proposition 13, the landmark law that limits annual property tax increases. It was built on a simple formula that sets the base property tax levy at 1% of a property’s market value as determined by the sales price. Rather than being reassessed each year for tax purposes, annual increases are limited to 2% of the base levy or the rate of inflation, whichever is less. This has successfully protected all property owners from wild and unpredictable increases, giving them a level of certainty in what is typically the largest annual expense associated with real property ownership.

Current Law Offers Predictable Revenue Stream

Proposition 13 has also given the state government a more predictable flow of revenue, as market values have moved up and down along the path of each real estate cycle. In fact, since 1978, property tax revenue have increased, on average, by roughly 7% per year, which makes a pretty good case for the law’s efficacy; property owners get protection from excessive taxation while state and local governments enjoy steady increases in revenue.

By and large, the law has been welcomed by property owners in all property sectors as fair because it insulates them from arbitrary property tax increases. However, state and local government officials, along with advocacy groups promoting more government programs, have not shared that fondness for the law. In fact, there have been numerous attempts to repeal or modify Proposition 13 over the years, and the most significant of those efforts will be on the general election ballot in November of 2020.

New Proposition To Challenge the Status Quo

The California Schools and Local Communities Funding Act would “split” the California property tax roll and all but eliminate Proposition 13 rules for commercial property. Residential and agricultural property would continue to be taxed under current law. If it passes, all non-residential and non-agricultural properties would be subject to reassessment to full cash value every three years beginning in the 2020-2021 tax year.

Billions in New Revenue…No Accountability

Proponents of the proposal estimate that the law would generate another $6.5 to $10 billion in additional annual revenue net of administrative costs, 60% of which would go to local governments with the remaining 40% going to school and community college districts. There are no limits set on administrative costs that various state, county and city agencies will incur, nor are there any restrictions as to how the new revenue is spent other than to disclose where each dollar goes.

In other words, the split tax roll will create an even larger bureaucracy with virtually no accountability. This is just one reason opponents of the law, including the Howard Jarvis Taxpayers Association and the California Business Properties Association are planning to mount a vigorous campaign to help defeat the measure. However, we can count on every school district, teachers union and local government to mount their own campaigns to make the proposal the new law of the state, as they will be the primary beneficiaries.

The text of the proposal contains several carve-outs and offsets to counter its impact on state income tax revenues and some small businesses. First, the State of California will be reimbursed for the loss of income tax revenue caused by the increase in legitimate property tax deductions. Then, county tax assessors and cities will get reimbursed for administrative costs. What remains would be distributed pro-rata to schools and local governments.

Limited Relief for the Little Guy

To mitigate the impact of the higher property tax burden on businesses, the tangible personal property tax on the first $500,000 in assets will be waived, and that tax would be eliminated altogether for businesses that employ fewer than 50 full-time employees. Also, the law would not apply to properties under $2 million that are owned by businesses that occupy the majority the space. Unfortunately, this would protect only a small fraction of commercial property owners in Orange County, as prices have risen to all-time highs.

New Cause for Uncertainty

To say that passage would cause a rise in uncertainty in the commercial real estate market is an understatement. It has the potential to substantially increase operating costs for property owners, occupancy cost for businesses and the price of goods and services for consumers, as the higher cost of doing business is passed along. In our next post, we will take a closer look at the impact of this dangerous proposal on each of these groups.

To learn how the split tax roll impacts your property & business, contact us for strategies on how you can operate your property efficiently.