396,345 Jobs Lost if Property Tax Split

March 19, 2012 - By admin

MARCH 19, 2012

By WAYNE LUSVARDI

The Davenport School of Public Policy at Pepperdine University is out with a blockbuster new study on the affects of the proposed elimination of caps on commercial property taxes provided for under Proposition 13.  The study is titled, “An Analysis of Split Roll Property Tax Issues and Impacts.”

This is also called a “Split Roll” property tax because residential and commercial property taxation would be separated and the base assessed values would be taxed differently, although the tax rate would stay the same.  Residential properties would keep their Prop. 13 property tax protections and such protections would be eliminated on commercial and industrial properties.

The study concludes that a split roll property tax would:

* End up losing 396,345 jobs over the first five years of a new split-roll property tax system.  This would increase the current unemployment rate of 10.9 percent to 13.1 percent.

* The lost economic output would be $71.8 billion over five years.  In other words, ending Prop 13 protections on commercial properties would result in losing about $14.4 billion in economic productivity per year to get about $3 to $8 billion annually in new property taxes.  Stated differently, the private economy would shrink and government would grow.

* Government property tax revenues would be susceptible to greater instability – the ups and downs of tax revenues — as commercial and industrial property values are affected by the swings and cycles of the larger economy.  This is especially so for retail commercial properties such as shopping centers.

Apartment Rents Up

* Apartment rents would have to be increased to comply with the increased commercial property tax rates.  Renters — who comprise disproportionately more of those affected by the economic recession — would be hard hit with rent increases. Homeowners would still enjoy the protections of Prop. 13 on any increase in property taxes until their property re-sold.  But then it would be the new buyers who would assume the higher tax burden.  This could increase “tax flight.”

* Small commercial property owners who do not have “triple net” leases with their tenants would have to disproportionately absorb the property tax increase.  Those large commercial landlords — shopping centers, malls and gas stations — could pass their property tax increase along to their tenants under a “triple net” lease. So, contrary to the stereotype created by tax advocates, “Big Commercial” landlords would be least affected and small commercial property owners would be clobbered.

This could result in “fire sales” of some small commercial properties. In 1978, before Prop. 13 was enacted, it was “widows” who had to sell their homes to pay property tax increases.   In 2013, it might be small landlords renting to “Mom and Pop” stores and owners of duplexes who would be more susceptible to having to sell their properties to pay property tax increases.

This also likely would adversely affect the trustees/heirs of those commercial properties held in family trusts.

No Quick Reassessments

I would add one thing to the study: According to tax assessors, it would take about three years for local county assessors to hire and train new staff and begin to undertake the reassessment of commercial properties.  So there is no “quick fix” for public school or county budgets dealing with prison realignment in a split-roll property tax.  Commercial properties cannot be valued by mathematical computer formulas as can single family residential properties (such as using Zillow.com).

The Pepperdine study responded to criticisms of Prop. 13, such as  May 2010 report by the California Tax Reform Association titled, “System Failure: California’s Loophole-Ridden Commercial Property Tax”. In that report, several high-profile commercial properties — such as Disneyland, high-end shopping malls and gas stations — were branded as being under-taxed due to vague “loopholes.”

But these alleged loopholes only apply to a small number of commercial property sales transactions of “internal sales” between partners, where commercial properties are owned by a partnership. Presently, the courts have rules these “loopholes” legal.

However, the Pepperdine study indicated it won’t be high-profile commercial properties or partnership-owned commercial properties that would be most affected.  Instead it would “Mom and Pop” stores renting space in Class B strip malls, older commercial buildings or owners of residential duplexes and small six-unit apartments.

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Comments(8)
  1. Beelzebub says:

    Since the big corporations own the politicians there were loopholes intentionally infused into Prop 13 that gave companies like Disney and JP Morgan (which purchased Washington Mutual) huge property tax breaks that a residential home owner or most commercial properties owners could never qualify for.

    They could never eliminate Prop 13 for residential properties or for most commercial properties without causing an economic depression that would make 1929-30 look like a Sunday school picnic. Real estate values would plummet causing a flood of foreclosures that would result in a chain reaction of economic disasters.

    But don’t expect the big boys to play fair. When you own the rule makers the game is always tilted in your favor.

    But the loopholes for the Too Big To Fails must end. They should pay their fair share like all the rest do.

  2. Say What? says:

    Have you tried to read this report? No, not the Executive Summary — the report? It is nothing but random statistics multiplied together without a moment’s consideration of what underlying realities are.

    First, the report never once considers that half the commercial properties in California have changed hands since 2000 and are valued at or near market. So how would revaluing them to market, where they are already, have any effect?

    Second, it never considers that 80% of the Prop 13 benefits for business (which they use a Board of Equalization Railroad Valuation estimate to guesstimate) are vested in fewer than 20% of commercial properties, those with assessment bases before 1980.

    If this were a scholarly research paper, rather than funded research for the mysterious “Small Business Action Committee,” one might expect that the authors would have done some actual research. (Especially since Pepperdine sits in Los Angeles County, whose assessment rolls can be easily bought and analyzed by property type, assessment base year, etc.)

    But why do original research when you have the IMPLAN modeling system, v. 3.0, from Minnesota to fill in any assumptions you care to make?

    Third, while they lean heavily on the concept of Triple-Net commercial lease terms, they don’t appear to have confirmed the actual nature of such terms in the 20% of the properties making up 80% of the $6 (estimated) tax that would be collected. Had they done so, they would have learned that most of those properties are protected by cap provisions on their triple-net commitment. Such caps are standard in commercial real-estate, but especially prevalent in these property leases since there is a significant chance that the owners (who have been enjoying Prop 13’s protections for 30 years already) might die, sell, or otherwise transfer the properties, triggering a tax increase.

    It’s no surprise that, in the preface of the report, the authors state “The opinions, discussion and analysis contained in this report of [SIC] those of the authors alone and do not necessarily reflect the views of Pepperdine University, the School of Public Policy, the Davenport Institute or those who have provided support, financial or otherwise, for this research.”

    Read the report yourself and see whether you, too, are inclined to run, not walk, away from espousing its overblown conclusions.

  3. joan says:

    People lost their jobs and Obama will help them if they are not behind in payments…How stupid it this…….thanks for helping the American in need….You would rather send it elsewhere…..

  4. Wayne Lusvardi says:

    Say What?

    I too was very disappointed in the Pepperdine study. Thanks for detailing its deficiencies.
    WL

  5. Bill-San Jose says:

    Prop 13 – another flounder like the lottery – to save our children.

    I am shaking my head at this article and the study. And the idea that one piece of legislation written in 1978 is going to save the world.

    Next.

  6. queeg says:

    It is over….like Thatcher says….eventually you run out of other prople’s money….

    Aren’ t you alarmed? It really could destroy property values…job loss is nothing vs net worth loss….

    Those of you who have little and run your mouths….you best hope someone is out there to stop all this maddnesd!

  7. Chris says:

    California’s economy for the last 12 years has been based on flipping houses. All the good jobs years ago have been shipped offshore or to other states. These jobs are now gone. Plus most cities are near bankruptcy and need to keep businesses here for their tax revenue. We need to keep the few businesses that are left.

    As far as I know the only residents that want to mess with prop 13 are the retired teachers and state workers. They want their platinum plated retirements to keep rolling in no matter what the long term damage is.

    I’m glad this was verified by our higher education institution research.

  8. Greg - San Rafael says:

    This is a purchased report that contains no research and only reports the ordered conclusions. Why else would the Pepperdine School of Business disavow responsibility for the “opinions presented”. 50% of commercial properties have been recently reassesed and less than 20% of the properties retain the savings of the original Prop 13. So how could all this massive damage happen? Only the richest corporations benefit. How could JP Morgan purchase all the Washington Mutual branches with none reassessed? The land under Disneyland has been sold 4 times and never reassessed. Saying that is a “legal loophole” as a sale between partners is a lie as new partners came in and purchased the corporation holding the land in each case. Some partners remained but they were sales involving new money and new partners.

    When I put my girlfriend (now wife) on my deed, I was reassessed for this new “partner”. Of course I cannot purchase legislation or get “lawyered up” like Disney. Split roll would correct a situation that is fundamentally unfair. When Prop 13 was passed corporations paid 80% of the property taxes and residences 20%. That has completely reversed as individuals like myself have been constantly reassessed, I, 3 times due to my girlfriend and 2 remodels. Now residences pay 80% of the property taxes and corporations 20%, (approximately). This sky will fall report is baloney and the large corporations, as with the income tax, will never pay their fair share. But they will spend hundreds of millions if split roll ever make it to the ballot to protect their unfair privilege over us working stiffs.

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