Are Split Rolls Coming Soon?

NOV. 16, 2010

By KATY GRIMES

The recent passage of Proposition 25, which allows legislators to pass a budget with only a simple majority vote, could have an impact on the future of property tax increases, according to Jon Coupal, President of the Howard Jarvis Taxpayer Association.

“The recent California election sent mixed messages to legislators but appears to have spared the property tax initiative Proposition 13, for now,” said Coupal.

Coupal said he was pleased that voters failed to pass additional taxes with the failure of Proposition 21, and voted to require any increase of fees be decided by a two-thirds vote in Proposition 26. “It’s a ‘hands-off’ message,” he said. “However, even with a Democratic controlled legislature, voters will circle the wagons to defend Prop 13.”

Coupal warned that in the upcoming year, unions will try to lower the vote threshold on parcel taxes. He explained that the parcel tax is a flat assessment and identical for all homes or businesses, so that the owner of a $300,000 home would pay the same parcel tax as the owner of a $5 million home.

Coupal also warned about the push in the state to “split rolls,” currently done in several other states. Split rolls separate industrial and commercial property from standard property tax roles, and charge the property owner a higher rate.

“California has had a unified tax roll since the mid 1800’s,” said Coupal. “Split rolls split the assessment roll in two, stripping commercial property owners of Proposition 13’s protection opening up the door for huge tax increases.”

Coupal warned that this would be the single most damaging tax policy enacted in this state, and would send a message to businesses and employers that California doesn’t want them to locate here. “The split roll would result in job losses and higher prices passed on to consumers,” said Coupal.

California already has the highest corporate tax rate, income tax rate, sales tax and business personal property tax in the west, according to the California Taxpayers Association. The CalTax website reports that advocates of a split roll base their arguments on a myth that Proposition 13 has shifted the property tax burden to homeowners, but they report that this is not correct.

“Data from the state Board of Equalization shows that the assessed value on non-homeowner property subject to Proposition 13 has grown an average of 8.5 percent per year, while homeowners’ property tax has grown an average of 8.3 percent,” states the CalTax site. “In other words, the Proposition 13 property taxes paid by non-homeowners have outpaced homeowners’ property tax burden.”

Coupal said as much as $8 billion in new taxes will be levied against businesses in the state, and will be passed on to California consumers with a split roll. Coupal referred to a CalTax study which reports, “Even the most limited split roll will increase taxes by billions of dollars annually. The Legislative Analyst’s Office estimated that a 2005 measure that would have changed assessment of business property to reflect fair market value (a ‘split roll’ initiative) would have resulted in a $3.5 billion gross increase in property tax revenues.”

And for University of California Davis Economics Professor Steven M. Sheffrin, that’s a good thing. He authored a 2009 study for the Commission on the 21st Century Economy, in which he advocated for a split roll of the property tax. Sheffrin didn’t return a call for comment, but his study states that split rolls would “promote stability in revenues.”

“I believe that moving towards a split‐roll property tax, under which commercial and industrial property is assessed yearly at its fair market value, can be an important part of a redesign of California’s revenue structure,” wrote Sheffrin. “The two key positions of Proposition 13 – two percent limitation on increases in the assessed values of properties until they are sold and the one-percent cap on the property tax rate – restrict the total amount of property taxes collected by the state and localities, and thereby place the burden of funding government services on other taxes. These assessment provisions also moderate fluctuations of property tax revenue itself. In periods of price increases, the assessment provisions in Proposition 13 limit the increase in total revenues. However, in periods of market decline, properties that are assessed at values lower than their current market value continue to pay at least their current level of taxes and may even pay two percent more.”

While the additional revenue to the state might please lawmakers, Sheffrin’s split roll study did not look at the long term consequences of such a tax split.

“Businesses with lots of tenants – apartment complexes or small strip shopping malls – cannot necessarily pass along a massive tax increase to tenants,” said Bill Leonard, a former state Board of Equalization board member and current Secretary for State and Consumer Services. “There is no way for small businesses to absorb huge increases in taxes overnight. Business property owners either have to cut back on profit and risk the investment’s worth becoming nothing, or drive customers or renters away. There are clear consequences to trying to split rolls.”

Leonard said that he’s talked to legislators in other states in which the property tax rolls are split and it has become a substantial political issue. One state has 50 to 60 different property tax rates. “What happens is that legislators get to pick the winners and losers,” said Leonard. “Businesses lobby the legislators to lower rates for certain businesses and raise them in others to make up for the losses. The unintended consequences are huge.”

Leonard said that “Prop 13 is the best compromise in a very poor tax system. At least the tax is based on the sales price of a piece of property, even though there is a great deal of unfairness, it’s still the best.”

The Board of Equalization prepared an in-depth analysis of AB 2492, the most recent bill to attempt to redefine change in ownership of property to trigger new property assessments. The BOE analysis also lists the many other bills that have attempted to redefine ownership definitions to trigger property reassessments or require property to be assessed annually.

“This bill creates a new event that would trigger a ‘change in ownership’ of property owned by a legal entity,” states the analysis. “Specifically, this bill would provide that if 100 percent of the ownership interests in a legal entity are sold or transferred in a single transaction, that event shall be considered a change of ownership of all the real property owned by the legal entity requiring a reassessment of all the real property owned by the legal entity,  and would require the Board of Equalization (Board) to notify assessors when such a change in ownership has occurred.”

Anita Gore, a BOE spokesperson, said the board does not endorse or take positions on legislation, and would not comment on whether split rolls might be coming soon.

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  1. bstrong
    bstrong 16 November, 2010, 16:32

    Question – if this is the case:
    “Data from the state Board of Equalization shows that the assessed value on non-homeowner property subject to Proposition 13 has grown an average of 8.5 percent per year, while homeowners’ property tax has grown an average of 8.3 percent,” states the CalTax site. “In other words, the Proposition 13 property taxes paid by non-homeowners have outpaced homeowners’ property tax burden.”

    Can someone explain the following? Are there fewer businesses? Thanks.

    “Santa Clara County, which has kept detailed records, illustrates the issue. In 1978, when Prop 13 passed, residential and commercial property owners each paid half of property taxes. This year, the share paid by residential owners had shifted to 64 percent, while commercial owners’ share had dropped to about a third, notwithstanding the tremendous growth in Silicon Valley industries since the 1970s.

    “The trend has been true in most counties. In Los Angeles County, with more than a third of the state’s population, residential property owners absorbed 53 percent of the share of property taxes in 1975 and 69 percent last year. In Contra Costa County, it was 48 percent in 1970 and 74 percent last year; commercial properties’ share plummeted from half to about a quarter.”

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  2. Jennifer
    Jennifer 16 November, 2010, 17:20

    Has anyone asked Mr. Coupal what message it sends to new or expanding businesses that they will have to pay five times as much property tax as their competitors?

    If that doesn’t send a clear message that California doesn’t want business to locate here, perhaps the government furloughs and collapsing public school system will get the message across.

    Protecting elderly neighbors from tax increases makes sense.

    Extending that kind of protection — in perpetuity — to commercial landlords and property owners is the same Socialist nonsense that made the Soviet economy fail.

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  3. Jennifer
    Jennifer 17 November, 2010, 08:36

    Could you also please ask Mr. Coupal how this uneven playing field becomes lower consumer prices? I haven’t been able to find this in my area — not in groceries, not in gas prices, not in dry cleaning.

    Furthermore, despite my own 20+ years in business and asking a number of commercial realtors, none of us can figure out how this feat of altruism happens. Presumably the landlord does NOT charge what the market will bear? And does NOT use this as a competitive negotiating advantage with his tenant? He just sneaks the tax difference into the consumer’s pocket? How?

    Our downtown consists of about a hundred 5000-square-foot lots. Many have been combined into 2- 3- 4- or 5-lot parcels, but it’s easily seen that a property with a 1978 base-year pays around $2000-2500/lot in general property tax. Those that have changed hands in the past ten years pay $10,000+ (often much more, since sale of a property is almost always followed by a teardown/rebuild, but let’s compare apples-to-apples). So we have $.40-$.50 vs. $2.00+ per square foot.

    From Loopnet, you can see that rental rates for our basic one-story main street retail space run about $30/sf.

    So, a would-be tenant walks into a bar. Two landlords — one who just bought the property and one who inherited it from his grandfather — are sitting there. Do both landlords charge $30 plus secret-to-be-unveiled-later taxes with a clause that says any savings must be reflected in consumer prices? Or does the new guy who’s paying the most drop his rental rate by $1.50-1.60/sf and swallow the difference? Or does the heir who’s paying the least towards our police, fire, roads, schools raise his rate by the tax subsidy?

    I believe that, as is taught uniformly at business schools around the world, prices reflect what a competitive market will bear. Consumer prices are completely unaffected by tax subsidies dished out generously to a small subset of the total business population. The lucky few dine well, while new property owners and residents fork out.

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