Why a split-roll property tax is DOA

June 11, 2012

By Wayne Lusvardi

A proposed ballot proposition circulating for signatures in California for what is called a “spilt tax roll” is dead on arrival at the ballot box in November 2012 should it gather the necessary 807,614 signatures. (See Item 1560 — Initiatives Cleared for Circulation, California Secretary of State).

A split tax roll in California would reassess commercial properties every three years, while residential properties would be reassessed only upon resale, as currently provided by Proposition 13.

The reason why splitting residential and commercial property tax assessments is toast?  New data from the U.S. Department of Commerce show California property taxes have increased about 45 percent since mid-2008, while median home values have declined about 19.5 percent over that same period of time.  Houses are worth less, but property taxes have gone up anyway.

Median Home Price & Property Taxes Collected — California

June 2008 April 2012 Percent Change Percent Change per Year
California Median Home ValueSource: Dataquick $328,000 $264,000 -19.5% -5.6% per year
(compounded)
Total California Property Taxes Collected
(approximate)
Source: U.S. Dept. of Commerce
$2.3 billion $3.2 billion +45% +9.8% per year(compounded)

There is no apparent need to split the property tax roll in California. The real estate market and the circuit breakers of Prop. 13 have already done it.

It apparently is not that commercial properties are not bearing their fair share of the property tax load, or are exploiting tax loopholes, as anti-Prop 13 tax advocates contend.  Rather, it is that aggregate single-family home prices are receding and thus not carrying their share of the property-tax burden.  Clobbering an already overburdened commercial property tax base composed of 97 percent small businesses with more frequent tax re-assessments is not a viable solution to the state budget deficit.

This trend of increasing property taxes and falling home values is nationwide, but is worst in California.  Despite home prices falling off a proverbial cliff in California since 2008, property tax collections have increased by 45 percent.

In other words, the median home price in California has fallen by 5.6 percent per year since 2008, but property tax collections have risen by 9.8 percent per year over the same time frame on a compounded basis.

Prop 13 is not to blame for the continuing state budget deficit.

Home prices can’t recover because rising property taxes are consuming much of the expendable household income.

Claiming that commercial properties are not bearing their fair share of the property tax load is deceptive.  It is residential home values, and thus, the residential property tax base that is declining instead. Any proposal to split residential and commercial property tax re-assessments is dead on arrival at the ballot box come November.

23 comments

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  1. Rob McMillin
    Rob McMillin 11 June, 2012, 14:19

    I confess I would like to see revenue from commercial property vs. residential before making this assessment.

    In considering the feasibility of a split roll property tax, inevitably the problem of determining valuation comes up, and when. It seems to me that all the problems of pre-Prop. 13 assessment would immediately festoon commercial property taxes, and we would likely be left with Disney and other politically well-connected entities getting sweetheart deals while the dry cleaner around the corner sees huge annual tax hikes. This is probably not what the proponents of a split roll had in mind, but it is how power politics work.

    Reply this comment
  2. Val
    Val 11 June, 2012, 15:00

    To give an example of the clobbering that could occur to a small business owner lets say the business owner has an apartment complex which was purchased at $2 million some odd years ago, with about a $200k gross earnings. If under current conditions that person has $100k in taxes and admin/operating expenses plus $20k annually in property taxes(not counting any additional fees or expenses) that leaves technically $80k net to either re-distribute to himself as profit or capital re-investment. Pretty decent for a business I’d say

    Now lets give split roll tax example, same property. Instead of a 1% rate, lets go to a usual 3-4% rate, we’ll use 2 further examples, baseline at $2 mill assessment and next at $4 mill assessment (lets assume a boom in property prices).

    If his gross rents are still the same $200k he now at the $2mil assessment still has the $100k after after operating/admin expenses, but now also faces instead of $20k of property tax, $60-80k. Reducing said profits to $40k or worse to $20k. Rather pathetic at that point when it comes to earning money potential

    At a $4 mil assessment this becomes worse. The business is now in the red with $120-160k in property taxes alone. A rise in property prices does not necessarily correspond to a rise in rents received for the landlord. Long example but hope this illustrates some of the problems.

    Reply this comment
  3. us citizen
    us citizen 11 June, 2012, 15:04

    Property taxes should be going down with continual decline on property values, like that is ever going to happen. Instead of raising anyone’s taxes…….CALIF should cut out all the freebies to illegals to start with! This state is being bled to death with people and their hands out, with some not even being in this country legally. What the heck is wrong with this legislature! You cant pick and choose which laws you are going to enforce. No wonder people are leaving this state by the groves.

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  4. queeg
    queeg 11 June, 2012, 15:35

    A beach four bedroom duplex unit…average room rate of $675.00 under Propositio 13. Bldg purchased in yr 2000.

    Under split role…conservatively the average room rent would rise to $1500.00 per month. Virtually unaffordable.

    If not rented…tax appeal…value of bldg plummets….. big drop in property taxes, immense loss in owner net worth, lender’s loan at risk, loss of quality housing for tenants, blighted neighborhood, no money for maintenance ,crime escalates-Detroit West….Lay off firefighters, paramedics, assorted public workers and…police.

    Guarantee…you go for split role…your life will change beyond your comprehension!!!!

    Reply this comment
  5. queeg
    queeg 11 June, 2012, 15:55

    Suggest stop blaming migrants for California problems…overworked…boring….same ole blame game….think hard….are you part of the solution….action….

    Reply this comment
  6. Wayne Lusvardi
    Wayne Lusvardi 11 June, 2012, 16:41

    Val
    Great analysis. My understanding of the Split Roll Property Tax proposition being circulated is that it will exempt apartments. But my experience with local government tells me this is just a way to get the proposition on the books. Once on the books the legislature can amend it or a court can extend it in “fairness” to apartment owners and renters.

    Many local bond issues pull off this bait and switch trick. They propose a bond issue for, say, public transportation improvements and promise the middle class in the suburbs grade crossings to lessen traffic congestion from light rail projects. Then when the bond is passed the local county board of supervisors amends the bonding authority to delete such grade crossings as eligible for funding. Thus the middle class is hoodwinked into voting for public transit for the so-called “poor.” Example: L.A. County Prop A.

    Reply this comment
  7. Val
    Val 11 June, 2012, 17:31

    Wayne, as far I’ve heard every single instance of the Split Roll Tax hits rental properties, especially multi-plex properties (4 units or more). Even in the best case scenario the taxes go up significantly depending on when your purchase date was as queeg illustrated above.

    Unfortunately for landlords the only way to offset such tax increases is to either 1)reduce operating/admin costs or 2) increase rent rates. For the first this doesn’t always work, as I illustrated in my example the theoretical owner would need to $40k to $60k in expense reduction to make the same amount of net he was making before, that’s a pretty drastic jump in efficiency (darn near absurd). As for option 2 that of increasing rents, that doesn’t always work either as quite a few rental properties are in rent controlled markets (limit of how much they can raise rents or even turn out tenants), or they are near the market limit for fair market value for rents.

    Going above fmv for rental units makes it harder to rent out, which can lead to a death spiral of loss of rents, while still paying operation expenses and taxes. All in all not a well thought out plan imo

    Reply this comment
  8. queeg
    queeg 11 June, 2012, 21:36

    The Progressives’ goal: all rental housing to be PUBLIC HOUSING gobbled up by nonprofits and public agencies at foreclosure/abandonment sales…pennies on the dollar.

    You do not want split role…..it will be the class warfare battle of your lifetime….and nobody will win!!!

    Reply this comment
  9. Jennifer Bestor
    Jennifer Bestor 12 June, 2012, 08:51

    Who has “…A proposed ballot proposition circulating for signatures in California?”

    All that I have ever seen is a filing, by a lawyer many months ago, with the Secretary of State for such a measure. When I ask the education organizations that are purported to be behind it, they all look puzzled. Skeptics tell me that this supposed initiative is a fund-raising ruse created by one of the many ‘pro-business anti-tax’ organizations that have sprung up in California. This gains credence when one sees that the only mentions of it are on the blogs and websites of such organizations.

    The sheer nebulousness of this nemesis allows “Val” to redefine this split-roll proposal as a different tax rate, and then to apply it to residential housing, “Queeq” to get on his public housing horse, and you to show a property tax graph purporting to be for California, with property taxes in the $2 – 4 billion range.

    Wayne, anyone who has spent weeks, let alone years, analyzing California property taxes knows that they have been over $40B in recent years … not $4B. Why are you using garbage data? Garbage data in, garbage analysis out.

    Seriously, this whole article must be a joke.

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  10. queeg
    queeg 12 June, 2012, 09:29

    There is only one stable source of taxation….the land. In urban areas….throw in land improvements.

    There is no doubt taxation ala Suffolk County, Long Island is near your door step…bloated/incompetent government, outrageous public worker renumeration and choking taxes making a serial killer proud!

    No one is crying WOLF! This above nightmare clearly is your unfolding reality…only the tax thingee needs fine tuning by Progressives.

    Reply this comment
  11. Wayne Lusvardi
    Wayne Lusvardi 12 June, 2012, 10:44

    Jennifer:
    Take your complaint to the U.S. Dept. of Commerce. Facts are always inconvenient aren’t they?
    WL

    Reply this comment
  12. CalWatchdog
    CalWatchdog Author 12 June, 2012, 12:22

    Wayne –

    Bestor has testified at legislative hearings in support of the split-roll. I covered a March Revenue and Tax hearing, where Bestor testified: “The shirkers are freeloaders,” said Jennifer Bestor, former treasurer of the Oak Knoll Parent-Teacher Association in Menlo Park. “All that noise is a smokescreen for greed.”

    Bestor said she did her own research into county tax records and concluded that those who benefit the most from Prop. 13 are freeloaders whose neighbors subsidize the government services used by everyone. “We’ve created individual entitlements,” Bestor said.

    Bestor made it sound as if owners of commercial properties and homes prior to Prop. 13’s passage have been stealing something from the more recent property owners. Bestor’s solution was to impose higher taxes on longtime property owners, instead of reducing property taxes tax for new buyers.

    “If you think the way I do, property taxes are not evil,” Bestor said. “They are not a sin tax.”

    http://www.calwatchdog.com/2012/03/20/revving-up-higher-property-taxes/

    Katy

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  13. Val
    Val 12 June, 2012, 13:26

    Jennifer simple math says in order to assess the property tax for a commercial property as I showed in my example at the same rate or very similar it would have to be taxed at lower than 1% (to maintain $20k for a property initially purchased at $2 million but now worth $3 million you would have to go to under 1% equivalent rate, unless you are seriously suggesting everyone should pay 50% increase in their tax bill every 1-3 years). Business do not work well under that because they can no longer predict their long term costs.

    Under your suggestion valuation of the property goes up drastically to increase revenue every year, which is absurd in the current economic climate for properties, or the other end of spectrum we get a tax rate under 1% on property taxes for businesses; which will only I suspect incite the general public further.

    Again math says this is not a winning solution.

    Reply this comment
  14. Val
    Val 12 June, 2012, 13:29

    Oh and to add further to this, is that just because a property has increased valuation it does not mean an increase in cash flow, because in order to actually realize the valuation the property needs to be sold, hence an increase property tax is actually a net decrease in cash flow until the property is sold (hopefully at the valuation price or higher, which is not always the case). Until then it is an expense pure and simple that affects the cost of operations of the business.

    Reply this comment
  15. queeg
    queeg 12 June, 2012, 14:17

    Don’ t be fooled again or feel deep remorse/guilt for owning your home or investment property.

    Northern Californians have a love affair with command economies ala vintage communist Hungary…..20 years waiting list to buy a four hundred sq. ft. condo in a 100 year old building…someone in the building buys a refrigerator….neighbors throw a frugal party of joy!!

    Be discerning…..you lose your property rights or your taxes are painfully confiscatory…you kneel at the socialist’s table groveling for scraps!

    And guess who sits at the table….crony nonprofit bosses, public housing czarinas, the usual Sacramento bundlers, lobbyists and media propagandists!

    Good Luck!

    Reply this comment
  16. Jennifer Bestor
    Jennifer Bestor 12 June, 2012, 15:19

    I am so sorry you find facts inconvenient, Wayne. Forgive me if I don’t bother to inform the St. Louis Fed that you’ve misread a chart automatically generated from Commerce data. That chart shows taxes on property collected by the State of California — which have nothing to do with property taxes collected by the counties and controlled by Prop 13. Go read Commerce’s “State Government Tax Collections Summary Report: 2011” to understand your data better.

    Of course, if you truly believe California property taxes are $4B total, you may want to inform the Legislative Analyst’s Office, since (as recently as February 17th this year) they seemed to think that Redevelopment alone collected over $5B last year, and total taxes are in the $45B range.

    http://www.lao.ca.gov/analysis/2012/general_govt/unwinding-redevelopment-021712.aspx

    Reply this comment
  17. Jennifer Bestor
    Jennifer Bestor 12 June, 2012, 15:33

    Katy,

    Let’s invite readers to go to the legislative hearing video to hear what I actually said AND read my handouts!

    http://arev.assembly.ca.gov/informationalhearings

    Scroll down to March 12th. Enjoy!

    And see if readers don’t agree with me that **individuals and businesses who have evaded Prop 13’s change of ownership rules** are shirkers and freeloaders.

    Honestly, it amazes me when people pretend to be “defenders” of Prop 13 when, in fact, they simply want to twist and bend it to avoid contributing to the local services that they, their tenants, their employees, and their customers rely on every day of their lives.

    Do Medicare recipients laud Medicare frauds? Social Security recipients champion Social Security cheats?

    As someone who believes in understanding facts, rather than searching for those that conveniently support a previously held point of view, I have come to wonder what is going on here.

    Still waiting to hear who is circulating this petition. Hmmm …

    Reply this comment
  18. Jennifer Bestor
    Jennifer Bestor 12 June, 2012, 17:43

    Katy,

    One quote from your article was fascinating — and sent me off researching back in March. You quoted David Wolfe, of the Howard Jarvis Taxpayers Association, as testifying: “Without Prop. 13, property tax revenue would have decreased by half.”

    Was he right, I wondered? Had we not passed Prop 13 in haste, but something closer to Massachusetts’ Prop 2-1/2 (which they passed two years later), would property tax revenues have been restrained to half of what they are today?

    Prop 2-1/2, if you recall, capped the growth in total property taxes for a whole county to 2-1/2% a year — rather than creating individual entitlements. This forced residents to remain active in setting spending priorities between schools, fire, police, city and county activities, compared with the Prop 13-triggered set-in-stone allocations of tax to different local services. It also kept a focus on public employee salaries and benefits.

    It’s a tough question to research, given the paucity of comparable data. I did find an analysis by Josh Barro suggesting that Massachusetts’ property tax had grown an inflation-adjusted 22% between 1980 and 2007.

    http://www.manhattan-institute.org/html/cr_62.htm

    Total property tax in California in 1978 appears to have been $10.3B, which inflation adjustments would grow to $32.8B by 2007. Instead total California property tax appears to have been $47B in 2007, for a growth-over-inflation of 44%. Or about twice the inflation-adjusted growth rate of Massachusetts’ property taxes. Had California’s taxes grown at the Massachuetts rate, they would have been $40B, rather than $47B, in 2007. (But hardly half of what they were. Could you possibly have misquoted David, as you did me?)

    I certainly enjoyed doing the analysis — and found it interesting that Prop 13 may have cost Californians $7B in comparison to an alternative property tax cap methodology — especially since Massachusetts schools have stayed at the top of the charts. I only wish I had the time to really research the numbers and get them right — being unwilling to just grab a couple that support personal suspicions.

    Reply this comment
  19. Rex the Wonder Dog!
    Rex the Wonder Dog! 13 June, 2012, 00:53

    “If you think the way I do, property taxes are not evil,” Bestor said.

    So said the teacher union sock puppet.

    CA teachers comp, is on AVERAGE, $108K per year in CA, except it is a “school” year, or 37 weeks, and that is a “school” week, which is only 36 hours. That is about $80 an hour JB.

    BTW some district teacher salaries average $150K in yearly comp. Or $120 an HOUR, in a job where you cannot be fired for incompetence, or laid off after 5 years.

    It is even better for cops and firewhiners, who average $200K per year in comp, more then medical doctors, yet they only need a GED to be hired.

    Reply this comment
  20. The Ted Steele Legal System (tm)
    The Ted Steele Legal System (tm) 13 June, 2012, 11:38

    Poodle boi—- Mr. out of context lie spin….zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz
    Take a breath Poodlewhinerboi !

    Reply this comment
  21. The Ted Steele Legal System (tm)
    The Ted Steele Legal System (tm) 13 June, 2012, 11:39

    Hey Poodlewhinerboi ™ —

    So how much to you think we ought to pay our teachers little buddy?

    Reply this comment
  22. Rex the Wonder Dog!
    Rex the Wonder Dog! 13 June, 2012, 12:34

    Less than $80 an hour 🙂

    Reply this comment
  23. Jennifer Bestor
    Jennifer Bestor 17 June, 2012, 10:38

    So your point, RTWD, is that Prop 13 has not controlled salaries of government employees, any more than it has the overall level of government spending, per my earlier calculations.

    Having spent my career in high-tech management (before, it would appear, becoming a sock puppet!), I haven’t had a lot of experience with unions, but it makes sense that Prop 13 has strengthened California’s unions by providing a long-term credible external threat. Pushing public employees to stick together (hence to the union) is crucial to union strength.

    And, of course, there is the near-impossibility of local control of the flow of property tax revenues among local services (even, for example, allocating more funds to elementary school district, then shifting them to the high school district, as a baby boomlet moves through). The gush and sputter of California property tax revenue absolutely rewards any special interest with a long-term perspective. During the gush years, it’s crucial to be first in line for immediate cash, e.g., salary increases. During the sputter years, it’s critical to loudly agree to no raises, while negotiating other contract terms without immediate cash costs, e.g., pensions, working hours, etc.

    And, of course, this seems to be what the California public employee unions have managed rather well — to their credit, considering their function, which is benefiting the public employees.

    However, it seems to have been to the detriment of the kids, in the case of teachers, since the counterbalance to relatively high salaries is that California has among the largest class sizes in the nation (per the NEA’s annual report, available on their website).

    But, overall, this does illustrate why I am always puzzled when commentators and lobbyists state that Prop 13 capped taxes or curtailed government spending. As illustrated in my earlier posting, a different approach may very well have controlled overall CA property tax better. I’m not sure it would have sunk teachers’ salaries (California’s public instruction salaries tend to run in a pack with the other high-cost-of-living states — New York, Massachusetts, etc.), but it would have given residents a decision in how much to fund schools vs. parks vs. libraries vs. police vs. fire vs. other city and county services — and therefore an incentive for each of those entities to provide value for money.

    OK, I’ve got to run to enjoy what some summer sock-puppet fun! (Moth hunting? Hole darning? No, kayaking. Go figure.)

    Reply this comment

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