“We’re here to talk about SCA 5, new legislation that will finally reform our commercial property tax system and make it fair,” said Sen. Mitchell, during the announcement of the new legislation. “We have large corporations and wealthy commercial property investors that have used loopholes in the law to avoid paying their fair share. We have large, multi-billion dollar corporations that actually have a competitive advantage over smaller start-ups simply based on when a property was purchased. In short, we have a few businesses that are benefitting from far lower taxes than their neighbors and competitors. That’s what this legislation is all about.”

The bill authors stressed that SCA 5 “would finally make California’s property tax code fair by assessing commercial and industrial properties at their market value, after a phase-in period.” They also stated the legislation would “provide significant tax relief for businesses, protect homeowners and renters from any changes to their property tax status, and create strict new accountability measures for new revenues.”

“This legislation will address flaws in Prop. 13 that have allowed a minority group of wealthy corporations and commercial property owners to dramatically lower their tax bills and shift that responsibility onto homeowners and renters,” said Senator Hancock in a prepared statement. “Our homeowners are now being asked to pay the vast majority – 72 percent – of property taxes, while the commercial side pays only 28 percent. In 1978 when Prop. 13 passed, each paid about 50 percent. That’s not fair, and it has strained the community services our residents rely on.”

Opposition to SCA 5

Other legislators are not so impressed.

“I am disappointed, but not surprised, that the majority party would introduce legislation to weaken Prop. 13. This assault on California’s most important taxpayer protection measure not only threatens to raise taxes on struggling small businesses, but the net effect would be higher prices for consumers and fewer jobs for hardworking families,” Assemblywoman Young Kim, R-Fullerton, said in a statement.

Senate Republican Leader Bob Huff, R-San Dimas, echoed the sentiment in a release:

“There will be a ripple effect. Small businesses will be hit hard by this tax increase. They may pass on the cost to California families or take the loss and see if they can survive.

 

“What California families need are good paying jobs, not new taxes on small businesses. Increasing taxes on employers by $9 billion dollars annually will mean less money to hire and retain workers. Taxing small businesses will not raise anyone’s wages, will increase consumer costs, and is likely to drive businesses out of the state.”

Teresa Casazza, president of the California Taxpayers Association and co-chair of Californians to Stop Higher Property Taxes, said in a statement, “SCA 5 is an attack on property owners, and just by being introduced it sends a damaging signal to anyone thinking of starting a business in or moving a business to California. Lawmakers introduced more than $132 billion in new taxes and fees in the current legislative session and SCA 5 would only add to that unfathomable number.”

Poll results on a split-roll tax initiative

In May, the Public Policy Institute of California released survey results regarding the issue of changing Prop. 13 and moving towards a “split-roll” tax on property, defined as “taxing commercial properties according to their market value while leaving limits on residential property taxes intact.” As Joel Fox noted in a previous CalWatchdog story, “50 percent of likely voters favored the proposal while 44 percent opposed.”

A different poll from the California Business Roundtable released in June revealed that over 72 percent of all Californians would approve Prop. 13 in its totality if it were to be voted on again. Only 21 percent of the respondents were interested in changing to a split-roll tax on property.

SCA 5 requires a two-thirds majority vote in both legislative houses before it can be placed on the 2016 ballot. Two split-roll ballot initiatives have been voted on in the state of California — Prop. 8 in 1978 and Prop. 167 in 1992 — but both propositions failed.

The legislation has since been referred to the Senate Governance and Finance Committee.

By Wayne Lusvardi

The attacks on Proposition 13 never seem to end. The 1978 tax-cut initiative’s enemies, such as former Assembly Speaker Willie Brown, conjure up a misleading image of large corporate owners of commercial real estate dodging taxes by selling commercial properties through “stock transfers.” They call for a “split roll” that would increase taxes on commercial property, while leaving residential property tax at current rates (for now).

The reality is that 97 percent of businesses in California are small. And small commercial properties are not sold by stock transfers. Moreover, stock transfers of large commercial properties are only a tiny fraction of the 3 percent of large commercial properties in the state.

Neither politicians nor the public seem to have an understanding how hard changes in Prop. 13, increasing property taxes, would hit small commercial properties with low tax-assessed values:

* A small mom and pop store or restaurant on a 5,000 square-foot lot could be hit with a combined added split roll property tax up to $6,250 per year.

* A family-owned small office building on a typical 10,000 square-foot lot could be facing up to $12,500 in added taxes per year.

* A 3,000 square-foot historical home leased for offices on a 12,000 square-foot commercial-zoned lot in a primed downtown location could experience $15,000 in added property taxes; or about half of the existing net office rent.

* An older convenience store and gas station on a 15,000 square-foot lot could face up to $18,750 in added property taxes.

* An older family-owned grocery store on one acre of land could incur up to $54,450 in added property taxes.

Demolished

In each of the above-described properties, the only way to afford the property tax increase would be to demolish the older, under-improved buildings and construct new, multi-story apartments, condominiums or offices.  This may be highly speculative.  Thus, taxes on sales of older commercial properties could occur.

Just as senior citizens on fixed incomes had to sell their homes for taxes in 1975 prior to Prop. 13, small businesses with older structures would likely have to sell, as they would be unable to pay the higher taxes.  This is because property taxes are assessed on the highest and best use of commercial land, not on its existing use.

Theoretically, such older properties are under-assessed for property taxes.  But in the real world, such properties may be the only current economic use other than letting the land remain vacant.

Ending Prop. 13 for older structures on commercial-zoned land also would end one of the favorite public policies of many liberal elites: historical preservation. Without the lower tax assessment afforded under Prop. 13,  many historical properties would have to be demolished, replaced by three to five floors of condos, apartments, offices or mixed-use residential projects.

The only other alternative would be for small commercial property owners to insulate their properties from such higher taxation by signing 100-year land leases or leasing their properties to non-profit agencies that have property-tax exemptions.  This strategy might escape the higher taxes, but it also would lead to disinvestment and the deterioration of the commercial building stock.

Under-assessed?

There is a perception problem that commercial property owners are under-assessed when it comes to property taxes as a result of Prop. 13. Many single-family property owners believe they are being overtaxed and that businesses should pay their fair share of taxes.

However, an impartial 2008 study by economists Jose Albero and William G. Hamm found that commercial properties were assessed at 60 percent of their market value and residential properties at only 53 percent. The study estimated that a split-roll property tax alone would result in the loss of 86,000 to 152,400 jobs; and 48,700 families, or about 170,450 people, would migrate out of the state for economic reasons.  That would equate to California losing the population — and the tax base — of a city about the size of Santa Rosa, Santa Clarita or Oceanside.

Nonetheless, homeowners that more recently bought their homes and pay full taxes often feel that any under-assessed properties are shifting added taxes onto them.

With their new supermajorities in the Legislature, Democrats already are taking aim at Prop. 13. As the Mercury News reported, “‘It is time for a fix, because Proposition 13 is broken,’ said Assemblyman Tom Ammiano, D-San Francisco, who plans to introduce a bill … aimed at forcing businesses to pay higher property taxes.”

If the tax increase is passed, it will hit small businesses the hardest. A small commercial property owner by the name of “Maureen” in Contra Costa County described her plight in a comment left on the Political Blotter of the ContraCostaTimes.com for Dec. 5, 2012:

“We have owned a small piece of commercial property for several years. The rent on this property is our only livelihood. We are not a corporation. If the split roll goes through either our 2 renters pay more rent (who are already doing badly) or we lose our property to the state, as we won’t be able to afford the taxes. In either case we all lose.”

“Maureen” goes on to explain that it will also be apartment renters — not just big corporations — that will be affected by the ending of Prop. 13 for commercial properties:

“[W]e bought the property in 1979. Because this is land it is an unusual piece of property as there isn’t much land in our area. Not only will we become victims of the state but our renters will [be] out of a place to rent for their needs (as there will be no other available) & will also go under.

“I know several other people in the same boat who are definitely not wealthy people. Our property taxes will probably go up 4 or more times to about $30,000/year. This is 1/2 the rent we collect. Our renters can’t afford to pay more. You do the math. The renters at trailer courts & apartment buildings will find their rent will increase for the most part. Read the Pepperdine University report which says minorities & female owned businesses will suffer the most from the impact & that is just the beginning.”

This is the reality of the battle over Prop. 13. It’s not the “big corporations” that would pay, but the small property owners, the backbone of the economy and jobs creation.

                        Estimated tax increase on underimproved
            commercial-zoned land due to split-roll property tax