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Two polls were issued last week, and while quite different in the territory they covered, both contained one question that examined the same issue – a split-roll property tax. In one way the results on that one question were quite different. In another way they reflected a probable similar outcome — altering the property tax system will be a difficult task.

In the Public Policy Institute of California poll, which was quite extensive and touched on many issues, the split-roll question (taxing commercial property differently than residential property) came within a series of questions dealing with state revenue and other potential tax increase proposals.

PPIC asked the question this way:

Under Proposition 13, residential and commercial property taxes are both strictly limited. What do you think about having commercial properties taxed according to their current market value? Do you favor or oppose this proposal?

The response: 50 percent of likely voters favored the proposal while 44 percent opposed.

The California Business Roundtable revealed results of a poll conducted for the organization by M4 Strategies. The M4 Strategies survey using mobile phones and online polling was much shorter and asked respondents to read the following pro/con arguments and register their support:

We should change our property tax policy and tax commercial property based on the current market value of the land because it will ensure businesses pay their fair share and generate $6 to $10 billion in new revenue for state and local government, including schools.

We first should focus on closing loopholes in out property tax law before raising property taxes on every small business in California. Closing just the loopholes will generate $70 million in new revenue for the state and California schools, but won’t drag down the state’s rebounding economy and won’t hurt small businesses and the thousands of jobs they create.

The response: 21.4 percent favored the first answer in supporting a split roll; 63 percent agreed with the second answer opposing a split roll.

The PPIC poll question suggested a close contest on the measure; the M4 explanations produced a one-sided result.

There is not much context to the PPIC question. It doesn’t suggest how much money a change in the property tax system would bring in; nor did it raise any issues about effects on the economy and jobs.

The M4 statement focuses on small businesses exclusively in the con argument, no mention of big business or even using the term “commercial property” in painting a negative picture.

While a campaign for and against a split roll would flesh out arguments for the voters, there is something to be taken from these two polls that seem to show different results. While the Roundtable/M4 poll indicates that a split-roll initiative will face daunting odds, the PPIC poll also indicates it would be difficult to pass a split roll measure.

Most experts agree that an initiative that doesn’t have 60 percent support well before a campaign gets started would face long odds. Put into the equation the massive campaign that would be unleashed against a split roll initiative and that would only increase those long odds.

PPIC notes that the 50 percent mark on the side of reassessing commercial property is the lowest a PPIC poll has seen on this issue. In fact, the number dropped from 54 percent support just last January.

In summing up the results on all the tax issues tested in his poll, Mark Baldassare, pollster and PPIC president said, “Most efforts to make changes to our state’s tax system face difficult hurdles even in the favorable climate of an improving economy.”

While the numbers in both polls are many percentage points apart they both indicate the same thing – a hard road for a split roll.

The PPIC poll can be found here. http://www.ppic.org/content/pubs/survey/S_515MBS.pdf

The Business Roundtable/M4 Strategies poll is here. http://www.cbrt.org/wp-content/uploads/2015/06/CaliforniaStatewideProp13.Topline.pdf

By Wayne Lusvardi

“Ignorance is strength.” –- George Orwell

California’s opinion polling has deteriorated to “measuring the public’s satisfaction with its ignorance” fed to them by pollsters.

That is the only conclusion that can be made from the recent opinion poll released by the Public Policy Institute of California (PPIC). The poll incredibly indicates that the public now approves many of the so-called “reforms” it just overwhelming rejected at the ballot box only 30 days ago.

PPIC unbelievably reports that voters now approve many of the parts of Proposition 31 that was rejected on Nov. 6 by 2,435,430 votes reflecting a 61 percent to 39 percent margin, such as:

— A two-year budget cycle (56 percent now reportedly approve);

— Increasing the budget rainy day fund (72 percent now reportedly approve); and

— Requiring new programs and tax reductions to identify a funding source (79 percent now reportedly approve).

The PPIC poll is so biased that it failed to inform the 2,001 respondents to its poll that two rainy-day funds are already in the law books in California. The “Budget Stabilization Account” provides for setting aside from 3 percent to 5 percent of estimated general fund revenues not to exceed a cap of $8 billion. Five percent of the current $92 billion state general fund budget would be $4.6 billion. Also, California’s“Special Fund for Economic Uncertainties” provides for the state controller to transfer a year-end budget surplus from a prior year to cover a revenue shortfall in the current year. The approved 2012 general fund budget includes $948 million in the “Special Fund for Economic Uncertainties” and $0 in the “Budget Stabilization Account.” The apparent purpose of such unneeded but popular reforms is to get voters to approve other items included in ballot initiatives that would be controversial such as the adoption of unelected regional councils that could make funding decisions without voter accountability.

PPIC also failed to inform those polled that there is nothing forbidding the Legislature from approving a two-year budget cycle now without voter approval. Only tax proposals require voter approval.

And as for requiring new programs or tax reductions to identify a funding source, again the PPIC poll question is deceptive.  The poll fails to tell those polled that this proposed reform would forbid cutting any programs or state pensions –- unless of course taxes were raised.

Split-roll property tax deception

The PPIC poll asked California residents:

“Under Proposition 13, residential and commercial property taxes are both strictly limited. What do you think about having commercial properties taxed according to their current market value? Do you favor or oppose this proposal?”

— 57 percent favor

— 36 percent oppose

— 7 percent don’t know

What the PPIC poll omitted was that commercial properties are already taxed according to their current market value UPON RESALE.

The proposal to approve a split-roll property tax is about taxing commercial properties differently than residential properties. Commercial properties would be reassessed every year or three years no matter if they sell or not. Residential properties would remain reassessed only when they are resold. In other words, commercial properties with older tax assessments would have their taxes increased even if the owners did not realize any monies from a sale. For example, stocks are taxed only when they sell, not when their price goes up or down at the end of each year.

What if the PPIC poll had accurately asked: “Would you vote for removing Proposition 13 for commercial properties if you knew”:

— Ninety-seven percent of all commercial properties in the state are owned by small businesses?

— It would result in losing 396,345 jobs over the first five years?

— It 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 Proposition 13 protections on commercial properties would result in losing about $14.4 billion in economic productivity per year to get about $3 billion 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.  Proposition 13 now protects local governments and school district from large drops in taxes due to rapid declines in market values from economic cycles.

Opinion polling in California has deteriorated to sheer propaganda paid for by large corporate foundations in return for laws and regulations that ensure them of monopolies from outside competition.

British writer George Orwell in his novel “1984” wrote about a slogan used by “Big Brother” government: “ignorance is strength.” Public opinion polls in California don’t measure public opinion as much as they manufacture and strengthen the public’s satisfaction with its ignorance.

By Chris Reed

For years, the California Chamber of Commerce has had a squishy aversion to confrontation and a comfort level with Sacramento’s machine politicians that should inflame any small-government conservative. What has this toadying and willingness to fight against constructive state initiatives and stay mum about destructive ballot measures gotten them? Will the Democrats who now control Sacramento like the Kim family controls Pyongyang cut them any breaks?

Hardly. Instead, we’re likely to see a coming bid to end the Proposition 13 protections for commercial property. The new Public Policy Institute of California poll shows the public is ready to make the change, and Sacramento certainly wants the billions in revenue it would produce. Per the PPIC:

PROPOSITION 13 — POPULARITY ENDURES

Now that Californians have approved the Proposition 30 tax initiative and Democrats have gained a two-thirds majority in the legislature, there is renewed discussion about changing Proposition 13, the 1978 initiative that limits both residential and commercial property taxes. Asked about Proposition 13, Californians remain highly positive about its overall impact. Solid majorities (60% adults, 64% likely voters) say it has been mostly a good thing for the state. Fewer (31% adults, 29% likely voters) say it has been mostly bad. Across political groups, regions, and demographic groups, majorities consider it a good thing for the state. However, Californians’ views are mixed when asked about the effect of Proposition 13’s tax limitations on local government services: 29 percent say the effect has been good, 25 percent say it has been bad, and 36 percent say there has been no effect.

There is support for one change to Proposition 13 — a “split roll” property tax. Majorities (57% adults, 58% likely voters) favor taxing commercial properties — now protected under Proposition 13 — according to their current market value. Most Democrats (66%) and independents (58%) favor the proposal, while Republicans are divided (47% favor, 48% oppose).

If this happens, I think it would be a bad thing for California. But it would sure feel like appropriate karma for the way the chamber and many big businesses have behaved over the years in kissing up to or acting as an extension of the Sacramento establishment.

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

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.

By Wayne Lusvardi

There is a big elephant in the room when it comes to a conversation about getting rid of Proposition 13, the 1978 tax limitation measure, by instituting a “split roll.” Under such a change, business property would be taxed at higher rates than residences.

The elephant in the room is that it is not big business that mainly would get socked with higher taxes, but the 857,167 small businesses, which represent 97 percent of the total of 878,129 businesses in California.

Those advocates for ending Prop. 13 for commercial properties say it is big business that is not paying its fair share of taxes.  But the owners of large commercial properties — shopping centers, recreational theme parks like Disneyland, and large Class A apartment complexes — would just pass higher rents through to tenants, who in turn would raise prices on goods and services.

Property owners would also pass through higher property taxes to tenants when leases are renegotiated. This is perhaps why the Dataquick real estate information service reports that in the First Quarter of 2012 “the only real positive seen in the retail sector is that the triple net or absolute net, single tenant, long corporate-backed leased property, with investment grade tenants continues to sell briskly.”

Owners of small businesses would have to suck up the higher taxes.  And it is those small commercial properties that have been most affected by the economic recession.

Proposition

The proponents of Ballot Initiative No. 1560 to end Prop. 13 for commercial properties claim it would generate $4 billion in new tax revenues. That would be $4,555 per year added tax burden on average for the 857,167 small businesses in California. That would equate to an average increase of $455,000 in assessed value for each small commercial property.

According to data from a U.S. Small Business Administration study, 74 percent of all small business loans in California in 2010 — or 587,225 loans — were for $100,000 or less.

Eighty-three percent,

Of 659,617 loans made by Wells Fargo Bank as of June 2010, 547,727 were “micro loans” of less than $100,000. And the average micro loan averaged just $17,335.  Most of these “micro” loans were not loans backed by the Small Business Administration.  This indicates that a preponderance of small businesses with bank loans could not easily absorb an increase of property taxes of $4,555 per year.

Wells Fargo Bank Small Business Loan Data 2010

And the actual added tax burden on small businesses is bound to be much higher than $4,555 per year. That is because about only about 20 percent of all commercial properties would actually have their taxes raised if Prop. 13 were ended.

Change of ownership

Most commercial properties have changed ownership since 1993 and have been reassessed at close to full market price.  The median sales year for most commercial properties is 1993.  It is those properties with old assessments frozen at pre-1993 base values that are going to end up paying the bulk of the $4 billion in added taxes per year.  And by and large, those properties with old assessments are small commercial properties with gross leases or owned by mom and pop business proprietors.

In a “gross lease,” the landowner pays the property taxes.  In a “net lease.” the tenant typically pays the property taxes.

Let’s assume 50 percent of all commercial properties are going to roughly end up paying 80 percent of the added taxes. Consequently, small business properties with old assessments roughly would have their taxes increased by $7,466 per year. Once again, small businesses with low profit margins easily eroded by economic adversity are not going to be able to easily absorb that magnitude of a tax increase.

Larger commercial properties with net leases typically have caps on the amount taxes and other expenses that can be passed through to the tenant. So the landowner, not the tenants, will be socked with more taxes on commercial properties.  Higher property taxes won’t be able to be passed through to commercial tenants until their lease is renewed for larger commercial properties.

The reason the public can’t seem to see the proverbial “elephant in the room” when it comes to ending Prop. 13 for commercial properties is that it is a midget elephant symbolic of a small businessperson. And for the little man, who speaks truth to those in power?

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.

L.A. Times columnist Steve Lopez continues his tax obsession with another attack on Proposition 13. His title is, “Speaking the unspeakable in California politics” — except that the “unspeakable” has been spoken continuously ever since voters passed Prop. 13 back in 1978, limiting increases in property taxes.

L.A. Mayor Antonio Villaraigosa, taking time out from letting Dodger Stadium devolve into a gang den, called Steve personally about gutting Prop. 13. Villaraigosa is interested in a “split roll” for property taxes that Lopez has been pushing. Under a “split roll,” homeowners would continue to operate under the Prop. 13 protections, but commercial property would be hit with higher tax rates. Lopez enthuses:

But [Villaraigosa] said he plans to go to Sacramento in August, and he’s thinking he might make a speech to the press club pitching Prop. 13 reform. He said he was surprised that Gov. Jerry Brown hasn’t done it himself, because at the age of 73, Brown doesn’t need to give much consideration to his political future.

“If he needs a guy like me to start it, then I’m going to do it,” said Villaraigosa, a former state Assembly speaker.

But neither the mayor nor Lopez cares about how a split roll would destroy California businesses and jobs.

First, increasing property taxes on businesses would mean they would have less money for jobs creation, increasing a state unemployment rate already second-highest in the nation at 11.7 percent in May. And after six years of Villaraigosa’s misrule, L.A.’s unemployment rate is even higher.

Second, businesses could avoid the tax by leaving the state, which they already are in record numbers.

Third, when other states have enacted split-roll property taxes, the action quickly leads not to just two tax rates (one for residential, the other for commercial properties), but a patch-quilt of rates from exemptions for special interests.

In California, first the environmental companies would say, “You’re killing green jobs and destroying the environment! Give us a tax break or Gaia will be polluted more.”

Then defense companies would say, “The higher property tax rate from the split roll is increasing the cost of producing weapons and equipment for our troops, meaning they have fewer of our products to defend themselves in the War on Terror. That means more of our brave young Americans will come home in body bags. Give us an exemption.”

And so on.

A split roll would be a full employment program for lawyers, lobbyists and politicians.

For the rest of us, it would be another California folly.

July 11, 2011

By WAYNE LUSVARDI and CHARLES B. WARREN

Democrats in the California Legislature want to repeal the property tax reassessment protections of Proposition 13 for commercial properties under the dubious notion that there is a pot of California 49er gold at the end of the rainbow. Prop. 13’s existing protections for homeowners would remain the same.

If the commercial protections are removed, this would create what’s called a “split roll”: different tax rates would apply to home and commercial property.

The vehicle being used to create split roll is  AB 448. But Democrats, to twist a phrase from Mark Twain when he was in California, may find that “there’s no gold in them thar hills.”

The current system of property taxation in California under Prop. 13 is based on reassessing all properties in the state only when there is a valid sales transaction, just as capital gains taxes are paid only when stock is sold.

Under AB 448, all 494,693 commercial properties in the state would be reassessed annually, while residential properties would still be reassessed only upon resale. It is uncertain if the existing 1 percent base tax rate and 2 percent annual maximum inflation adjustment under Prop. 13 would stay the same.

Proponents of increased taxation as a solution to California’s structural budget deficit have clamored for years for adoption of a more “equitable” split commercial-residential property roll tax. They say it would raise the assessed value of all non-residential property to the property’s market value. To such taxation advocates, “rich” commercial property owners are being granted an unfair subsidy that is robbing public schools and the medically needy.

However, the recent real estate market crash has seen commercial property values falling to levels that now are generally at the same level with assessed value ratios.

The problem with the proposal currently being floated about the state legislature is that no one seems to have done some simple arithmetic.

In 2008 economists William Hamm and Jose Alberro completed a study, “The Economic Effects of Adopting a Split Roll Property Tax.” It concluded that, as of 2007, commercial properties were assessed at 60 percent of their market value and residential properties at about 53 percent of market value.

We asked Co-Star Real Estate Market Data service to trend commercial real estate values in California from 2007, which was near the peak of the Real Estate Bubble, and coincident with the market data that Hamm and Alberro relied on in their study.

35 Percent Commercial Property Decline

The results of Co-Star’s analysis of 11,145 sold properties indicate that average unit values for all commercial properties have declined about 35 percent from 2007 to the end of 2010. This is generally consistent with other national commercial property value indexes, such as Moody’s Commercial Property Index.

Co-Star reported that the average unit price of all sold commercial properties dropped from about $185 in 2007 to $117 per square foot (36 percent) by the end of 2010. Smaller owner-user properties declined from $142 to $100 per square foot (30 percent).

California Commercial Property Unit Price Trend

.

If commercial property values have declined about 35 percent since 2007, their market value today would be about 65 percent of the value at that time.

We additionally contacted the California State Board of Equalization for the commercial property tax assessment ratio they used for the years 2006 to 2010, which were:

2006 — 65.6 percent
2007 — 61.0 percent
2008 — 59.9 percent
2009 — 58.0 percent
2010 — 65.1 percent

Change in Commercial Market Values and Assessment Ratios

.

Split-Roll: No New Revenues

Thus, extinguishing Prop. 13 reassessment protections for commercial properties would be a non-starter. It would not yield any large increase in tax revenue, as shown in the table above.  It would be another California Gold Rush, but for fool’s gold.

From 1850 to 2011, California has gone from “gold country” to “tax country.” The Party of Government in California is like the opposite of Rumpelstiltskin — they know how to turn gold into straw.

Perhaps poet John Greenleaf Whittier, one of the early founders of the Republican Party, said it best:

Give fools their gold, and knaves their power;
let fortune’s bubbles rise and fall;
who sows a field, or trains a flower,
or plants a tree, is more than all.

Note: This is the first in a series of stories on California’s proposal to eliminate the protections of Proposition 13 for commercial properties.  We won’t be responding to comments until subsequent articles are also posted expanding and clarifying the above.  However, please leave comments.

Next: Part 2 – “Dunning Commercial Prop 13 is King Midas in Reverse.”

Wayne Lusvardi is former chief appraiser for a large water district in Southern California and writer at Calwatchdog.com.  Charles B. Warren, ASA, MRICS (Urban-Real Property), is a former county assessor and currently an appraiser in San Francisco.