Split Roll Tax, Devastating Setback to CA

August 5, 2013

SACRAMENTO-There is a growing movement among some Sacramento legislators to raise new revenues by increasing the property taxes on commercial real estate owners. This is the Split Roll Tax. Split roll is the term for any attempt to pull commercial real estate out from under the protections of Proposition 13. If enacted, this aggressive tax increase would have a devastating impact on California’s economy.

According to a recent Pepperdine University study, a split roll tax would increase property taxes on businesses by an estimated $6 billion annually. NAIOP SoCal, as part of its commitment to be the voice of commercial real estate development in Southern California, has made this issue a legislative action priority due to its potentially devastating consequences for the commercial real estate industry and our local economy.

Kevin Ivey, KPRS Construction Services and NAIOP SoCal Legislative Affairs Committee Chair, talked more with on the tax, it’s immediate threat, and where to go from here. Please provide some background on Proposition 13 and the Split Roll threat:

Kevin Ivey: Prop. 13, approved by two-thirds of California voters in 1978, set a uniform 1% property tax rate, limited increases in assessments to no more than 2% a year and established property valuation at its purchase price. This resulted in a two-fold benefit for home property owners and local governments: property owners could budget for their future and be protected from runaway property taxes that would have forced them to sell or lose their homes, and local government programs were protected by creating tax-revenue stability. Property tax is already one of the largest sources of revenue for local governments. In fact, according to a 2012 report by the Legislative Analyst’s Office, property tax revenues increased throughout the recession while other major revenue sources declined significantly.

Now there is renewed interest by members of the California Legislature to increase property taxes on commercial property owners. One of the main threats to Prop. 13 is a “split roll” property tax that would raise property taxes on business properties and not on residential properties. Currently, property taxation under Proposition 13 uses an acquisition-value on all properties as the tax base when the property changes ownership or undergoes new construction.  A split roll would tax commercial property at higher rates than residential, would reassess commercial property more frequently and would allow new real estate taxes to be approved by only 55% of voters instead of the currently required two-thirds. This would be a devastating setback to California’s economic recovery. What is the “real cost” of a split roll tax?

Ivey: Under a “split roll” system, property taxes on business will increase by an estimated $6 billion annually, according to the Pepperdine University study. The cost to the California economy of this property tax increase would total $71.8 billion of lost output (labor, land, capital, enterprise used to produce something to sell) and close to 400,000 lost jobs over the first five years of a split roll property tax scheme. It is projected that the losses to California’s economy would be even greater in succeeding years.

Moreover, increasing commercial property taxes will hit middle income Californians the hardest. That includes our local industry’s property owners, tenants and certainly consumers. Small businesses typically lease properties, and any tax increase will be passed through to the business. These small businesses will have to pass the costs on to consumers, lay off workers, or go out of business. What is the immediate threat?

Ivey: We do not expect any legislation during 2013 related to split roll, especially with the Legislative session nearly finished.  However, we are tracking a number of bills and we do expect the Legislature’s super-majority in Sacramento to attempt to put a split roll tax scheme on the ballot in November 2014. Any campaign to establish a split roll system would likely come cloaked in the argument that it increases “local control” and that it is needed to fund “vital local services.” The reality is the lost output and loss of jobs noted by Pepperdine University would have the potential of decreasing funding for vital local services due to the resulting loss of tax revenue from those sources. What should the real estate community do now?

Ivey: Californians to Stop Higher Property Taxes is the statewide umbrella organization that is working to oppose a split roll tax on commercial real estate. We encourage the commercial real estate industry to help fund the education efforts of Californians to Stop Higher Property Taxes in order to support efforts to clarify misinformation and educate the public, legislators and policymakers about the history and purpose of California’s Proposition 13.

We also invite the entire real estate industry to reach out to everyone including your legislative representatives, tenants, and other professional contacts and let them know this is a very serious issue with significant impacts to the future of California.

By Natalie Dolce