Real Estate Round-Up

What exactly is the “California Schools and Local Communities Funding Act of 2018?” It sounds like it has something to do with financially supporting our communities and schools through a bond or statewide ballot initiative.

The initiative is another money grab, compliments of Sacramento that entices our support by laying the benefit at the feet of our schools, and who wouldn’t want to support schools?

The title was a real bait and switch and was circulated last fall to gather signatures to qualify it for the November 2020 election. Due largely to the misleading title, it was overwhelmingly supported, because, after all, who doesn’t want to support schools and communities? Believe it or not, this funding act was an attack on Proposition 13, but who’d have ever guessed that?

Schools are a priority in California. Over 50 percent of the 2019 state budget goes to schools, K-12 and higher education combined. The problem is that much of those funds don’t make it to the classroom.

Over half of the school budget goes toward pensions. What’s left over equates to a little over $10,000 per student and ranks California at No. 41 out of the 50 states and Washington at the K-12 level. Student performance at the K-12 level ranks next to last, with only Alaska doing worse. Florida, another state full of immigrants ranks No. 1, tied with Wyoming. Knowing these statistics provides an interesting perspective regarding the need for additional funding for schools.

Whether or not residents believe that our schools should have more funding is debatable. Whether schools would receive additional funds on top of the current budget for schools is not spelled out, so this bill could simply become another way for Sacramento to raise taxes for the general fund. But the title of the funding act is deceptive at best.

The accurate title should have been “Amendment to Proposition 13.” That would have made homeowner’s ears perk up. After all, Proposition 13 is the holy grail in California. We don’t have many tax breaks, but Proposition 13 makes all the other taxes property owners pay a little less painful when balanced with the savings we receive from Proposition 13 and the controls it has on increases to property taxes in California.

This act would tax commercial properties differently and separately from residential. Another name for this type of tax is split roll. This initiative would amend the state constitution to allow commercial and industrial properties and vacant land not intended for housing or used for farming to be taxed based on their current assessed market values.

The initiative would exempt from market-value assessment property used by the owner to run a business provided that “the total fair market value of all property owned by the taxpayer in the state in which the business operates is less than $2 million.” The measure would also exempt from property tax $500,000 of the value of a business’s personal property and all personal property owned by businesses with less than 50 employees.

The tax on these types of properties could be re-assessed yearly and at the point of sale. If the tax assessor felt that the property held higher value than the purchase price or had increased in value over the previous year, it could be assessed higher than what the buyer paid for it and assessed more than the 2 percent per year that currently exists. There is no yearly cap to the assessment. It has the potential to be a runaway train when it comes to how much taxes could be collected.

It should come as no surprise that the California Federation of Teachers and the League of Women Voters support this initiative. Their argument is that the state has been giving away billions of dollars in tax breaks to millionaires, billionaires and big corporations. They want the projected $6.5 to $10.5 billion in additional revenue.

The opponents argue that this initiative would adversely impact the cost of doing business in the state and result in higher prices on the end product as well as reduced employment. They also argue that it could have unintended consequences for small businesses, many of which lease property from large business owners. After all, the owners will be forced to pass on the additional carrying cost of the building.

The opponents, largely supported by the Howard Jarvis Taxpayers Association, have previously highlighted a loophole in the current tax assessment that allows larger property owners to “breakup” sales of property through various limited liability companies and partnerships so that a single owner never takes over a majority of the property, which allows the property to not be reassessed. They suggested “fixing” this loophole which would generate additional funding without hurting every commercial building owner.

One final concern is that approving this initiative is a little like putting the camel’s nose under the tent. It starts with his nose, then it’s his head and then the whole body. There’s no turning back. How long would it be until residential properties became the next target? Stay tuned for updates on this initiative.

November 2020 seems far in the future, but make no mistake, this initiative will have financial consequences that will impact businesses, tenants who lease commercial buildings, employment and the overall economy of California far beyond 2020.

Kim Murphy can be reached at [email protected] or (760) 415-9292 or at 130 N. Main Avenue, in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.