Real Estate Round-Up: Split roll update

Another week, another proposed tax, thanks to the state’s largest public labor unions and civil rights groups, who don’t feel that residents pay enough taxes. Astonishing.

California is one of the highest taxed states in the nation. California has the highest state income tax at 13.3%, the highest state sales tax at 7.25%, the highest gasoline prices because of the taxes added on, the sixth highest vehicle registration fees because of the tax added on and the 16th highest property taxes. But the public labor unions and civil rights groups want more money.

This initiative is being packaged nicely in the name of “The Schools and Communities First” campaign. The correct name is “split-roll” tax.

The Legislative Analyst’s Office estimated that the measure will raise between $6.5 billion to $10.5 billion per year. These funds would go first to the county assessors to cover their administrative costs – with no limits placed on such costs –and to the state General Fund to backfill income tax losses coming from higher property tax deductions.

Of the amount left over, 60% of the new revenue would go to cities, counties and special districts and 40% would go to schools and community colleges with little or no requirements on how the money would be spent.

Last Thursday, I attended a State Board of Equalization meeting covering the proposed split-roll initiative. There are four members on the State Board of Equalization, representing geographic areas across the state.

Mike Schaefer is the representative for the 4th District, which includes San Diego County. It just so happened that the tax assessors from throughout the state were also in San Diego for a meeting of their own. They provided invaluable perspective to this ill fraught idea.

The meeting was titled information hearing “Modernizing California’s Property Tax System-Part 1,” opportunities, challenges and emerging issues. Let’s just start by understanding that current property taxes are second only to state income taxes in revenue to the state.

In 2018, over $60 billion was collected in property tax. This proposal would separate commercial and industrial properties from the current assessment valuation, which assesses property at the time of sale or if a major improvement is done that increases the value to the property. It is the identical criteria used for residential property.

The proposed initiative would assess commercial property every three years to market price, whether a sale occurred. It does exempt small-business owners with property valued at $3 million or less, businesses that employ 50 or fewer employees, and provides a phase-in provision aimed at providing small business tenants with sufficient time to locate other rental options if they believe they will be affected by a rent increase as a result of the reassessment.

It is not simply about an increase in taxes for commercial and industrial property owners, it will affect everyone. If property taxes are raised on commercial and industrial property, the owners will undoubtedly pass that increase on to their tenants. The tenants, subsequently, will have to raise their prices to cover their increased costs, find a different location for their business or close their doors.

On a larger scale, split roll will make it more difficult for California businesses to compete. Large businesses will have to decide at what cost does staying in California make sense. Can they pay the additional tax? Can they still hire more employees? Can they purchase business upgrades? If the answer to any of these questions doesn’t make sense, businesses will leave, which will ultimately hurt California’s economy.

Two businesses have already seen the writing on the wall and have opened new corporate locations in Texas: McKesson and Uber. McKesson originally said that they were strictly opening a second corporate location, but they eventually closed their California headquarters and settled in Irving, Texas. Uber recently announced they have opened a second corporate location in Texas. Only time will tell if they make the same move as McKesson.

The three-year automatic assessment comes with additional concerns over the volatility of tax revenue. Imagine what happens to property tax revenue if another 2008 recession occurs. Property values across the state dropped 50-60%.

What happens when the state has budgeted for 2007 revenue and suddenly there is a major drop in values? I don’t have to tell you that the schools and communities that were supposedly going to be helped by the split roll tax would become the big losers in the scenario.

Another major concern that was voiced at the State Board of Equalization meeting last week, from every assessor that spoke, was the immediate need to hire additional staff and to improve the technology that they use to assess the over 12.8 million commercial and industrial properties.

In Los Angeles alone, there are 2.5 million commercial and industrial properties that would have to be re-assessed. Jeff Prang, the Los Angeles county assessor, said that he would need an additional 500 appraisers to his already 650 appraisers plus additional systems and software to accommodate this change.

The funds will exist from the new tax, but it begs the question, how much of the actual revenue will ultimately end up in the hands of the counties, cities, special districts and schools and how much will be needed to support the additional assessor employees and to the state general fund to backfill income tax losses coming from higher property tax deductions.

If all of this thinking doesn’t concern you, think of this issue. A change to the assessment of commercial and industrial property is most likely a precursor to the eventual attack on Proposition 13, which protects residential properties from re-assessments, except at the time of sale.

The California Association of Realtors said they believed this split roll proposal is like the camel putting his nose under the tent. This drastic change will be only the beginning.

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