Real Estate Round-Up: Prop 15- Proposed Tax on Commercial Property

Last week I wrote about AB 1253, an Assembly Bill that would raise taxes on the wealthiest residents in California. AB 1253 would affect the tax returns of only 0.5% of those who filed in 2018, according to data compiled by the state Franchise Tax Board.

But those taxpayers already account for 40% of all income tax revenue collected that year. The next time someone says the rich don’t pay their fair share, remember this statistic: 0.5% of the residents in California pay 40% of all tax revenue collected. It’s worth repeating.

Legislators and commentators who support tax increases have a way of making it sound like the only people who will be impacted by the new tax, is the individual or entity who is receiving the new tax. If only that were true, it would be easy to willy-nilly add taxes to any person, product or service, and know that the buck stopped there.

But as we saw with the “gas tax,” which read like a novel for infrastructure improvement, everything became more expensive because of the new tax on gasoline and on vehicle registration. Why? Because every product or service that uses gasoline was not able to absorb that additional cost into their bottom line. That tax passed on to everyone, in the form of higher prices for everything that was delivered or produced by a gas-powered engine. That includes your meat, your produce, your toilet paper, all building materials and your medicine.

Let me introduce you to Prop 15, another proposed new tax, this time on commercial property. It will be on the November ballot and for those that like to pinpoint who it will affect, the proponents of this Proposition say it will only affect commercial property owners. Here we go again.

There is no tax that is levied that simply stops at the place it was intended to tax. It will get passed on and, eventually, you the consumer will be paying for this tax.

California is a state with an endless hunger for more revenue. We are a state that purports to want to help everyone. The only problem is that the funds received to do everything aren’t coming from some money tree on the grounds of the State Capitol. It is coming from the hard-working people that live here, in the form of higher taxes. Before I continue about why this will not just rest on the shoulders of commercial property owners, let me tell you more about Prop 15.

Prop 15 would amend the state constitution and deliver a blow to the original Prop 13, the 1978 taxpayer-revolt initiative that stabilized state property taxes for all property owners. Prop 13 created a property tax starting point, no matter when you enter the ownership category. The people that benefit the most are people that purchased property years ago and have, until now, continued to own that property. Their property tax basis has been limited to a maximum 2% per year increase.

We have had clients who have a tax basis from the 1980s, on a property that has a value as much as five times the 1980s value. But, every property owner, whether they purchased in the 1980s, 1900s 2000s or just last week, benefits from the regulated 2% annual tax increase. The original Prop 13 was created to help people stay in their homes and not be forced out of their primary residence due to property tax increases.

Prop 15 is a partial repeal of Prop 13, but the key word is “partial.” It applies only to commercial and industrial property, and only to holdings worth more than $3 million. If it passes, the assessment on such property would rise annually based on market value instead of being capped at a 2%-increase a year.

Think about that $3 million number. Even Fallbrook has properties worth over $3 million. Think, The Major Market, Albertson’s or Northgate shopping centers, Axelgaard Manufacturing, Del Rey Avocado or The Grand Tradition and Estates. This new tax only applies to commercial and industrial property, but any tax increase imposed on an individual and entity, will filter down to the end users, the consumer. In real terms, commercial property would be reassessed every three years, regardless of whether a sale occurred on the property or not. This reform could generate proceeds as high as $12.4 billion a year, according to a February study by three USC researchers. Local communities would receive 60% of the revenue; schools would get 40%. Considering the anticipated deficit of $54 billion next year, this additional revenue would help offset that deficit. However, remember this, that tax is ultimately going to be paid by you.

Proponents love the potential for increased revenue, citing the historic climb of real estate values over the years. But what about when economic retraction occurs? Remember 2008-2012? Property values across the state shrank 60% on average.

Or what about this year, when commercial property is sitting vacant, which directly impacts the properties real value? The market value of those vacant properties will be based on their CAP rate. Prop 15 addresses the upside potential but not the downside exposure. The existing Prop 13 provides a stable tax basis that does not adjust up or down based on market value. It only adjusts when a sale occurs or when a major remodel is done to the property that adds value to the property. The proponents will tell you that this reform only affects 10% of the corporate properties and would generate 92% of the revenue raised by the initiative. Let me remind you of the revenue source from AB 1253. 0.5% of California taxpayers provide 40% of all income tax collected. Who says the rich don’t pay their fair share of taxes? I think they don’t. They pay their share and a lot of each one of our shares. Let me give you an example.

Disneyland, one of the members of the 10% club, has a property tax basis from when Prop 13 originally passed in 1978. It has had 2% annual increases, as well as increases when remodels and additions were made to the park. I don’t know that original basis, but it would be extremely low in relation to Disneyland’s current market value.

Under Prop 15, it would be assessed at today’s market value and then reassessed every year based on that year’s market value. Would it increase five times or more? What would that do to Disneyland’s bottom line? Disneyland would not absorb the additional property tax. They would pass it on to the visitors at their parks.

In the early 1990s, we would take our sons to Disneyland. We could afford to buy a three-day pass and enjoy the park without going broke. That pass would include lodging at the Disneyland Hotel and breakfast with Mickey, all for less than $1,000. Now, that same three-day pass costs $1,200 and doesn’t include any lodging or food. Imagine what the cost of a ticket will grow to if their property tax is increased as outlined in Prop 15?

Proponents would also tell you that Prop 15 will provide income for California’s outdated infrastructure, and much needed funds for our schools, which currently rank 39th in the nation for spending per pupil. The title and summary of the gas and vehicle registration tax stated that it would provide funds to alleviate our infrastructure problems. The tax passed, but the funds didn’t go to infrastructure. The funds went straight to the general fund.

As for our schools, over 40% of the state budget goes to K-12 education. Ask yourself why educating just under 6 million children who attend K-12 education requires 40% of the state’s total budget? To provide some perspective, in the 2010-11 budget, $49.7 billion was dedicated for the 6.2 million K-12 children; this year it is $84.1 billion for just under 6 million K-12 children.

Prop 15 will not just affect commercial property owners. It will trickle down to affect everyone and, if passed, it will very possibly be a precursor to a proposition, yet to be numbered, that will be focused on individual residential property. Enough is enough. You have the power of the vote on Prop 15. Use your power.

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.