California Considering Change that Threatens CRE

Interest groups in California are collecting signatures in order to place an initiative on the November ballot that could change the way property taxes are calculated.

If passed, the move (known as “split roll”) would place a heavier property tax burden on commercial real estate and hinder economic growth. Any NAIOP member doing business in commercial real estate in California would be impacted by the ballot initiative.

Since the passage 40 years ago of Proposition 13, the tax rate on residential and commercial property has been treated the same way. Prop 13 controlled the growth of property tax rates by limiting annual increases of property assessments to no greater than 2 percent each year. NAIOP members participated in discussions during the California Business Properties Association winter board meeting last week on ways to preserve Proposition 13 and its economic benefits.

However, an interest group called “Make It Fair” wants to separate the treatment of residential and commercial properties, creating a split roll system where commercial property assessments can increase much more quickly than residential assessments. The split roll question has gained greater attention because of the impact of last year’s federal tax reforms on high-taxed states such as California.

Under their proposal, known as “California School and Local Communities Funding Act,” all commercial properties would be reassessed based on their value in 2020 and then reassessed every three years. This would create uncertainty for CRE owners, harm job creation and result in an estimated $11 billion tax hike.

“Numerous studies have found raising property taxes would hurt California’s economy by eliminating jobs and increasing the cost of living,” points out the group Californians to Stop Higher Property Taxes. The group’s website explains the economic risks of a split roll taxation system.

Expect the issue to play a big role in California politics throughout the year.