California Groups Seek Property Tax Hikes

Summer 2018 Issue
By: Kevin Ivey, NAIOP So Cal Chapter, KPRS Construction

A ballot initiative could remove Proposition 13’s protections for commercial property.

FORTY YEARS AFTER California voters approved Proposition 13, the issue of the state’s property tax limits could be headed back to the ballot in 2020. A coalition that includes the California State PTA and the League of Women Voters has received the green light from the state’s attorney general to promote a proposition that would remove Proposition 13’s protections for commercial property. While it appeared that the proposition was headed for the California ballot in November 2018, its backers have read the political tea leaves and postponed it to the general election in November 2020, when the presidential contest will produce a larger, potentially more sympathetic voter turnout.

The backers say the initiative, called the California Schools and Local Communities Funding Act, would leave in place Proposition 13’s protections for residential property and agricultural land while removing protections for commercial property. Many businesses would be affected by higher occupancy costs, since landlords typically pass on any increase in operating expenses, including property taxes, to their tenants by increasing rents. 

The measure would result in all commercial property and land zoned for commercial use  being reassessed up to market value in the year 2020, and raised again to current value every three years after that. This would create a huge tax hit for commercial property owners as well as increased uncertainty. 

The initiative is the latest in a series of attempts to establish a “split-roll” property tax that would unbundle commercial real estate from the protections of Proposition 13 and reassess it more frequently. Under Proposition 13, property is reassessed only upon its sale, when more than 50 percent of its ownership transfers, or when construction of a new project or renovation is completed. Barring a sale, a property’s assessed value can increase no more than 2 percent annually. The proposed measure would change all of that for commercial property.

Advocates for the split-roll initiative say the projected $11 billion to be generated annually in new property tax revenue from commercial property is needed to provide new funding for schools and infrastructure. But commercial real estate owners say this is simply another attempt to raise taxes at the expense of California’s business community. 

“It’s a foot in the door to changing a fundamental feature of Prop. 13,” says Jon Coupal, president of the Howard Jarvis Taxpayers Association, founded by and named for Proposition 13’s author in 1978. “The way the law is now, businesses can predict with certainty what their property taxes will be in the future. This initiative discriminates against California businesses.” It could give them yet another reason to move out of the state. 

The initiative’s proponents say they’re only seeking to eliminate a loophole that allows real estate corporations to avoid paying higher property taxes if 50 percent or less of a property’s ownership transfers in a sale. The reality is that this court-created wrinkle has a legislative fix. Both sides came close to resolution in the California Legislature in 2014, only to see the split-roll advocates pull out of the compromise at the last minute.

The ballot measure was filed on Dec. 15, 2017, with the State of California Department of Justice’s Office of the Attorney General. By law, 585,407 valid petition signatures (8 percent of total votes cast in the last election for governor) are needed to qualify it for the November ballot. This means proponents will have to gather nearly 1 million signatures to account for duplicates and invalid names. Postponing the initiative until 2020 allows proponents more time to gather these signatures.

Opponents point out that passage of a split-roll initiative would have an enormous negative impact on the state’s economy. They cite the most recent study by Pepperdine University’s Davenport Institute forecasting that a split-roll property tax would: 

  • Increase property taxes on businesses by an estimated $6 billion annually.
  • Cost the state $71.8 billion in lost output and increased unemployment from a loss of more than 396,000 jobs in the first 5 years alone. 
  • Hit small businesses the hardest, as landlords pass the increased property taxes through to lessees.

NAIOP chapters nationally must be on the lookout for similar efforts. Often, as California goes, so go other parts of the country. Efforts such as this ballot proposal suggest that comparable efforts to increase commercial real estate taxes could be coming to other states and cities that also limit increases in their parcel-specific property taxes. Those include Arizona, Florida, Michigan, South Carolina and Texas, as well as Cook County, Illinois, and New York City. As politicians in these states and municipalities look for new revenue, it’s easy to see them following this California movement and rolling out their own versions of a split-roll property tax.

Kevin Ivey is chairman, NAIOP Corporate State and Local Subcommittee, and business development officer, KPRS Construction Services Inc., Los Angeles.