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State and local governments argue they need additional funding for programs and services. That is forcing them to turn to other sources of revenue, such as commercial real estate taxes.
Consider California, where voters will decide next year on whether to lift the protections provided under Proposition 13 and increase the property tax burden on commercial real estate to generate more revenue for education.
Robert Gutierrez, president and CEO of the California Taxpayers Association, commented in a recent NAIOP webinar that before Proposition 13 passed in 1978, massive, frequent and unpredictable jumps in property tax bills were not uncommon. Many owners were forced to sell their homes or businesses to pay excessive property taxes.
Proposition 13 limits the growth of tax rates on both residential and commercial property to no more than 1% of the assessed value per year. It also caps annual increases in assessed value at 2% per year. The fair market assessment is established at the time of purchase and can be reassessed only when the property sells or is substantially improved.
After Proposition 13, people could afford to remain in their homes, and businesses could invest in property with confidence that they wouldn’t be priced out by tax increases. It’s helped contribute to California’s astonishing growth during the past four decades.
That’s why NAIOP is working to oppose the California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative, in which property taxes would be levied on commercial real estate at a higher rate than other types of properties. This “split roll” would lift the cap on assessments and require the reassessment of commercial and industrial properties at least every three years. According to an October 2018 article in the San Francisco Chronicle, imposing the split roll could lead to approximately $11 billion per year in higher property taxes for commercial real estate.
Commercial real estate already pays a higher share of property tax than it did before Proposition 13. Gutierrez reports that business property accounted for 58% of real property tax revenues in 1978 and accounts for 63% now.
Rex Hime, president and CEO of the California Business Properties Association, spoke about split roll at NAIOP’s I.CON West event earlier this year in Long Beach, California.
“Raising property taxes on businesses means they will pass on the costs to every Californian by increasing prices on just about everything we buy and use, from diapers and day care to gasoline and groceries,” he said. Those price increases, of course, would also be seen across the country. That’s one reason split roll will be an important topic at NAIOP’s CRE.Converge in Los Angeles this October.
Increasing the property tax burden on commercial real estate would have consequences that are detrimental to economic growth and job creation. Michael Lucci, vice president of state projects at the Tax Foundation, said in the NAIOP webinar that higher property taxes lead to less business, because companies can move from higher-taxed jurisdictions to lower-taxed ones. He stated that a 10% increase in property taxes has been associated with a 1% to 2% decrease in investment in particular states. He also noted that businesses usually end up paying far more in property taxes to local governments than they receive back in services.
Lucci also noted that local governments rely on property tax because it’s efficient — the assets are impossible to move and difficult to hide.
“State and local initiatives are increasingly turning to commercial real estate as a revenue source. The split roll initiative targets one industry, and one industry only: commercial real estate,” James Camp, president of NAIOP California, wrote in a post for NAIOP’s Market Share blog in May. “Any NAIOP member who invests in commercial real estate or receives professional services from a California business would be impacted.”
Property taxes continue to be the main source of funding for local governments, and NAIOP members need to be aware that it’s not just the Golden State, often a bellwether for social and political trends, that could be affected. If California alters Proposition 13, it could cascade across the country, with other states following suit and targeting commercial real estate to increase tax revenue.