Retail landlords in California are facing the threat of mushrooming tax bills. This is because some tax revision advocates have proposed plugging government budget shortfalls by pushing for taxation of commercial properties separately — and more heavily — than residential real estate. The issue carries implications for taxpayers in other states too, according to Jon Coupal, president of the Howard Jarvis Taxpayers Association, a California watchdog group named for the activist who rallied opposition to onerous tax policies there in the 1970s. “If they split the tax roll here, even in states that have a split roll themselves where some business properties are taxed more, it sends a signal that you can target commercial property for more-draconian treatment,” Coupal said. “That’s not good in any state.”
At issue is the taxpayer protection law called Proposition 13, which Jarvis co-authored and which the voters approved by a 65 percent majority in 1978 to stave off rapid increases in the tax rate or taxable property values. The measure set the tax rate for all property types at a uniform 1 percent of market value as of that year and set a limit on future increases in assessed property value of no more than 2 percent annually. A change in ownership triggers a reassessment to current market value, with the 2 percent annual increase cap in place for the future. Several groups have mounted campaigns in recent years to overturn portions of Proposition 13 and single out commercial properties for additional taxation. “In the last couple of years, I’ve sensed a renewed push for a split roll,” Coupal said.
There are billions of dollars in new tax collections at stake. One University of Southern California study estimated that local governments could collectively pull in an additional $9 billion in the 2019–2020 tax year by boosting taxable assessed values on all commercial properties up to market value, while leaving assessment practices for residential and agricultural properties unchanged.
Yet exposing commercial properties to more-frequent assessments and annual tax increases greater than the current 2 percent cap would be bad for the state economy, argues Rex Hime, president and CEO of the California Business Properties Association. “One of the major values of California property since Prop 13 has been that you know with certainty what that is going to cost you annually when it comes to property taxes,” Hime said. “Some economists have said that if we were to go to this new system, there would be a 7 percent or 8 percent drop in the value of commercial real estate in California.”
A decline in commercial property value would bring down the net asset value of REITs, pension funds and other commercial owners of California properties, Hime contends. In a state with already high costs of living and of doing business, tax volatility would drive some companies out of the state — and jobs would exit along with them, he says.
So far, opponents of Proposition 13’s protections for commercial property owners have lacked sufficient support to substantially change the law, thanks in part to information campaigns by taxpayer and business groups that are intent on preserving the measure, including ICSC, the California Business Properties Association and the Howard Jarvis Taxpayer Association, among others. In the 2013–2014 legislative session alone, pro-business groups successfully stymied five bills in the state Senate and two more in the Assembly that sought to undermine various portions of Proposition 13, according to the Jarvis Taxpayer Association.
The fight continues, however, as both sides try to convince lawmakers and voters alike that fairness and equitability are on their side. One effort to rework Proposition 13 fizzled out as recently as September, when legislators concluded the 2014–2015 session without voting to put a constitutional amendment on the November 2016 ballot. That measure, State Constitutional Amendment 5, would have created a split tax roll allowing commercial properties to be taxed differently from residential properties and required a phased-in reassessment of most commercial properties to be taxable at current market value.
The fundamental risk to landlords may lie in the split roll itself, because it opens the door for communities to tax those businesses differently from home owners, observes Herb Tyson, vice president for state and local government relations at ICSC. “The commercial properties don’t vote, so anytime [local governments] have got an economic challenge or need, or want to create more revenue, you just land in the commercial category,” Tyson said. “There’s no down side electorally.” — Matt Hudgins
