(March 11, 2008) Talk of a “split roll” property tax has resurfaced in the midst of the state budget crisis, leading the California Chamber of Commerce to warn the business community of the dangers of such proposals.
A “split roll” tax seeks to divide the tax treatment of commercial and residential properties by removing Proposition13 protections from commercial properties, while leaving those protections intact for residential properties.
When passed, Proposition 13 capped property tax rates at 1 percent of assessed value, and restricted that value from growing more than 2 percent a year. Only when ownership changes or there is new construction may the value of the property be reassessed at more than 2 percent. These protections were extended to both residential and commercial properties under the 1978 landmark proposition.
Proposition 13 resulted in a very stable property tax structure that is top ranked nationally — fifth best in the nation in the Tax Foundation’s 2008 State Business Tax Climate Index.
By contrast, California’s other major tax revenue sources — personal income tax, corporate tax and sales tax — are considered extremely volatile and ranked 50th, 40th and 42nd nationally, with 50 being worst.
“Any attempt to erode Proposition 13 protections will have a dramatic, detrimental impact on the state’s economy,” said CalChamber Policy Advocate Kyla Christoffersen. “California’s property tax structure is a bright spot for both homeowners and business owners in this state.”
Recurring Theme
There have been numerous attempts to erode the protections of Proposition 13 via a “split roll” tax — proposals seeking to tax income-producing properties such as apartment buildings, commercial developments and industrial facilities at a higher rate than residential properties.
A recent well-known “split roll” property tax measure was the one proposed by the California Teachers Association in 2005. The proponents opted not to submit signatures for the measure, a move the CalChamber praised as a major victory for the state’s economy.
The measure would have led to $3.5 billion in higher taxes each year, according to the non-partisan legislative analyst.
Some legislative efforts to increase the tax burden on commercial properties, however, can be subtle and structured to be majority-vote only bills. An example is bills that attempt to redefine change of ownership, which can be a complex determination for business properties owned by multiple interests, such as shareholders.
Adverse Effects
A “split roll” tax would undermine the intent of the protections cemented in Proposition 13, and have a negative effect on job-producing operations and the state’s well-regarded property tax structure.
Commercial properties already contribute significantly in tax dollars — generating approximately two-thirds of the property tax revenues, just as they did before the passage of Proposition 13. Implementation of a “split roll” tax would mean tax increases for California businesses likely to exceed $3 billion per year.
Increasing commercial property taxes will not occur in a vacuum — it will harm not only businesses, but also their ability to provide jobs, benefits, and cost savings to tenants and customers. Consumer costs could increase as a result of
the increased cost of doing business.
“Higher property taxes could unfortunately result in higher rents for the thousands of California businesses that lease their commercial space,” Christoffersen said. “This could significantly worsen the already-troubled housing market and state budgetary situation.”
Pending/Potential Legislation
Legislation has been introduced, AB 2461 (Davis; D-Los Angeles), which directs the Board of Equalization to conduct a study of the amount of revenue that could be generated from imposing a “split roll” tax.
No proposals have surfaced yet that directly propose a “split roll” tax, but the CalChamber will keep close watch and let members know if any legislation develops that would advance a “split roll” tax.
Staff Contact: Kyla Christoffersen
Additional Materials
Taxation