An initiative on the 2020 General Election ballot could partially unravel Proposition 13.
In a conventional sense, the “third rail” refers to the energized parallel line in an electrical subway or rail system. Railway and subway commuters know to stay away from it for fear of electrocution.
The term “third rail” became a political idiom in the 1980s when then Speaker Tip O’Neil’s office used it to describe Social Security reform. Congress refused to touch it because it would mean political death for those that did.
California’s third rail has long been Proposition 13. Conservatives see it as one of the last taxpayer protections. Progressives view it as a roadblock to funding additional programs. There haven’t been any significant reforms to Prop 13 since its passage in 1978 when voters approved it with 62.6 percent of the vote.
There have, however, been many attempts to undo Proposition 13 with the most recent in 2016 when Senate Constitutional 5 failed to even receive a hearing in Sacramento, let alone a vote. Many have sought to reform or change Prop 13. All have failed. They’ve failed because politicians aren’t interested in raising the ire of property owners, the vast majority of whom own residential (as opposed to commercial, industrial or agricultural zoned) property.
But what does Prop 13 actually do? A good understanding of it is absolutely necessary in order to fully comprehend the significance of a November 2020 initiative.
Put simply, Prop 13 caps the amount of assessed property tax at 1 percent of the value of the property. It also caps the amount of the assessed value to not exceed more than 2 percent per year and prohibits a property value reassessment unless the property changes ownership or new construction is completed.
So, a $100,000 home couldn’t be assessed more than $1,000 in annual property tax. And if the property increased in value to $110,000 the following year, the assessed value couldn’t exceed $102,000 (due to the 2 percent property growth cap). The property tax would be $1,020.
How’s that for a Political Science major’s math skills? Of course, there are likely other additions to a property owners annual tax bill, including MelloRoos taxes and other so-called direct levies for schools and other special districts.
But you get the idea — the property tax is capped at 1 percent so policymakers can’t increase it by extraordinary amounts. Additionally, the growth in the property for assessment purposes is capped at 2 percent so significant growth doesn’t cause massive property tax increases.
The effect is that property owners can accurately estimate and predict their property tax in future years. That’s why conservatives see Prop 13 as taxpayer protection and progressives see it as a roadblock to higher revenues. For what it’s worth, property taxes primarily fund schools, local agencies, and special districts.
But potential changes are on the horizon that will again test California’s third rail. A special interest group, called Schools and Communities First, has successfully qualified an initiative for the 2020 General Election ballot to enact a split roll tax to partially unravel Prop 13.
Colloquially known as Initiative No. 17-0055 and entitled “The California Schools and Local Communities Funding Act of 2018,” this initiative will require commercial and industrial properties, with several exceptions, to be assessed at least every three years at the full cash value of the property.
This initiative effectively eliminates the 2 percent Prop 13 cap on assessed value. It also changes when the property is reassessed due to a change of ownership or the conclusion of new construction to “no less frequently than every three years.”
Now, this initiative won’t have much impact on companies that have recently purchased property because the 2 percent assessed property cap hasn’t had much of an impact on newly owned property.
But for companies that have owned their properties for significant amounts of time, the effect is massive. The chart shows exactly how the 2 percent assessed property cap controls and lowers the 1 percent property tax amount. For a $10 million property owned for 30 years, assuming an annual 4.125 percent property value growth rate, the initiative would increase the property tax $151,481.94 to $336,240.82 or an increase of 45 percent.
That’s for just one property owner. Statewide, the non-partisan Legislative Analyst Office estimates increases in overall property taxes between $6.5 billion and $10.5 billion for commercial and industrial property owners. That’s a huge tax increase for California businesses.
To make matters worse, this increase would go into effect almost overnight and it would dramatically and proportionally cost property owners more based on how long they have owned the property. This is due to the 2 percent cap on growth.
It looks like the construction industry is headed into another political dog fight in this split roll tax initiative.
The longer the property is held, the longer the 2 percent Prop 13 growth cap functions and the bigger the difference between the actual property value and the value based on the 2 percent Prop 13 cap. Should the initiative pass, the 2 percent Prop 13 growth cap vanishes, and the new tax rate applies. There are other, I daresay positive, considerations regarding this initiative, both from a policy perspective and a polling one.
The initiative does provide several exemptions for businesses that operate on most of the real property they own and if the fair market value of the property owned by the taxpayer is less than $2 million. If both of those conditions are met, Prop 13 limits still apply.
Additionally, the initiative provides two tangible personal property exemptions. Tangible personal property used for business purposes would be exempt up to $500,000 per taxpayer and if the taxpayer has fewer than 50 employees in the state, then all the taxpayer’s tangible personal property is exempt so long as it’s only used for business purposes.
So how does the initiative measure up politically? Are Californians really interested in taking on this political third rail? I haven’t seen any specific polling on the initiative, but the ever-reliable Public Policy Institute of California polled likely voters in March if they thought they paid more taxes than they should. Somewhat surprisingly, 63 percent of them said they either pay much more or somewhat more than they should. That high opposition number bodes well for the opponents of the initiative.
The high negative poll numbers, combined with another significant factor, put the proponents in a difficult predicament. California’s $144 billion budget is facing an unprecedented $20 billion surplus for the 2019-20 fiscal year. An electorate that feels overtaxed and is paying $20 billion in surplus taxes is difficult to persuade to increase taxes by another $6.5 billion to $10 billion.
A rather wise man once told me never to get into disputes with companies that buy ink by the barrel – an obvious reference to newspapers because they have access to a wide and vast audience. That same sentiment can be used with any split roll tax proposal. Proponents of Initiative No. 17-0055 are picking a political fight with some of the wealthiest interests in the state.
The construction industry showed a lot of strength in its opposition to 2018’s Proposition 6. That initiative failed with 57 percent voting no. But it looks like the industry is headed into another political dog fight in this split roll tax initiative.