A Split Roll for Property Tax is a Bad Idea

In the final months leading up to the historic vote in June of 1978, special interests vested in high property taxes staged dramatic displays of propaganda against Proposition 13, predicting statewide devastation and a collapse of government services that would threaten the safety of all Californians.

As it turned out, the economic boost resulting from the ensuing tax stabilization produced a net increase of total state and local tax revenues, with combined state/local spending more than tripling from $38 billion in 1978 to $143 billion 17 years later.[i] The bureaucratic flow of dollars from taxpayers to local governments certainly changed, but ultimately the teachers, fire fighters and police officers stayed on the job, today enjoying some of the highest salaries and retirement benefits in the nation.[ii]

Evidently, Sacramento’s leaders believe it’s not enough to be the highest tax state in only five major categories (statewide sales tax, gas tax, income tax, capital-gains tax and annual business franchise tax).[iii] They want to be #1 in property tax, too.

In a nutshell, proponents of the “split roll” want to charge a higher property tax rate for non-residential real estate.

As former general counsel for a firm that secured refunds of tax assessments against commercial property owners, I have seen the darker side of California property taxation. In drawing special assessments districts, local governments long ago figured out that commercial parcels do not represent “votes” the way single-family residences do. Layers of overlapping tax districts now fall disproportionately on commercial/industrial properties, with the total tax burden for some owners far surpassing the mythical 1% limit. Indeed, I have seen tax bills in which the combined ad valorem and special taxes exceeded 3% of the property value.

Moreover, taxing agencies (and not just in California) rely on a degree of complacency among commercial property owners, whose employees or accountants may not be as diligent in questioning the accuracy—or legality—of their property tax bills.  We can only speculate how much windfall tax revenue is attributable to unquestioning A/P clerks.

Case in point, I once obtained a refund in excess of $200,000 from a Bay Area city on behalf of an owner of unimproved land, after years of paying a hefty library tax. The city had misapplied a tax rate based on a proposed development that that had never broken ground, and the owner had dutifully paid hundreds of thousands of dollars in excess property taxes. (Lest you think this is an isolated incident, sadly a small cottage industry exists in helping property owners reclaim excess taxes collected errantly or illegally from municipal agencies).

Finally, the notion that only commercial/industrial owners will pay increased taxes under a “split roll” regime is utterly fanciful. Everyone reading this article understands how the cost of these taxes will be passed indirectly to tenants or customers.

For some of you, a jump in your property tax may be the final straw before moving your real estate equity or business to a state that actually wants you (and the contribution you make to the economy). But even if you do not own property subject to increased taxes, consider that this tax represents another drain on the California economy, which affects everyone except the politicians in Sacramento living off your hard-earned tax dollars.

If you or your clients are considering selling a rental property in the midst of this unprecedented economic environment, please give 1031 Capital Solutions a call today at (800) 445-5908 or visit our website, 1031CapitalSolutions.com.

Richard Gann is Managing Partner of 1031 Capital Solutions and grandson of Paul Gann, co-author of Proposition 13.

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[i] https://s10294.pcdn.co/wp-content/uploads/2016/05/State-and-Local-Government-Expenditures-in-CA-_1998.pdf

[ii] https://www.nea.org/assets/docs/2019%20Rankings%20and%20Estimates%20Report.pdf; https://www.zippia.com/advice/police-salary-by-state/; https://www.zippia.com/advice/fire-fighter-salary-by-state/; https://www.teacherpensions.org/blog/what-average-teacher-pension-my-state

[iii] https://www.thebalance.com/california-state-taxes-amongst-the-highest-in-the-nation-3193244

https://en.wikipedia.org/wiki/Fuel_taxes_in_the_United_States

https://howtostartanllc.com/taxes/llc-taxes/business-taxes

​This information is for educational purposes only and does not constitute direct investment advice or a direct offer to buy or sell an investment, and is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. The views of this material are those solely of the author and do not necessarily represent the views of their affiliates.

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