Split-Rolling Toward a Recession

 
 

Split-Rolling Toward a Recession

Officially known as the “California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative”, this would be the first real change to Proposition 13 in 40 years.

Other than agricultural real estate, all retail, industrial and commercial properties with a market value of $3 million or more, will have their property taxes increased to current market rates.  These funds would be ostensibly used for education and local government expenses, but don’t be fooled, they will be used for the looming pension bills for public employees.

When proposition 13(prop 13) passed in June of 1978, it froze all property taxes assessment to the amount paid for a property, any property, with a maximum increase of this base amount of 2% per year.  Even if a property increased in price by 10% in one year, the property tax bill could only increase 2%.

California is one of the only states to pass such a measure, and most other states, and their counties fund local education and public services with property taxes.  California funds most of its services with state tax on personal income, sales tax and taxes on capital gains.  But these taxes are highly volatile and decrease significantly in recessions: people make less money, buy less and sell fewer homes and stocks at a loss.

In addition, almost every city, county and the state itself passed lucrative pension agreements with teachers, police officers, firemen and elected officials in 1999 to 2000, with some public employees able to retire with 90% of their highest year of pay for life after only 25 years of service, with full medical benefits.  As an example, a police officer at 25 who started their career at $50,000 might be earning $100,000 after 25 years and 50 years old, retire, and collect $90,000 for another 30 years.  So they earned $1,875,000 during their career, but collected another $2,700,000 after retiring.  Simply put, this pension is not sustainable.

Most jurisdictions have corrected this poorly planned pension arrangement, but they are still on the hook for every employee up to 2005 or so, when the true cost of these pension plans became apparent to the ones paying for the pensions.  Since to date, prop 13 has been the third rail of politics, and no one would consider tampering with it, the state has been busy raising taxes on every other sector of society: gas taxes, tax on the wealthy and increased sales taxes.  But there is little left to tax that will generate the substantial funds needed to fund this pension problem, and now it is time to dismantle prop 13.

The argument they make is that prop 13 was never meant to protect businesses from increased property taxes, it was designed to keep older folks from being displaced from their own homes because of high property taxes.  Now in California, it is not uncommon to have two homes side by side each worth $1,000,000: one pays $12,000 a year in taxes because they recently bought the home and the other $1,000 because they have resided there for 30 years.  The same holds true for commercial and retail properties.

If this new proposition passes, property taxes will increase dramatically for non-residential real estate, but these increased will be passed onto the tenants, who will have no choice but to increase prices for their goods or services.  The $12 burger will become $13.  The $15 haircut increases to $16.   At every turn, at every store, consumers will pay more and have less disposable income.  The 5 to 10 billion in additional annual revenue must come out of someone’s pocket, and I doubt it will be the landlord’s. Those against this measure also believe it will lead to the complete reversal of prop 13 and should the revenue generated by this ballot measure not cover the pension bill (which it won’t), or should we suffer another recession and the state budget contract dramatically, the only way to keep the state afloat would be to assess all real estate closer to market values.