The following is for study only and has NOT been approved by the Taxation
Committee, Legislative or Executive Committees or the Board of
Issue Should C.A.R. revisit its historical position of
opposing imposition of a split roll property tax system which would tax
commercial property at a higher rate?
Options 1. Do Nothing. Maintain C.A.R.’s policy of
opposition to a split roll property tax system.
2. Revise Existing Policy. Revisit C.A.R.’s policy of opposition to a split
Status/Summary Due to the large budget deficits the state
has faced in recent years, split roll property taxation is again being talked
about as a means by which the state can avoid such deficits. Under Proposition
13, property is assessed when a change in ownership occurs and is taxed
annually at 1 percent of the assessed value – regardless of whether the
property is residential or commercial. A split roll property taxation system,
however, would tax commercial property at a higher rate than residential
property and, thus, more tax revenues would accrue to the state. When the
implementing statutory language for Proposition 13 was being considered, a task
force considered – but, ultimately rejected – recommending a split roll
property taxation system because it was concerned that a shift in tax burden
from commercial to residential properties would result because commercial
properties change ownership less frequently. The question of whether a tax base
shift from commercial properties to residential properties has occurred has
been intensely debated with parties on both sides of the issue pointing to
statistics they claim proves that there has or has not been such a shift.
C.A.R. has historically opposed a split-roll property taxation system with the
idea that taxes levied against real property should be fair and equitable
across all types of real property.
Discussion In large part due to the large budget deficits
the state has faced in recent years, split roll property taxation is again
being talked about as a means by which the state can avoid such deficits.
Simply put, a split roll property taxation system would tax commercial property
at a higher rate than that at which residential property is taxed and, thus,
more tax revenues would accrue to the state. Phil Ting, the Assessor/Recorder
for San Francisco City and County is the most vocal of current public officials
to advance the proposal. He recently formed the Close the Proposition 13
Loophole political action committee to educate voters on the split roll issue.
Ting contends that the method under which commercial property is currently
taxed violates the intent of Proposition 13 because it results in a shift in
property tax burden from commercial property owners to homeowners. In San
Francisco, for example, commercial properties comprised 60 percent of the tax
base when Proposition 13 was approved; residential properties, however, now
make up the majority of the city’s tax base.
Generally speaking, under Proposition 13 properties are assessed when a change
in ownership occurs and are taxed annually at 1 percent of their assessed
value. However, the term “change in ownership” was not defined in Proposition
13. As a result, the Assembly Revenue and Taxation Committee formed a task
force to make recommendations relating to the implementation of Proposition 13.
The task force considered a “separate entity theory” as well as an “ultimate
control theory” with regard to property ownership. With the former theory,
property is not be reassessed even if the ownership of the legal entity holding
title to the property changes hands. (For example, if Disney sells ABC – which
owns Blackacre – to Paramount, Blackacre would not be reassessed because ABC
still owns Blackacre.) The latter theory attempts to determine who has ultimate
control of the property. (Thus, in the above example, since ownership of ABC
was transferred from Disney to Paramount, control of Blackacre was also
transferred and, as a result, Blackacre would be reassessed.)
The task force considered the “ultimate control theory” because it was
concerned that a shift in tax burden from commercial to residential properties
would result because commercial properties change ownership less frequently.
However, the task force ultimately recommended the “separate entity theory”
approach because of the administrative burdens that would have been involved in
implementing a taxation system based on the “ultimate control theory.” The
statute implementing the corresponding change of ownership definitions was
adopted in 1979.
The question of whether a tax base shift from commercial properties to
residential properties has occurred has been intensely debated. In “Cal-Tax
2008: Proposition 13 Revisited,” the California Taxpayers’ Association
(Cal-Tax) contends that since “the assessed value of non-homeowner property
subject to Proposition 13 has grown an average of 8.5 percent per year, while
homeowners’ property has grown an average of 8.3 percent” that a shift has not
occurred. However, at the August 12 annual Board of Equalization meeting with
California assessors, Santa Clara County Assessor Larry Stone pointed out that
the Cal-Tax report does not include all residential property because it does
not include rental residential property. For example, in both Santa Clara and
Orange Counties, approximately a quarter of the single family homes do not have
a homeowners’ exemption. If a home did not have a homeowners’ exemption, it was
not included with the other residential properties in the Cal-Tax report. Thus,
the Cal-Tax report does not accurately reflect the growth in assessed value of
commercial properties versus residential properties. As such, it’s not clear
that the results indicate that there has not been a shift in tax base from
commercial to residential properties.
The California Tax Reform Association (CTRA) has been pushing for split roll
property taxation for years. In a July 13 Los Angeles Times column, Michael
Hilzik writes: “In Los Angeles County, for example, single-family residences
accounted for 39.9% of the tax roll by value, in 1975, before Proposition 13.
This year their share is 55.8%. In the same period, commercial-industrial
property has gone from 46.6% of the tax roll to 30.9%. These figures are from
the county assessor’s annual report, but a similar pattern holds statewide.”
Likewise, in its April 2004 “California Commercial Property Tax Study,” the
CTRA found great disparities in tax rates for similarly situated commercial
properties. For example, in Sacramento, the Holiday Inn Capitol Plaza paid
$.22/square foot in property taxes while the Sheraton Grand which is just nine
block away paid $1.45/square foot. The disparity is due to the Holiday Inn
having last been reassessed in 1978 while the Sheraton was not reassessed until
1999 when it was completed. CTRA’s study found such discrepancies in cities
across the state.
Several economic arguments have been advanced against a split roll property
taxation scheme. In a September 2008 study commissioned by Californians Against
Higher Taxes titled “The Economic Effects of California Adopting a Split Roll
Property Tax,” it is contended that adoption of a split roll would have seven
primary effects. These include: 1. More development, 2. Increased fiscal
zoning, 3. Higher rents paid by families and small business, 4. Reduced
investment/fewer jobs, 5. Reduced wages, 6. Increased consumer prices, and 7.
Decline in the value of financial assets held by public retirement funds.
On the other hand, in a presentation before the Commission on the 21st Century
Economy earlier this year, the Executive Director of the CTRA, argues that
there would be several positive economic benefits to adoption of a split roll:
1. Land costs would be lowered, 2. Development costs would be lower and the
permit approval climate improved, 3. Competitors will be treated equivalently,
4. Costs will be borne by those with locational advantages with the largest
economic rents, 5. Infrastructure development will be encouraged, 6. Potential
trade-off for other taxes, particularly personal property, could relieve both
business investment and assessors, and 7. Because the value of property is
based on future income, the tax burden declines in a time of recession,
providing business relief, and only expands as the economy expands.
In January 1982, an initiative sponsored by “Taxpayers for California” that
would have taxed commercial and industrial properties at a rate one-third
higher than residential and agricultural properties was cleared for
circulation. As a result, C.A.R.’s Legislative Committee with the Executive
Committee in concurrence voted to “oppose the initiative … and to contact
Boards of REALTORS® and other appropriate organizations requesting that they
not sign or endorse the initiative.” Ultimately, that initiative failed to get
the number of signatures needed to qualify for the ballot. A second attempt was
made in 1989 by the group Voter Revolt that would have taxed non-residential
properties at 2.2 percent while the tax rate for residential properties would
have stayed at 1 percent. This attempt also failed to secure enough signatures
for the ballot. The C.A.R. Issue Briefing Paper produced on the 1989 effort
noted that “C.A.R. has historically opposed a split-roll property taxation
system with the idea that taxes levied against real property should be fair and
equitable across all types of real property.” In addition, in discussions in
the Taxation Committee in recent years, it has been contended that adoption of
a split roll would result in local government viewing commercial property as a
revenue producer and, as a result, would favor commercial over residential