Goodbye Prop 13? A Guide To California’s Split Tax Roll: Part 1

This lengthy analysis by Capital Rivers Commercial1 of the “split roll” measure, a California initiative constitutional amendment appearing on the November 2020 statewide ballot, is presented as a 3-part series. Here, in Part 1, we present the issue and exactly where we are today. Part 2 will examine the proposed measure in detail. Part 3 will discuss what the new taxation system would mean for the CRE industry and beyond.

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Since it became law in 1978, Proposition 13 has sometimes been called the “third rail” of California politics: touching it would equate to career suicide. But California has a way around politicians, something called the initiative process. And just like 42 years earlier when it was used to create Prop 13, it’s now being used in an effort to topple it.

When Californians vote for President this November 3, they will also be asked to vote on the “California Schools and Local Community Funding Act of 2020”.2 The pleasant-sounding initiative would increase funding to schools and local authorities on the backs of those paying taxes on commercial real estate – typically the businesses that occupy it – by forever changing the system under which such real estate is taxed in California.3

What The Split Tax Roll Would Mean For California Commercial Real Estate

Goodbye Acquisition Value, Hello Market Value

Prop 13,4 passed by the voters to address ever-increasing property taxes caused by soaring property values, established an acquisition-value based system of real property taxation in California.  At its core, this 2-part system (1) establishes a new assessed value (i.e., the value used to calculate taxes) of real property following a change in ownership,5,6 and (b) caps the increase of that base value at 2 percent per year. This system applied, and still applies, to commercial and residential property alike.

The proposed new initiative would end this approach for most commercial property,7 creating a “split” in the tax roll under which counties would assess such property at current (no more than 2 years ago) market value. Almost anyone who has held California real estate for a while is likely to appreciate the impact of being taxed on the basis of current value rather than acquisition value.  Demonstrating this impact on a macro scale, a recent USC study estimates that approximately $11.4 billion in new tax revenue would be generated in just the 2021-22 tax year under a simplified model of the new tax law.

“Take 2”

Remarkably, and indicating how well-funded8 and well-organized the split roll backers are, the Act is a re-take. The California Schools and Local Community Funding Act of 2018 became eligible for the November 2020 ballot back on October 15, 2018, and the California Schools and Local Community Funding Act of 2020 is just a revision of that already-eligible measure.9

Sponsors of the split roll tax undertook the arduous and expensive process of collecting over 1.7 million signatures – cost per signature for the first measure was estimated by Ballotpedia to be $5.96 – to qualify the replacement version for the ballot, just to make some improvements that don’t alter the fundamentals of the measure.10 The Secretary of State announced signature validation on May 22, meaning the revised measure is now eligible for the November ballot.  The last step in the process, qualification, becomes official the 131st day prior to the election, or June 25.11

We therefore present an analysis, in Part 2, of what the California Schools and Local Community Funding Act of 2020, if passed, will do to taxation of California commercial real estate…

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Stay Tuned For Part Two!

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This article is general in nature and is intended only as background material for informational purposes. It does not constitute legal advice. It may not apply to your specific situation or may be incomplete or outdated. You should not act or rely on any information in this article. You are not authorized to treat this article as legal advice, and it does not create any sort of attorney-client relationship. Before acting or delaying action, you should first seek the advice of an attorney qualified in the applicable subject matter and jurisdiction.

1.  After a pair of earlier pieces on this topic (this Sacramento Business Journal piece and this July 2019 website article), this article presents our first analysis of the split roll measure since April 2, the date that split roll proponents submitted over 1.7 million signatures for qualification of a re-written version of the measure; see “Take 2” below.

2.  As received by the Initiative Coordinator of the State Attorney General’s Office and posted on the Attorney General’s website.

3.  As with our previous pieces, this article deals exclusively with the real property taxation aspect of the proposed new law.

4.  This Proposition 13 is not to be confused with the completely-unrelated initiative of the same name that went down to defeat earlier this year on March 3, 2020.

5. At the time of passage, Prop 13 automatically rolled back assessed values of all real property to their level for the 1975–76 tax year.  Thus, properties that have not changed ownership since 1978 retain this base value, subject to the limited annual increases.

6. Also, the value of any new construction upon a property is added to the base value.

7. The terminology used in the Act is “commercial and industrial”, but for simplicity’s sake in this article we sometimes lump them together as commercial.

8. Demonstrating this, Ballotpedia calculated campaign contributions to be $19,736,008.78 through March 31, 2020; this compares to $3,226,412.70 against the measure through the same date. 

9. A full airing of the 2018 version was made in this July 2019 Capital Rivers article.

10. According to a POLITICO article on the re-do, a spokesman said the changes include “improvements to implementation dates, expansive new small business tax relief, clarified education financing and stronger zoning language to ensure large corporations cannot avoid reassessment.”

11. Current status can be followed on the Secretary of State’s website.