California's tax structure needs tweaking, but one economist is not sure approving a split roll property tax is the answer.
A consortium of educational and housing groups says it has gathered enough signatures to place a measure on the state ballot in 2020 that would allow for greater growth in the property tax levied on commercial properties.
Under the current system created by 1978's Proposition 13, property assessment increases are limited to a maximum of 2% annually, unless a property is sold, at which point it is reassessed at the sale price.
Eliminating the commercial cap would provide additional tax revenue at the local level, but also increase volatility, because it is coming at a time when commercial real estate — and retail in particular — is under increasing pressure, said Kevin Klowden, a senior economist with the Milken Institute, a Santa Monica-based think tank.
"People are talking about a retail apocalypse, people are talking about vacancies in retail properties, and there also has been pressure on commercial real estate in general," Klowden said.
The concept of separating how commercial real estate is taxed has been floated before.
Proponents of the measure hope the latest version, which excludes business properties worth less than $2 million, will be the magic elixir to provide more money for education and affordable housing.
Proponents estimate in the ballot
After paying for county administrative costs and backfiling state income tax losses related to the measure, the remaining $6 billion to $10 billion would be allocated to schools and other local governments in a 40%-60% split, respectively.
Property tax is a local government and school district revenue source, not a state source of revenue, said Gabriel Petek, a managing director in S&P Global Ratings' U.S. Public Finance Division.
But, if there were additional revenues generated locally from the property tax base as a result of a split roll, it would provide relief to the state's general fund, Petek said.
Proposition 98 establishes a minimum guarantee for education funding and the state is obligated to support whatever portion of per pupil funding that is not generated by the local property tax base.
"In that case, the state could see its general fund budget capacity increase, possibly opening the door to new or expanded funding commitments," Petek said. "As for unintended consequences, I would just note that we've been commenting in recent years about California's housing shortage. It's conceivable that a split roll could encourage a "fiscalization" of land use policy."
Local governments may opt to zone land for commercial, rather than residential uses if they expect it would result in more/higher future property tax revenue, Petek said.
The Proposition 13 assessment caps are something that helps retain businesses in California, Klowden said.
Exempting smaller businesses with the $2 million property value and under 50 employee threshold might appeal to some small businesses, he said. It could also have the effect of encouraging small businesses near that threshold to begin looking to relocate to other states, he said.
"The biggest cost in California for doing business is not business hostility — it's the cost for workers," Klowden said. "This is still one of the best places to start a business. It has the most entrepreneurs and the best access to startup capital through venture funds."
Klowden said he doesn't think the idea will gain traction unless the state experiences another budget crunch. Raising taxes is a hard sell when the state has an $8 billion surplus, he said.
