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Split Roll – Los Angeles Commercial Property Tax Appeal
Since the passage of Proposition 13 in 1978, there have been several attempts to roll back the reforms that were put into place. Making nationwide news when it was passed, Proposition 13 put strong property tax limitations into place. Furthermore, any new state tax must be approved by a two-thirds vote in both houses of the state legislature and in certain situations, local governments within the state as well.
In the 2020 election cycle, a new attempt called the “split roll” is being promoted by government labor unions along with advocacy groups to boost commercial property taxes on businesses in Los Angeles and all of California.
The attempt is being made to boost property taxes and provide more money to the state government. Opponents of the split roll claim that the passage of the new law would cripple small business growth and hamper the economy in Los Angeles, and all of California.
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What is a Split Roll? Why Appeal?Essentially, the term means to split apart the business and residential property tax system into two different groups. The residential property taxes in California would essentially remain protected by the Proposition 13 law. However, business commercial property taxes would be split into a new category allowing for rates to rise at a faster pace.
In other words, some of the protections of Proposition 13 would be stripped from the business side of property taxes. The current split roll proposal is nothing new in California politics. Ever since the passage of Proposition 13 over 40 years ago, there have been various bills that have sought to overturn or at least pull back some of the protections that Proposition 13 offers.
In 1992, a ballot measure that included the split roll was defeated rather handily. But in 2018, the California Schools and Local Community Funding Act which advocated for the split roll was proposed as a constitutional amendment. It has qualified to be on the ballot in November of this year. However, the proponents of the amendment are gathering signatures to alter what has already been put on the ballot. They have until mid-April of 2020 to change the measure.
What the Split Roll Initiative Means? Why Appeal?If passed, the amendment to the California constitution would make the following changes.
Mixed-Use: Only business properties would fall under the split roll system. Residential and agricultural properties would not fall under the split roll changes. However, mixed-use properties that combine residential or agricultural with business would be considered a commercial property and fall under the split roll.
Reassessment: All business properties would be reassessed to their fair market value. However, the changes may be phased in over three years. And every three years, the fair market value of every business would be reassessed.
Exemptions: If a business is under a single ownership and does not have at least $3 million worth of property in the state, it will not be included in the split roll. In addition, there will be exemptions from taxation up to $500,000 for business personal property along with exemptions from taxation for all tangible personal property of selected small businesses.
The estimated gain from the new property taxes would rise an estimated $7.5 billion to make it roughly $12 billion per year. About 40% of the money raised by the new split roll taxes would be directed towards the California school system which includes community colleges. Local governments, including counties, cities, and special districts would receive the rest.
In terms of allocation, there are no additional requirements and the money can be used for however the local school systems and government agencies see fit. However, there is about $1 billion earmarked for the cost of implementing the new split roll tax system. This includes the administration, compliance, and support of existing programs at the state and Los Angeles local level.
Impact of Split Roll - Why Appeal?Both proponents and opponents of the proposed split roll tax are united in terms of understanding the dire financial situation in terms of government resources in California. However, opponents of the split roll tax have pointed out several issues with the new proposition as it currently stands.
Rise of Costs: What has really changed in California over the past 40 years is the rise in costs incurred by local and state governments. While revenues are still flowing in even under Proposition 13, the cost of programs such as Medi-Cal, a health care program aimed at the poor in California, has risen ten times since 1978.
Costs have also increased dramatically for pension and health care across the state. Cost estimates are expected to triple up to $9 billion a year just to support the retirement system alone. It is the massive rise in costs over a short time that has in large part brought about the new split roll proposition. But as opponents have pointed out, the rise in estimated revenue from the split roll may not nearly be enough. The system itself will have to change and costs reduced.
Small Business: Despite some of the exemptions put into the proposed amendment, it is believed that small businesses will take a massive tax hit. The impact will be that small businesses will either have to dramatically raise their prices or simply close up shop and move to another state. The result will be reduced job opportunities and an overall lower property tax collection in the state.
The increased costs on businesses will be passed on to the consumer and the result will be a hit to the California economy. Given the already high cost of living in most of California, yet another increase in either taxes or prices may slow an already troubled economic situation down even further. The concern expressed by opponents is that it will lead to a cascade effect in which costs continue to rise as revenues fall short of meeting their needs.
Whether the new split roll proposition passes is a matter for debate. But what is true is that California despite all its issues has considerable revenues and a large surplus already in place. It is the projected cost combined with expanding programs that is fueling the split tax proposal. Opponents believe that it is not needed and instead new constraints on spending need to be put into place.
Get a free case evaluation today at 562-204-6700.
