Changes Ahead for Prop 13?

​Passed in 1978 by 65% of voters, in response to a perception of out of control property tax increases, Proposition 13, among other things, sets the property tax rate at 1% of assessed value, restricts annual increases of assessed value to not exceed 2% per year, requires that local special tax increases be approved by voters with a two-thirds vote, and requires that state tax increases be approved by a two-thirds vote of each house of the Legislature.  Since that time, Prop 13 has been blamed for everything from poor schools to potholes.

Last week the latest attempt to change California’s legendary Prop 13 tax system was unveiled.  Senator Holly Mitchell (D-Los Angeles) and Senator Loni Hancock (D-Oakland) advanced a plan for a split roll property tax measure and held a press conference with a number of public employee labor groups to announce the effort.  “Split roll” literally means splitting the tax rules so that home owners will still be protected by Prop 13, but commercial property would not.

SCA 5 would amend the State Constitution to allow for regular reassessments of commercial and industrial property to their fair market value (rather than establishing the value once, at the time of purchase), starting with the 2018-19 fiscal year. However, the constitutionally mandated 1 percent tax rate would be retained.  Proposition 13 protections would continue to apply to residential rental property and agricultural property.  If approved by two-thirds of the Legislature the measure would be placed on the November 2016 ballot.  The Governor’s signature is not required.

The measure would also provide for a five-year phase-in of regular fair market value reassessments for certain commercial and industrial property owners; and exempt from personal property taxes $500,000 of tangible personal property used for business purposes, beginning January 1, 2019.

The California Business Properties Association is coordinating with Californians to Stop Higher Property Taxes and allied groups such as the California Chamber, CalTax, and Howard Jarvis, to respond.  The anti-tax folks have come up with some pretty compelling facts and arguments as to why Prop 13 should be left alone:

* According to a 2012 report by the Legislative Analyst’s Office, “Property tax revenues increased throughout the recession while other major revenue sources declined significantly.” 

* A Pepperdine study showed that in 2008-09 when California property values faced the dramatic decline in the wake of the sub-prime crisis and the market collapse (industrial and commercial values fell 6.5%), property taxes collected from these same properties actually rose 5.0%. 

* Board of Equalization data shows that the average annual growth of property taxes for non-homeowner property is 7.34% and for homeowners it is 6.82% since Proposition 13 was put in place. Business property taxes have increased at a higher rate than homeowner property taxes. 

* Local government services and schools can more easily plan out their future budgets because property tax revenues are more predictable and stable than other sources of revenue. 

We will keep an eye on this effort as it moves forward.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.