By Assemblyman Tim Donnelly (R-Twin Peaks)
They say those who do not study history are doomed to repeat it.
The battle over Proposition 13 is about to be fought all over again. Prop 13 passed by nearly 65% of the vote back in 1978. A significant majority of citizens of all political persuasions were united in support of a proposition that protected property owners and tenants alike from massive property tax increases.
The reason for this is simple. Markets work, and ordinary Californians are very savvy when it comes to their money, even if their politicians aren’t.
For an example of just how much public support Proposition 13 has, we need look no further than the 45th Assembly District, where candidate Susan Shelley nearly defeated her Democratic opponent – in a highly Democratic district – by putting the issue of Proposition 13 at the front and center of her campaign.
The most dangerous assault on Prop 13 is what’s called the “Split Roll.” In simple English, it means you divide the residential and commercial property rolls and only allow residential properties to continue to be covered under the protections of Prop 13. This means all commercial properties, including business properties, retail properties like your local shops and restaurants, could be reassessed at dramatically higher values, doubling or even tripling their property tax.
Many businesses not only do not own the property, but are on triple net leases, which means they pay three times any additional costs incurred. So your favorite local hang-out might be forced out of business if the split-roll scheme were to pass. If they stay in business, the only way they are to be able to provide you their goods or services is to raise the price. But the dirty little secret is that the tenants of apartment buildings – those who can least afford it – might suffer the worst.
Renters are not stupid. They know if the cost of housing goes up, their rent must go up to cover the cost. There are no “free lunches.” Someone has to pay. The politicians believe they are sticking it to the income property investors – and this may be true for a year or two, but eventually all costs get passed on to the tenant.
The reason for that is also simple: investors need to know they will earn at least a minimum rate of return on investment, also known as the Capitalization rate (or Cap Rate for short), or it is not worth putting their capital at risk.
Since the average cap rate for apartment investments is about 5%, that means every dollar of extra tax lowers the value of the property value by $20 (it’s a 20 to 1 ratio) Meaning, if property tax goes up $5,000 the value of the property comes down $100,000. Why is this important? Because the property is being taxed on its value. So raising the rate does not net out the amount the politicians think it will.
Property tax receipts will fall because property values will fall to bring the market in line with the average cap rate. So their net gain will not be as much as advertised. The lower property values will mean that the county will receive less transfer tax upon the sale of the property. The state and federal government will receive less capital gains tax upon sale. The budgets of cities and counties have been under intense pressure as tax revenues continue to fall, and business owners and taxpayers are leaving California in droves to flee the crushing burden of the nation’s highest income tax.
Since apartment housing is the cornerstone of affordable housing, we cannot overstate the case that a split roll would not only fail to accomplish the proponents goals, but it would put tens of thousands of small business owners livelihoods at risk, and might possibly put an end to affordable housing in California altogether. Rarely do you see a cause that is joined by renter and building owner alike, where the interest of the employee and business owner are the same, but it can be argued that splitting Prop 13 poses a unique threat to public sector budgets and private sector enterprise, equally. The higher tax is just another reason for large businesses to leave the state, taking their jobs with them.
According to contemporary polling on this issue, Proposition 13 still retains the substantial support it had 35 years ago. It is urgent that we join forces and stand unified against the one move that could sink California’s once-vibrant economy for all time. We can do this, you can help.