Gauging the Revenue Effects of a Split-Roll Property Tax

One of the most common proposals for reforming California's Proposition 13 is the introduction of a "split-roll" property tax.  The term "split-roll" means different things to different people, but in the context of reforming Prop 13 the term is typically used to describe a system in which commercial/industrial property (but not residential property) is periodically reassessed at market value.  A useful source of data for evaluating the revenue effects of such a change is the annual memorandum prepared by the California Board of Equalization in order to determine compliance with 4-R Act requirements.  These memos show (1) the total statewide assessed valuation of commercial/industrial property, and (2) the total statewide fair market value of commercial/industrial property.  It is interesting (though not particularly surprising) to show how much the latter figure has changed over the past three years, while the former has stayed pretty much the same.  These are the figures (in 000s) from the three most recent memos, with links to each year's memo:

2007-08 Roll: $1,215,997,953 (assessed value) and $2,250,986,523 (market value)

2008-09 Roll: $1,275,373,832 (assessed value) and $2,075,614,788 (market value)

2009-10 Roll: $1,280,309,309 (assessed value) and $1,627,633,442 (market value)

Notice the sharp downward trend in market values and the steady (but modest) upward climb in assessed values--this is the operation of Prop 13 in a down real estate market.  As market value approaches assessed value, not only do the revenue consequences of moving to a split-roll change, but the politics of such proposals could change as well.  Food for thought...

 

Comments

[Jennifer Bestor]

Have you discussed using the Board of Equalization's railroad ratio for split-roll purposes with them? They've always discouraged me from doing so, and I've had the hardest time finding out what their methodology is.

All that they've said is that, when Prop 13 was passed in 1978, it was recognized that some commercial property (like public utilities) would benefit disproportionately due to lack of property turnover. Thus, the unitary tax process was created to counteract some of that free-rider effect.

That said, my own close analysis of commercial property assessed values does suggest a 10+ year time frame for reassessment -- for the sake of both assessors' and owners' time. It is only at the 10-year mark that a significant tax subsidy (for commercial or residential owners) begins.

I believe you err, however, in stating that it is Prop 13 that kept the two-year climb in assessed values relatively modest. In common with other assessors' annual reports, Santa Clara notes, "While the number of homes receiving a reduction increased 4%, the number of commercial properties in Prop 8 decline jumped 41 percent..." (page 14, 2011-2012 report) Commercial property owners are aggressive in using Prop 8's devaluation-to-market provision to address the cyclical nature of their real-estate values.

One reason that the BoE's methodology is so important is that the Prop 13 tax benefit is heavily concentrated. Around 20% -- one commercial-industrial property in five in California enjoys a 1975 tax basis -- paying about 40% in real dollars what it paid then towards local services. Those properties are the most attractive to investors to acquire through legal methods that avoid technical 'ownership of record' change (hence reassessment). They are also the ones that, when they do turn over, do so at 10X the assessed value.

Methodology, therefore, becomes extremely important -- especially since only a few counties seem to have a clear idea of how many of their properties are enjoying those early-year bases. If the BoE is just looking at each sale that comes in, and noting that they seem to average about a 25% mark-up, ... well ... yes, that gives an 80% value ... but, if the majority of these properties are turning over for the second time this decade -- or even in the past 20 years -- it's not a useful ratio for any purpose except conservative increases in public-utility assessments.

Your research on the topic would be much appreciated.

[Account Deleted]

Commercial property and residential property are taxed the same under the provisions of Proposition 13. However, some advocates want to see the property tax roll “split” into at least two categories with residential and commercial property treated differently. http://swagatamindia.com/

[Hendri Prastio Kurniawan]

wow amazing
2007-08 Roll: $1,215,997,953 (assessed value) and $2,250,986,523 (market value)

2008-09 Roll: $1,275,373,832 (assessed value) and $2,075,614,788 (market value)

2009-10 Roll: $1,280,309,309 (assessed value) and $1,627,633,442 (market value)
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[Mr Sheone]

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