Two California senators, Loni Hancock and Holly Mitchell, introduced a constitutional amendment June 10 to change Proposition 13 for commercial real estate owners. This amendment may cause businesses to move out of state, job losses due to increased property taxes, and commercial and industrial real estate markets to return to recession levels or worse. The purpose of this amendment is to throw more money at our failing school systems and repair our ailing infrastructure. This is a terrible idea.
Proposition 13 was passed by the voters in 1978 and protects all owners from rising tax rates until they sell or remodel their property. This new amendment will increase taxes to current property values only on commercial and industrial properties.
Proposition 13 currently requires a 2 percent annual increase in the real estate tax levied on a property. For instance, if property taxes in one year were $10,000, the taxes will increase to $10,200 the following year unless the property was remodeled or sold.
This new amendment will increase taxes to astronomical levels due to current commercial and industrial real estate prices. For example, a property purchased in 1990 that cost $2 million will have an annual property tax of 1.2 percent, which is $24,000. This same building is now worth $7.5 million today. The proposed bill would require the owner to pay an annual tax rate of more than $90,000 – nearly four times as much.
This might be a rare example of a tax increase, but it does demonstrate how potentially damaging a split tax roll will affect business. It should be considered that commercial real estate typically is held for long periods of time and that it is sometimes handed down from generation to generation.
Every commercial lease has a pass-through provision for increased expenses in the contract; therefore, tenants will bear the cost of additional taxes. This bill will add huge costs to all commercial real estate owners and tenants. Those tenants might have to lay off employees, raise prices or move out of California all together. Furthermore, this proposed increase in taxes will push the value of commercial real estate down and it will surely send the California real estate market into a tailspin.
The thought of huge tax increases on commercial real estate will depress real estate values. Sure, the taxes will go down with the value of the property; however, the mortgage market could collapse in California, since the value of the real estate will be dramatically depressed. Real estate investment trusts will be devalued and might cause major calamity in the securities markets.
Hurting everybody
The California senators say they are targeting the state’s largest corporations and property owners; many of those have avoided reassessment in the nearly four decades since voters passed Proposition 13, sometimes by taking advantage of loopholes in the law. However, they will be hurting everybody in the state.
California has already lost many big companies moving out of the state because of high taxes, such as Toyota Motor Corp. Should we just send all our big corporations to Texas? The last one can turn off the lights. In addition, before Proposition 13 was voted on, people were losing their homes because they couldn’t afford the property taxes.
The California senators are trying to put this ridiculous initiative on the ballot in November of next year. The outrageous thought of having voters review this matter is basically a road map to a recession if approved. Since most Californians tend to be unsophisticated when it comes to economic propositions, a voter might simply check the yes box without knowing the consequences.
This tax shift merely imposes a tax on every individual by disguising it as a good way to help our schools and infrastructure. The implementation of Proposition 13 has served the residents of California well for more than four decades. Why change something that works?
We have been raising taxes for years to fix the school budget problems. Maybe the government should start thinking about changing what doesn’t work, like the California primary and secondary education system.
The government should look to itself for a change instead of taxing the community to fix its ongoing budget problems. Higher taxes never seem to resolve the school budget problems no matter how much we pay and the state infrastructure never gets repaired.
One of the thoughts behind the formation of Proposition 13 was to keep people on fixed incomes in their homes and not to tax them out of their nest egg. Numerous retirees live on income derived from commercial real estate including me. Raising taxes on commercial real estate will clearly deprive the benefits of real estate ownership to this ever-growing segment of the population.
Our elected officials never fail to surprise me. This potential ballot proposition illustrates that the people we are sending to Sacramento clearly need a lesson in economics.
Lee Segal has been in the commercial real estate business for more than 40 years. He is an expert witness for commercial real estate litigation attorneys and he is president of Segal Commercial in West Los Angeles.
