Orange County Election Results for the March 3, 2020 Primary Election are still being tabulated and, as has become customary, it could be a couple of weeks or more before results are certified and official.  Among other things, preliminary election results demonstrate one certainty – ballot propositions involving an increase to property tax obligations are not for the faint at heart.

In the March 3, 2020 Primary Election, Orange County voters were faced with nine measures to approve bonds for school facilities.  In most of those nine propositions, a majority of the voters rejected the measure.  In the few school districts where voters approved the propositions by at least a majority, none so far have reached the 55% voter approval required to pass.  Statewide, Proposition 13, titled the “School and College Facilities Bond (not to be confused with Proposition 13, the “original” Proposition 13, the “holy grail” of the tax revolt led by the Howard Jarvis Taxpayers Association and overwhelmingly approved by California voters in 1978), is suffering a similar yet more dramatic defeat, with almost 54% of voters rejecting the proposition statewide and over 63% of Orange County voters voting “No.”

In Orange County, with almost 50% of registered voters casting ballots, it’s fair to state that Orange County voters, generally, aren’t willing to pay more in property tax assessments to fund our schools.

Just when you thought it was safe to go into the property tax water, though, there is another shark in the lagoon.  And with apologies to Chief Brody and the good people of Amity Island, for those hoping for robust and widespread opposition to the Split Roll Initiative, well, we think you’re gonna need a bigger boat.

Today, no less than 24 initiative measures are working through the process to qualify for the next election.  Many of these proposed initiatives in some way affect property tax.  In each case, the California Legislative Analyst and Director of Finance estimate property tax revenue gains in the hundreds of millions of dollars each year.  In at least one case, the net increase in annual property tax revenues is estimated to be up to $12 billion.

For this article, we’re going to focus on the following measure.  This proposed initiative is commonly referred to as the “Split Roll” proposal.  Listed below is the Attorney General’s circulating title and summary of the chief purpose and points of the measure. 

“The California Schools and Local Communities Funding Act of 2020 (No. 19-0008A1)
INCREASES FUNDING FOR PUBLIC SCHOOLS, COMMUNITY COLLEGES, AND LOCAL GOVERNMENT SERVICES BY CHANGING TAX ASSESSMENT OF COMMERCIAL AND INDUSTRIAL PROPERTY. INITIATIVE CONSTITUTIONAL AMENDMENT.

Increases funding for K-12 public schools, community colleges, and local governments by requiring that commercial and industrial real property be taxed based on current market value. Exempts from this change: residential properties; agricultural properties; and owners of commercial and industrial properties with combined value of $3 million or less. Increased education funding will supplement existing school funding guarantees. Exempts small businesses from personal property tax; for other businesses, exempts $500,000 worth of personal property.”

This initiative is actually the second generation of a ballot measure that has already qualified for the November 2020 General election ballot.  For the record, the original measure was similarly labeled: “The California Schools and Local Communities Funding Act of 2018”.   But the Attorney General’s circulating title and summary of the chief purpose and points of the original measure were, well, different:

“Requires Certain Commercial and Industrial Real Property to be Taxed Based on Fair-Market Value. Dedicates Portion of Any Increased Revenue to Education and Local Services. Initiative Constitutional Amendment.

Taxes certain commercial and industrial real property based on fair-market value—rather than, under current law, the purchase price with limited inflation. Exempts agricultural property and certain small businesses. Dedicates portion of any increased revenue to local services and to supplement, not replace, state’s minimum-funding guarantee to schools. Provides tax exemption for $500,000 worth of tangible personal property used for business and all personal property used for certain small businesses.”

One version or the other of this ballot initiative appears destined for ballots in the November 2020 General Election.

Overview of the Split Roll

Both versions of the initiative would amend the California constitution to generally require commercial and industrial properties to be taxed on their current market value.  The proposal to assess property taxes on commercial and industrial properties at market value, while continuing to assess taxes on residential properties based on purchase price, is known as the “Split Roll.”
Rather than distributing the potentially significant increased property tax revenues into California’s General Fund, the ballot initiative would create a new constitutional process for distributing revenue from the revised tax on commercial and industrial properties.  But before allocating any part of the increased property tax revenues to schools and local government funding, the measure uses increased revenues to cover a couple of issues:

First, the proponents recognize that property tax increases may actually decrease income otherwise taxable by California residents and businesses.  So, the measure has a solution.  The increased revenues would be distributed to the State to supplement decreases in revenue from California’s personal income tax and corporation tax due to increased tax deductions, and to counties to cover the costs of implementing the measure.  The measure would add a new Section 8.6(b)(1)(B) to Article XVI of California’s Constitution:
“Prior to making the transfer pursuant to subparagraph (A) of this subdivision [to the Local School and Community College Property Tax Fund created by the Split Roll measure], the county auditor shall subtract an amount equal to the county’s share of the … due to the revenue loss resulting from the exemptions provided by Section 3.1 of Article XIII to be transferred to the General Fund.”  
The initiative would require the California Franchise Tax Board to “determine the reduction to the General fund and any other affected state revenue fund of revenues derived from [income taxes] due to the deduction of any net increase in property taxes resulting from” the Split Roll.  This may sound better than it will work, given that California residents’ ability to claim property tax deductions on their income tax returns have been severely constrained by the Tax Cuts and Jobs Act.

Second, proponents recognize (as they should) that county tax assessors are going to incur significant additional administrative costs of implementing the Split Roll, including costs of assessments, assessment appeals, legal counsel, tax allocation and distribution, and auditing and enforcement of the provisions of the Split Roll, as well as start-up costs.  Counties who have administered property tax assessments under Proposition 13 (and who have not been required to defend significant volumes of assessment appeals), are likely to discover very quickly that the administrative costs of implementing fair market value-based assessments will be extraordinary.  Proponents also recognize that county assessors may be required to provide refunds of property taxes paid in the prior fiscal year as a result of corrections to assessments.  So, before making increased property tax revenues from commercial and industrial properties available to schools and local governments, as the ballot title and summary suggest, the Split Roll initiative will first protect the State of California’s General Fund and the Counties’ property tax assessors. 

Observations

Among several findings and statements of purpose set forth in the proposed Split Role initiative, the proponents offer these:

“California is the fifth largest economy in the world, but if we don’t invest in our future, we’ll fall behind.  To grow our economy and provide a better quality of life now, and for future generations of Californians, we need to do a better job of investing in our schools, community colleges, and local communities, and do more to encourage small businesses and start-ups.”

“Our competitiveness begins with making children and their education a priority.  Decades of cuts and underfunding have undermined California schools.  A recent national study ranked the performance of California schools in the bottom half of all states.  The top ranked states spend thousands of dollars more per student than California.”

“It is the intent of the People of the State of California to do all of the following in this measure:

Be very clear that this measure only applies to taxable commercial and industrial real property by including provisions stating that:

1)    All residential property is exempt so homeowners and renters will not be affected in any way by this measure.”

Homeowners and renters will certainly be affected by the Split Roll, unless of course they just don’t need to purchase goods or services from businesses in California.  Because we believe the Split Roll would significantly increase the cost of doing business in California, assuming property tax values will continue to rise over the long term.  Increased property tax assessments will result in higher lease and rental properties, considering the enormous number of businesses whose facilities are leased on a “triple-net” basis.  Commercial buildings, shopping centers and business parks are traditionally leased to businesses under leases which allow for increases in rent to cover increased property taxes.  In turn, business should be expected to pass the added costs on to businesses and consumers by increasing the price of goods and services and/or reducing jobs or compensation and benefits available to employees, which ultimately can be expected to result in a less-competitive environment for attracting and retaining businesses in California.  And if doing so has the added consequence of impacting the market values of commercial and industrial real property in California, we will have failed to generate the additional funding for California schools and local governments the Split Roll measure was designed to deliver.  Fluctuations in market value determinations will also result in increased volatility, rather than stability, of property tax revenues, which would undermine the school and local government funding benefits promised by the proponents.

According to BallotPedia (accessed on March 16, 2020), the Split Roll Initiative has been endorsed by several of the Democratic candidates for president, including those who have recently suspended their campaigns, including Former Vice President Joe Biden, Senator Bernie Sanders, Senator Elizabeth Warren, former Mayor Pete Buttiegieg, Senators Kamala Harris and Cory Booker, U,S, Rep. Beto O’Rourke and HUD Secretary Julian Castro.  Organizations endorsing the Split Roll include the California Democratic Party, the San Francisco Board of Supervisors, the Los Angeles and San Francisco Unified School Districts, the ACLU of Southern California, THE CHAN-ZUCKERBERG Initiative, the California Teachers Association, the California Federation of Teachers and the American Federation of Teachers, among others. 

Opponents of the Split Roll include the California Business Roundtable, California Chamber of Commerce, California Taxpayer Association, the Western Manufactured Housing Communities Association and the Howard Jarvis Taxpayers Association.

Through December 31, 2019, according to BallotPedia, Proponents of the Split Roll have raised over $13.5 million in contributions and have spent almost $9 million dollars in their issue campaigns supporting this initiative.  Opponents have raised almost $2.6 million, with most of the funding contributed by two Political Action Committees - Californians to Stop Higher Property Taxes and Protect Prop. 13, a Project of the Howard Jarvis Taxpayers Association.

The Split Roll Initiative is gearing up to be a highly controversial, hotly contested and closely watched ballot measure heading into the November 2020 General Election.

Author: J. Michael Vaughn, Shareholder, Enterprise Counsel Group