A potentially game-changing ballot measure in California is now likely to go before voters in November: Supporters of the so-called “split roll” initiative, which would dramatically alter the property tax landscape in the Golden State, have just submitted 1.7 million signatures, almost double the amount needed to qualify for the ballot.
Modifying California’s system for assessing property taxes might sound technical and arcane, but the net result, if it’s approved by the voters, would mean a massive increase in tax revenue—estimated at an additional $6.5 to $10.5 billion per year—without affecting residential homeowners’ property tax bills. These new revenues would offer a huge boost to the state’s perpetually constrained municipalities and school districts, which depend heavily on property taxes to cover their expenses.
The proposed split roll framework would remove commercial and industrial properties from coverage under Proposition 13, a notorious 1978 ballot measure spearheaded by conservative activist Harold Jarvis that has undermined everyone who’s tried to govern California ever since its passage. Prop 13, as it’s commonly known, was one of the first and best-known examples of taxpayer revolts using the initiative system, and it operates in two ways.
First, it limits the annual property tax on a particular property to no more than 1% of its assessed value. Second—and where it does most of its damage—it limits the increase in a property’s assessed value to no more than 2% per year, unless it changes ownership or improvements are made to it. This 2% cap applies regardless of how much the property’s actual market value changes.
As you can imagine, in a state like California with rapidly appreciating property values, that leads to situations where properties are assessed at only a fraction of their true value, and property taxes in turn are levied based on these obsolete assessments. As an example, consider what happens when a house’s market value goes from $500,000 to $1 million over the course of a decade, a fairly typical trajectory in many parts of California.
Under Prop 13, that $1 million home would, after 10 years, be assessed at just $610,000—and that figure is what its taxes would be based on. And under Prop 13’s 1% limit for annual property taxes, the owners of this house would pay just $6,100 in taxes instead of $10,000, almost a 40% shortfall. Multiply this by millions of properties across the state and you wind up with revenues far smaller than they ought to be.
Disentangling Proposition 13 is one of those classic third rails of politics. For one, any attempt at a wholesale repeal of the rules would enrage a lot of otherwise liberal homeowners, whose support would be needed for such an effort. Beyond that, there’s the problem of a lot of “house-rich but cash-poor” households that simply wouldn’t be able to accommodate higher property taxes, particularly among retirees who’ve lived in the same home for decades.
That’s what led reformers to propose switching to a split roll system—the “roll” in question referring to the roster of properties every municipality maintains. On one side of the role would be residential and agricultural properties; on the other, commercial and industrial properties. For the residential and agricultural half of the roll, Prop 13’s 2% annual limit in assessed property values would remain.
However, commercial and industrial properties would be removed from Prop 13’s ambit and instead be reassessed at least every three years at actual market value. These property owners should, at least in theory, be better able to pay a larger property tax bill than homeowners.
But the state’s deep-pocketed commercial landowners will fight this bitterly. They’ll no doubt launch an ad blitz arguing that higher commercial property taxes will get passed down to consumers, just as they claim with every proposed tax hike. But if the initiative’s backers—who include not just labor unions and school groups, but even Facebook’s Mark Zuckerberg—can get the word out that residential homeowners will still get the break they’ve become accustomed to, the switch to a “split roll” property tax system could have a huge effect in breaking California’s notorious revenue logjam.