With today being Election Day, I thought I’d share some important points regarding the upcoming November 2020 election. It’s time for people to start discussing what’s about to happen in California and the rest of the nation should a critical initiative that is on the ballot pass. It is called the California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative. It is better known as the “Split-Roll” initiative.
I am most concerned about the real impact of the misguided Split-Roll initiative. I wrote about the initiative last May, Would Your Business Survive the End of Prop 13?A “Yes” vote on this initiative will support a California constitutional amendment to require that commercial and industrial properties, except those zoned as commercial agriculture, be taxed based on their market value, rather than their purchase price. This will remove the protection of Prop 13, the initiative passed by voters in 1978, from most businesses around the State.
Let’s take a few minutes to discuss how Split-Roll will affect the average Californian and others around the nation.
Split-Roll and the Average Californian
For this example, I’m using A Day in the Life of a family of four living in California. This family has two working parents and two children. The day begins with one parent leaving early for work because they need gas for their car. The other parent will take the two children to school.
The first parent, on their way to the gas station, stops and picks up a donut and cup of coffee. The coffee shop owner leases his storefront, so it seems he’ll be exempt from the Split-Roll tax. The truth is, the building where the coffee shop is located will not be exempt, and thus the building’s owner will be hit with the higher property tax. This increase will then be passed on to the coffee shop owner in the form of higher rent who will, in turn, have to raise his prices. It will be the same for the dry cleaners and nail salon businesses next door.
Once at the gas station, this average Californian will continue to experience the effect of the Split-Roll initiative in the form of higher gas prices. Part of the higher price comes from the increased property taxes on the property where the gas station is located. Another reason for the higher price comes from the higher taxes for the property on which the gas company’s refinery is located. Those higher taxes will be passed onto each driver in the State.
Once this parent arrives at work, the effect of the Split-Roll tax increase continues. This average Californian has not seen a pay raise since the Split-Roll came into force. This is because the property where he works belongs to a second-generation printing family. The building is located on property that was first purchased by the current owner’s father many years ago. With the removal of the 1978 Prop 13 protections on the property, the current owner has seen a tripling of their property taxes. To keep the business afloat, the owner has laid off one-third of the employees and has suspended raises for all others. (It is estimated that a loss of close to 400,000 jobs will result if the split-roll initiative becomes law.)
Let’s now take a look at parent two. While taking the children to daycare and school, they stop by a local fast-food establishment for a quick breakfast. There’s a substantial increase in the price of the food due to the Split-Roll initiative. The tax increase affects the business on several levels. First, the property where the establishment is located has seen a rise in property taxes. Second, the property where the food processing plant is located has seen an increase in taxes. And third, the property where the distribution building is located has also received an increase in taxes.
Parent two drops the first child at daycare. While the daycare service rents its facilities, the building where it’s located has seen an increase in property taxes. That caused an increase in the cost of daycare for the family. Parent two then drops off the second child at school and heads to work.
This parent was one of the 400,000 average individuals that experienced layoffs due to the Split-Roll initiative. This parent works part-time at a local retailer and is just happy to have a job. They, too, have not seen a raise since the passage of the tax bill. The retail establishment where they work is located in a shopping mall that has seen an unbelievable increase in their property tax. The increase is because the land for this mall was purchased in the 1970s. The tax increase has been passed onto every retailer in the mall. And each of these retailers has passed it onto each and every shopper.
Later that day, parent two leaves work, picks up the children, and stops by the supermarket on the way home. Again the increase in property taxes is felt on many levels. First, the taxes have increased on the store’s property. Second, prices are higher on the milk, vegetables, wine, and other foodstuffs in the store because taxes have increased on the properties of the processing, packaging, and distribution facilities that supply these products.
This family, in one day, has seen multiple effects of the increase in business property taxes. But this will not only affect the average person in California. People across the nation will feel the impact.
The proponents of the split-roll ballot initiative have recently admitted that they will redefine commercial and industrial structures to include barns, food processing structures for eggs, broccoli, citrus, lettuces, wineries, almonds, and just about anything that grows in the ground. Over a third of the country’s vegetables and two-thirds of the country’s fruits and nuts are grown in California. How will the rest of the country feel about the largest tax increase in the history of California?
But wait, it’s for the children!
Let’s talk about children and schools. First, after the Split-Roll becomes law, the State will take $1 billion to pay for administrative costs and paying back the State for loss of income tax revenue, according to California’s Legislative Analyst’s Office. What’s left will be split 60/40 with cities, counties, and special districts getting 60% and schools and community colleges will get the rest. There are little or no requirements on how the money will be spent. This statement is critical in light of a recent audit of K-12 schools.
State Auditor, Elaine Howell, revealed in her November 2019 audit of K-12 Local Control funding, that California could not account for billions of education dollars. According to the California State Auditor Report 2019-101 November 2019, billions of dollars of funding to be used to help needy children were misidentified and misused, which “deferred improved educational outcomes for the intended student groups.”
If the State has given schools directions and BILLIONS never got to their intended target, what will schools do with millions from the Split-Roll initiative if there are no requirements on how the money will be spent?
But wait! Why do the cities, counties, special districts, schools, and colleges need these massive amounts of money? We are led to believe that it is for funding classrooms. Yet, when one looks at the financial statements for these entities, the biggest need is the funding of retirement benefits that have grown out of control for many years. Recently, a high school friend of mine challenged me with the question, “Then what should we do?” I replied that in the absence of our legislators and administrators making tough decisions, the answer likely lies in the experience of cities like Stockton and San Bernardino who succumbed to bankruptcy protection because of the staggering debts that they faced and their inability to fund it. The reality is, this situation is no different from the problems faced with funding Social Security. We’ve talked about that for years but no one has found an answer so we “kick the can down the road” for the next generations to address.
I cannot resist adding the financial problems of the Los Angeles School District. Sure there are administrative woes and crumbling classrooms and facilities, but the glaring problem is that a huge portion of the budget is devoted to retirement benefits.
Think about it. Most businesses terminated their pension plans years ago. Most of our retirements are linked to how well we have saved money in our 401(k) plans. Most of us are not looking forward to something like 90% of the highest salary of the last five years with lifetime health benefits. And what does “most” mean. I asked a State lobbyist the other day, “what percentage of the California working population will benefit from the proposed increase in funding?” The answer was staggeringly low which I interpreted to mean that the vast majority of us are going to get hit with increased costs brought on by increases in property taxes all for the benefit of a small percentage of the population. AND I am still not convinced that our government infrastructure and the schools and children will see any significant benefit.
A reader of my last blog challenged me on the “fairness” of the 1978 Prop 13. This is a great challenge and the answer is that it’s really not fair that two properties side by side do not have the same tax burden. The 1978 Prop 13 was the result of taxpayers saying “enough” to out of control tax increases. There is no question in my mind that we need to find a solution, but the solution cannot be just to increase revenues without gaining control of runaway costs. It has to be fair and its implementation cannot be such that businesses are forced to close and/or leave our State for communities that do not burden their personal and commercial residents. This is a bipartisan issue that needs to be addressed by reasonable people.
Does the State Need More Money?
The nonpartisan California Tax Foundation released a study recently that shows that in 2019 Governor Gavin Newsom signed into law higher taxes and fees that result in more than $4.4 billion a year. Tax revenue to Sacramento has never been higher. The 2019-2020 California general fund budget is $144.2 billion, an increase of $20 billion over the 2017-2018 budget. How much more does the State need? Legislative Analyst Gabriel Petek released a report projecting the state will bring in a $7 billion surplus in the 2020-21 budget year.
What about the Cities, Counties & Special Districts?
In April of 2019, 51 cities raised local sales taxes. These included Pasadena, Burbank, Glendale, Pomona, Covina, and others. On today’s ballot, March 3, 2020, the city of Lakewood is looking to raise its local sales tax with Measure L. Paramount has Measure Y. My home city of San Dimas has Measure SD on the ballot to raise the sales tax. But wait. Didn’t Los Angeles County voters pass a sales tax increase with Measure M in 2016? When does this stop?
An exchange on Nextdoor, our local online idea-sharing neighborhood, included the comments that while we have a surplus, we need to raise the sales tax rate because other cities are doing it and we are below the state maximum. Again, I found lots of generalities for how the additional funds are to be used, things like “continued services” but there is no list of how funds would actually be appropriated because to do so would “restrict” the funding and handcuff the city supervisors. Strange that they want us to give them money but they don’t want to tell us how they actually plan to use it.
What the Proponents Say
The League of Women Voters of California, California Professional Firefighters, California Federation of Teachers, UTLA, SEIU, ACLU, California Nurses Association, and the Los Angeles Unified School District will tell you that the Split-Roll will only affect big business. They say it will make the rich pay their fair share. There’s one thing these government employees, organizations and labor unions should keep in mind. Many public employee retirement managers like CalPERS, and State teachers retirement managers like CalSTRS, and labor union pension accounts, invest heavily in California commercial real estate properties. What affects these properties will affect these retirement accounts. Further, these “big businesses” and the “rich” employee a great many people who don’t have retirement programs anything like the proponents. And don’t get confused that CalSavers is the silver bullet that is going to cure our retirement needs.
The Split-Roll initiative will have a bad impact on the average Californian. And, while it seems that the “fat cats” will be made to suffer, the ones affected most will be middle and lower-income Californians. Each of us has to make a decision as to how to vote. I caution everyone to take the time and do your homework AND to vote!