May 2019

42 MAY 2019 • WWW.AAGLA.ORG SOUNDING THE ALARM: ANew“Split Roll” Initiative Threatens Businesses and Jobs in California By Susan Shelley, Howard Jarvis Taxpayers Association Ever since Proposition 13 was passed with the support of nearly two-thirds of California voters in 1978, “reforming” Proposition 13 has been a high priority for the state’s powerful public employee unions and others who see California property owners as an untapped source of government spending money. They were trying to replace Proposition 13 before it even passed. Sharing space on the same ballot was a rival measure, a “reform” hastily cooked up by then Governor Jerry Brown and the Legislature in the hope of dissuading voters from passing the stronger reforms of Proposition 13. That measure, Proposition 8, would have created a “split roll” property tax. “Split roll” is a term for a property tax system that would allow higher taxes on businesses than on homeowners. The “roll” is the county assessor’s property tax roll, the list of all real estate parcels that are subject to property taxes. “Split” refers to a division of the list into different types of property, such as residential and nonresidential, or homes and businesses. In June 1978, California voters rejected the Proposition 8 “split roll” proposal by a margin of 53- 47, while Proposition 13 passed with nearly 65 percent of the vote. California has always had a single, unified property tax roll, going all the way back to the 19th Century. Proposition 13 did not change that, but it lowered the property tax rate to 1 percent from a statewide average of 2.67 percent, and it put new limits on annual tax increases. Gone were the periodic assessments to fair market value that had led to heart-stopping annual tax increases as real estate values skyrocketed. Under Proposition 13, properties are assessed when sold, and thereafter the assessed value may rise no more than 2 percent per year until the property is sold again. Any additions or remodeling are assessed at fair market value at the time of construction, and that portion of the assessment is also limited to a 2 percent maximum annual increase until there is a change of ownership. Proposition 13 did not define “change of ownership,” and after the measure passed, that issue was taken up by a 35-member task force appointed by the Assembly Revenue and Taxation Committee. The task force considered how to apply the change in ownership provisions of Proposition 13 to a property owned by a legal entity, such as a corporation or partnership. Two alternatives were considered: the “separate entity theory” and the “ultimate control theory.” Under the “separate entity theory,” a property would not be reassessed if it was continuously owned by the same legal entity, even if the ownership interests had been transferred. Under the “ultimate control theory,” assessors would look through the entity to determine who held the ownership interests and “ultimate control.” The task force recommended that the “separate entity theory” be adopted because of “monumental” administrative and enforcement problems in determining when control of a corporation or partnership had changed. But the Revenue and Taxation Code was changed to provide that whenever there is a change in control of more than 50 percent of the total ownership interests to a single person or entity, a change of ownership has occurred. There have been many proposals since that time for revisions of the law defining change of ownership. In 2015, Senator Patricia Bates (D-Laguna Hills), introduced Senate Bill 259, which would have defined a change of ownership as the sale or transfer in a single transaction of 90 percent or more of the ownership interests in a legal entity. Senator Bates’ proposed lawwould have prevented some large commercial properties from skirting reassessment by keeping all buyers under the 50 percent threshold of ownership. Her bill had the support of the Howard Jarvis Taxpayers Association, but it was ultimately blocked by those who hoped to “reform” Feature Story