California’s business climate is well-known for being unfriendly. CEO Magazine has rated California as the worst state in which to do business for more than eight years running.  Undoing Proposition 13’s provisions, as is currently being proposed, will make a big problem even worse by increasing taxes on the very businesses that create jobs and contribute to our economy.  

California small businesses failed at rates 69 percent higher than the national average in 2011.  Of the top five metropolitan areas for small business bankruptcies, four are in California.  We also struggle with one of the highest unemployment rates in the nation and have a higher poverty rate than Mississippi.  Yet despite these figures, Sacramento politicians think now is the time to make it more expensive to run a business.  Proposals to increase business property taxes threaten to make it even tougher for the tens of thousands of small businesses in this state to hire workers and contribute to their local communities.  

How it works:

In 1978, California voters passed Proposition 13.  That was when the average property tax rate in California was more than 2.6 percent of the market value.  Not only that, but there were no limits on either the tax rate or increases in taxable value.  As a result, homeowners were faced with skyrocketing property tax bills. For some homeowners, losing their property became a reality because they couldn’t afford a doubling or tripling of their property taxes.

Despite all the myths surrounding Prop. 13, it is actually quite simple.  First, it sets a uniform 1 percent property tax rate cap on all California property.  Second, and just as important, it limits increases in the assessed (taxable) value to no more than 2 percent a year.  Third, it permits a reassessment of the property to full market value when it is sold.  

Prop. 13 benefits property owners and local governments. Property owners — both homeowners and businesses — are now afforded a great deal of certainty in their future property tax liability.  For local governments, the benefit is a tax stream far more stable and less volatile than either income or sales taxes. Revenue volatility has been identified by tax experts as the worst problem with California’s tax structure.  

Despite all the good policies advanced by Prop. 13, California lawmakers and special interests are looking to reverse some — if not all — of Prop. 13’s protections. One proposal is a “split roll” property tax that would raise property taxes on business properties, causing a devastating setback to California’s economic recovery.

Small biz can’t afford higher taxes

A 2012 study by Stephen Frates and Michael Shires at Pepperdine University’s Davenport Institute showed that dismantling Prop. 13’s landmark protections for business properties would cost California families and businesses $6 billion and 396,345 jobs over the first five years.  It would disproportionately hurt small businesses, especially those owned by women and minorities.

We are extremely concerned about a so-called split roll when many businesses are already operating on thin profit margins.  Just like homeowners, businesses benefit from consistent and predictable property taxes because it gives them the ability to plan for the future.  

Also, many people forget that most small businesses rent their spaces and don’t own the property.  However, they are far from immune from property tax increases.  Most leases held by small businesses include provisions requiring them to pay the property taxes associated with their facility, and they simply can’t afford to absorb these costs.  

What should change:

While Prop. 13 needs no alteration, the same may not be true for some of the implementing statutes.  During the 2014 Legislative session we reached out to Lenny Goldberg, who represents the California Tax Reform Association, to find common ground in Assembly Bill 2372 (Ammiano, D-San Francisco), a common-sense approach to fixing a statute that allowed — contrary to the intent of Prop. 13 — some clever lawyers to avoid reassessment of property even when it had fully changed hands among owners.  Unfortunately, an isolated fix to a problem that all parties agreed needed to be addressed was not the full blown split roll that the tax-and-spend interests are holding out for.  Even though Mr. Goldberg initially joined us in supporting the bill, he was forced to change his position to oppose. So much for compromise.

Although lawmakers think that now is the time to revisit Prop. 13, California voters do not. A recent PPIC poll shows that Prop. 13 is still supported by 64 percent of likely voters. Not only is Prop. 13 popular in California, several states throughout the country have followed in California’s footsteps by enacting their own property tax reforms, including Arizona (2012), New York (2011) and Florida (1993).

At a time when Californians are finally starting to bounce back from a devastating recession, making changes to Prop. 13 in order to increase property taxes on homeowners and business owners would only stop that recovery dead in its tracks.  

This piece originally ran as a web exclusive in November. Comments made at the time are still available here.