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HomeMy WebLinkAbout06 - Prop 13 and Split RollCITY OF °� mz NEWPORT BEACH C9C /Fp0.N`P City Council Staff Report Agenda Item No. 6 February 11, 2014 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: City Manager's Office Dave Kiff, City Manager 949 - 644 -3001, dkiff @newportbeachca.gov PREPARED BY: Dave Kiff, City Manager APPROVED: TITLE: Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll ABSTRACT: Proposition 13 was approved by California voters in 1978, adding Article 13A to the California Constitution. It fixed property tax rates at 1% of the full cash value of a property and fixed increases in property taxes to 2% per year unless re -set by a change in ownership or completion of new construction. Since 1978, various groups have defended Prop 13 aggressively as well as attempted to change it. The Howard Jarvis Taxpayers Association is a major defender, and the California Tax Reform Association is a group attempting to change it. The latter group sometimes proposes "splitting the rolls" — meaning asking the voters to amend Proposition 13 to allow commercial properties' taxable value to increase on a regular, periodic basis (without sale and based on market values, generally) while residential properties would remain fixed at up to a 2% increase per year. RECOMMENDATION: Adopt Resolution No. 2014 -15 expressing support for Proposition 13 and opposition to efforts to split the property tax rolls so that commercial properties are re- assessed differently than residential properties. FUNDING REQUIREMENTS: There is no fiscal impact associated with the adoption of this resolution. Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 2 IM9111 *4t37�F This staff report will not spend extensive time discussing either Proposition 13's roots or its benefits and consequences since 1978. Readers tend to be familiar with what the voter- approved constitutional amendment does. In summary, Proposition 13 (generally): • Limits property taxes on commercial and residential property to 1 % of the property's base year value; and • Limits increases in a property's assessed value (for tax purposes) to up to 2% per year. Proposition 13 is often called the "Third Rail" of California politics, given the benefit it provides to residents — especially older Californians and persons on fixed income — who reside in areas where the market value of properties significantly increase in any one period. In effect, proponents say it has "kept people from being priced out of their homes." Business officials would say the same thing about Proposition 13 and its effect in keeping commercial property taxes low and predictable. Given what can be dramatic increases in property values in Southern California, it's also said that Proposition 13 "gains new advocates every year" each time a person or family purchases a new home and that home's taxable value is locked in to at most a 2% annual growth rate. Various efforts have been made since 1978 to amend Proposition 13 to address what others believe are inequities within it. The inequities suggested include: • Persons living in nearly identical houses, even sitting next to each other, can pay different property tax amounts depending on how long they have owned the homes. • A business or commercial property can change ownership differently than a residence. For example, if not more than 50% of ownership changes hands in a transaction, that transaction does not trigger a reassessment of commercial property for tax purposes. • Some allege that the complexity of business transactions has led to fewer business property tax reassessments than there would otherwise be, leading to a shift in the property tax burden from businesses to residences. A recent LA Times commentary said that homeowners in LA County once paid 40% of all property taxes, but in more recent times they pay 57 %. The proposed changes that some have advocated include: 4 Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 3 • Reassessing commercial property on a more regular basis instead of linking reassessments to changes ownership. This is referred to commonly as a "split roll ". • Redefining what it means to change business ownership (see the LA Times commentary in the attachments for more information). • Recapturing "lost" property taxes when a property sells (tax recapture on sale). All of the above would require a voter amendment to Proposition 13. Amendments have occurred over time to Prop 13, but generally to assist property tax payers further — such as Prop 60 (1986) which allowed persons over 55 to transfer their assessed value to a replacement home if that home is of equal or lesser value. The Newport Beach City Council has weighed in on the issue of a Split Roll recently before, and the current Legislative Platform (amended and adopted via Resolution No. 2013 -19 on February 12, 2013) states as follows: BAs a part of a comprehensive reform package, the City W411 support changes in the State -Local fiscal relationship if the changes maintain or improve revenues to local governments, promote local discretion on land use decisions, and result in the long -term stability of local government revenue sources. E_400000se actions to chance 1978's Proposition 13, includino the development of a "split roll" prooertv tax valuation system. F-.LcIlSupport legislation that reforms California's tort system to curtail unreasonable liability exposure for public agencies and restore the ability of public agencies to obtain affordable insurance. This agenda item would call out the City Council's support of Proposition 13 more directly, at a time when Sacramento officials and advocacy groups such as "Evolve - ca.org" may be more active regarding the Split Roll. ENVIRONMENTAL REVIEW: Staff recommends the City Council find the adoption of this resolution is not subject to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. K Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 4 NOTICING: This agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers this item). Submitted by: : .. A DcWe Kiff City Manager Attachments: A - Resolution No. 2014 -15 B - Two January'14 Commentaries — HJTA and LA Times Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 5 RESOLUTION NO. 2014 -15 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH, CALIFORNIA EXPRESSING SUPPORT FOR PROPOSITION 13 AND OPPOSITION TO A SPLIT ROLL PROPERTY TAX APPORTIONMENT WHEREAS, on June 6, 1978, Proposition 13, officially titled the "People's Initiative to Limit Property Taxation," and popularly known as the "Jarvis -Gann Initiative," was overwhelmingly approved by California's voters, reducing property tax rates on homes, businesses and farms, and capping the rate of increase in the future; WHEREAS, prior to the adoption of Proposition 13, California's high rate of inflation had sent property tax bills in California soaring, causing many families to sell their homes because they could not afford to pay their taxes; WHEREAS, prior to the adoption of Proposition 13, property tax assessments showed wider divergences than assessment disparities under the current acquisition - value system; WHEREAS, with the approval of Proposition 13, real property values were adjusted to a base value equal to the 1975 -1976 assessed value of that real property, thereby introducing an objective standard upon which real property would be taxed and ending the previous subjective standard for assessment that engendered the property tax assessment abuses that occurred in the 1960s and 1970s; WHEREAS, with the passage of Proposition 13, California taxpayers, for the first time, were provided a measure of certainty with respect to their property taxes; WHEREAS, following the passage of Proposition 13, the average homeowner has saved tens of thousands of dollars in property tax payments, money that was instead spent to grow the economy, create jobs and foster economic development; WHEREAS, following the passage of Proposition 13, renters also benefitted as the reduction in property taxes reduced upward pressure on rents; WHEREAS, the volatility of income and sales tax revenue to the state and local governments is a major flaw in California's tax system, while Proposition 13 has rendered California's property taxes as a stable and predictable source of public revenue, even during economic downturns, which has provided a major benefit to local governments throughout California; Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 6 WHEREAS, since the passage of Proposition 13, proposed alternatives to Proposition 13 would have had a variety of unwelcome effects, including substantial tax increases for low- income and elderly homeowners; WHEREAS, voters intended Proposition 13 to protect all property owners, and have repeatedly rejected previous attempts to impose higher taxes on small businesses, knowing that these so- called "split roll" proposals would inflict irreparable harm on California's economy; and WHEREAS, Proposition 13 has become a nationwide symbol for taxpayer revolt and for citizens exercising control and power over their governance. NOW, THEREFORE, the City Council of the City of Newport Beach resolves as follows: Section 1: In recognition of the positive impact Proposition 13 has on the State of California, we formally reaffirm our support for Proposition 13 and the benefit that it provides to individual homeowners, renters, local governments and to the state's overall economy. Section 2: We further restate our opposition to any effort to split the tax rolls between commercial and residential property so that commercial property is reassessed at market value on a period basis versus only on change of ownership Section 3: The recitals provided in this resolution are true and correct and are hereby incorporated into the substantive portion of this resolution. Section 4: This resolution shall take effect immediately upon its adoption by the City Council, and the City Clerk shall certify the vote adopting this resolution. ADOPTED this 11`h day of February, 2014. Rush N. Hill, II Mayor ATTEST: Leilani I. Brown City Clerk n Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 7 Attachment 8 Howard Jarvis Taxpayers Association — January 20, 2014 Undermining Prop. 13: The Beat Goes On January 20, 2014 - By Jon Coupal A handful of far -left, Bay Area activists think they have come up with a clever plan to chip away at Proposition 13. Specifically, they are attempting to persuade local school boards and city councils to pass resolutions in support of removing Prop 13 protections for business property. While "resolutions" are not laws, they nonetheless can lay the groundwork for future political action. To bolster their argument in favor of higher taxes on businesses, these activists falsely claim that homeowners are paying a greater percentage of the total property tax today than they were when Proposition 13 passed 36 years ago. In fact, the percentage paid by non- homeowner occupied property accounted for 58.16 in 1978 -79 and has increased to 60.26 percent of all assessments in 2011 -12, which means the percentage paid by homeowners has declined. They further justify the increase in property taxes they advocate by saying that Proposition 13 has decimated education while ignoring that, after adjusting for inflation, California is spending 30 percent more per pupil than prior to the passage of the landmark taxpayer protection. Apparently unimportant to the radical activists is that a system where business pays more (called a "split roll" property tax) would result in a loss of nearly 400,000 thousand jobs and a reduction of billions of dollars in economic activity, according to a recent Pepperdine University study. Of course, the hardest hit by this proposed change in our property tax system would be small businesses and owners of residential rental property -- renters could be expected to see an escalation in their rents. For homeowners, higher taxes on commercial property would also be bad news because if business no longer is invested in protecting Proposition 13, homeowners would have to stand alone against the attack. When it comes to protecting Prop 13, there is surely strength in numbers. A massive tax increase on business property would be counterproductive. As Howard Jarvis used to say, business does not pay taxes, we pay their taxes through higher prices. The best way to generate more revenue in our already high tax state is to encourage the private sector to prosper, adding jobs and improving the quality of life for all Californians. Rather than tearing down Proposition 13, those concerned about our state's future would do better to build on the foundation Proposition 13 represents. Proposition 13 not only protects property owners from unpredictable tax increases, but the certainty in taxation allows both home and business owners to spend and invest in ways that boost the economy. Even without the increased economic activity, a portion of which is captured by taxation, the Proposition 13 system provides local government with its most stable source of revenue. Proposition 13 is like a goose that that lays golden eggs. The problem is not the goose, but the predators who want to eat it. Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 8 Los Angeles Times – January 29, 2014 George Skelton, Capitol Journal SACRAMENTO — Are California voters ready yet to change Proposition 13 so that all corporations pay their fair share of property taxes? A new nonpartisan poll indicates they might be. But a better, more relevant question is whether any state political leader — namely a governor —is courageous enough to lead the charge. Answer: Of course not. Gov. Jerry Brown told me five years ago, before he was elected to a third term as governor, that "messing with 13 is a big fat loser." Clearly he hasn't changed his mind. That's despite the fact that Brown currently has political capital to burn, according to the same poll that found voter sentiment for updating the 36- year -old, landmark property tax - cutting initiative. A survey by the Public Policy Institute of California, released Wednesday night, showed Brown enjoying record popularity, at least for his elder statesman phase in Sacramento. Brown's job performance is approved by 60% of likely voters. Only 32% disapprove. The governor is seeking a fourth term, although he hasn't announced it. It's looking like a blowout reelection win. In a hypothetical fall matchup with hard -right Republican Tim Donnelly, a state assemblyman from the Lake Arrowhead area, Brown runs 36 percentage points ahead -53% to 17 %. Another Republican contender, former U.S. Treasury official Neel Kashkari, hadn't formally announced his candidacy when the survey began. In the same poll, the Legislature also records relatively decent marks -33% approval among likely voters — especially when compared to Congress' 15 %. "People right now are thinking that things are going pretty well in California compared to their feelings about Washington," says Mark Baldassare, the policy institution's president and pollster. But it's conventional wisdom that Brown and the Legislature wouldn't be faring so well in public opinion if they were tinkering with Prop. 13, the feared "third rail" of California politics. Never mind that this governor —with legislative acquiescence —has been pushing unpopular high -speed rail and getting away with it. Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 9 Baldassare's poll found that 59% of likely voters favor taxing residential and commercial properties differently —a so- called split roll. Even 43% of Republicans are OK with it. The notion is approved by all age and income groups, including homeowners. But that sentiment has been relatively steady for years, and Baldassare says he's a political realist. If any group made a serious effort to tweak Prop. 13, it would be bombarded unmercifully by anti -tax zealots and the business lobby. Old people would be warned of a slippery slope that could result in the assessor taxing them out of their homes —even if residential property was untouched by a Prop. 13 modification. "It would be a difficult campaign to run," the pollster says. Baldassare specifically asked voters about taxing commercial property at its current market value, as it was before Prop. 13 passed in 1978. That measure allowed for significant reassessments only when property changed ownership. And it's too easy — especially for corporations —to construct purchases of commercial property so that the real estate technically doesn't change ownership. For example, a partnership owns an office building. New people buy into the partnership, but if they don't purchase more than 50 %, it doesn't trigger a reassessment of the real estate. Actually, it's all very murky and generates a lot of law business. A classic case was computer magnate Michael Dell's agreement in 2006 to pay $200 million for the Fairmont Miramar Hotel, a beachfront landmark in Santa Monica. By bringing his wife and two investment advisors into the deal —with no person owning more than 50 % —he was able to avoid reassessment and keep the property's assessed value at $86 million. The way Prop. 13 is supposed to work —and does for homeowners —taxes are based on 1% of a property's purchase price and can rise no more than 2% a year. Because of Prop. 13, the property tax burden has steadily shifted from businesses to homeowners. In Los Angeles County, homeowners used to pay 40% of property taxes. Now they kick in 57 %. Assemblyman Tom Ammiano (D -San Francisco) tried to alter the law last year to assure that business property was reassessed when, in fact, it changed hands. The lawmaker hoped Prop. 13 was no longer "the untouchable third rail," he told me, but "more like the bad guy with the mustache who has tied California to the rails with the fiscal train wreck coming." Not in the state Capitol. Ammiano's bill barely passed the Assembly, then died in the Senate without a hearing. He has given up on the legislation. Resolution No. 2014 -15 Expressing Support for Prop 13 and Opposition to a Split Roll February 11, 2014 Page 10 "The political climate is death for anything that gets close to Prop. 13," says Ammiano's spokesman, Carlos Alcala. "This is his last year [because of term limits], and he wants to work on something that can get done." Lenny Goldberg, executive director of the California Tax Reform Assn., has been pushing for years to modify Prop. 13 and close the corporate loopholes. "We're trying to organize, educate and expose what's really happening," he says. "We're developing data and looking at some of the largest landowners in the state. If it turns out people don't care, they don't care." "My modest goal is to get it out front and center so people can have a discussion and not avert their eyes." The poll shows that voters are willing to be led into updating Prop. 13. Too bad there are no leaders. george.skelton@latimes.com Copyright @ 2014, Los Angeles Times 10