Three Unintended Consequences of a Property Tax Increase

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Last week I delved into a subject best discussed in private - politics. Specifically - taxes and your tenancy. I weighed in on a proposed ballot initiative which - if passed - would split the property roll. Known as the California Schools and Local Community Funding Act - the proposal would tax commercial and industrial properties differently than those zoned for agriculture and residential uses. Local communities and schools would benefit.

UPDATE - As of August 12, 2019 - the authors of the proposition - which qualified for a spot on the November 2020 ballot - have removed the plan in favor of one with a few tweaks. From my review - it appears any commercial or industrial property with an assessed value of less than $3,000,000 and at least 50% of the property occupied by the owner will now avoid re-assessment. The previous text exempted fully Owner Occupied commercial and industrial spaces with an assessed value of less than $2,000,000. Now - petition signatures are needed for ballot qualification.

You may be thinking - so what? Large commercial property owners should pay their fair share. Why should a large corporate entity benefit from a property tax “loophole”? Maybe. But let’s consider - for a moment - the potential consequences of a revised levy. By the way - three companies paid a collective $185,481,000 in property taxes for the fiscal year 2018-2019 - close to 3% of the total secured property taxes billed in Orange County! Can you guess who they are?

Unintended consequence number one. The two largest property tax payers also employ close to 34,000 people. Next in line adds another 13,000 paychecks and is corporately based in Los Angeles County - so it’s tough to surmise how many reside in the OC. Suffice it to say - quite a few. If property taxes on these three are re-written to current market values and the “loophole” closed - thus raising the cost of doing business - will new investment and hiring be curtailed? Who cares? Certainly businesses who sell to these large corporations - contractors, food suppliers, material handling companies. And those who rely on paychecks from these companies to rent housing or service debt, buy groceries, fund college educations, pay medical bills, attend sporting events, eat in restaurants, stay in hotels, etc - all huge drivers for our local economy.

Unintended consequence number two. Over 1% of the total property tax receipts come from a large investment concern whose operations rely upon rents from its holdings. Guess where that property tax increase will fall? Yep! On the backs of the many tenants whose leases contain provisions for such a tax pass-through. So? Well - the CPA who prepared your tax return, the attorney who drafted your will, that department store where you rented your tux, and your favorite dining spot for date nights could rent from this owner. His costs will have to be recouped somehow. I wonder where? Probably with increased charges to you.

Unintended consequence number three. Companies with fewer than fifty employees - whether they lease or own the business property they occupy - will get an exemption from the unsecured property tax they pay. Machinery, fixtures, and equipment used in the operation of the company are taxed similarly to real property - 1% of their assessed value. A manufacturing company with a ton of CNC machines, injection molding equipment, or drill presses might opt to automate vs hiring new folks - especially if their head count is at or near fifty. Look at it this way. An employer could automate - thus reducing his need for workers plus get a tax break from the automation equipment he buys.

I certainly hope you invest some time to fully understand this ballot proposition and the potential consequences it can create.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.com.