Introduction
The primary objective of this term paper is to examine the intended and unintended consequences of the Split Roll taxes in California. Also, the term paper will address how commercial and residential property owners will bear the costs of Split Roll taxation system. Finally, I will offer alternatives to the Spilt Roll taxes and why I think they are ideal choices.
I don’t support the Split Roll taxation since it would treat commercial property unfairly. Leaving out residential property in the current taxation system is not ideal since all individuals should be subject to a standard tax system. Also, the proposal would affect the California economic growth in the long run. The economy of California may be less competitive in the international market if the prices of goods and services are high. I suggest that the administration should seek other forms of taxation to ensure fair taxes while providing relief to the low-income earners.
Proposition 13 – Split Roll Taxes
California uses the Proposition 13 tax system which came into effect in 1978 (SPLIT ROLL PROPERTY TAX,” 2013). Under this taxation system, the constitution doesn’t discriminate between commercial and residential property. These lie under the same tax bracket, and the same policies are employed in determining the value of assets that should be taxed. Hence, Proposition 13 doesn’t bar individuals market from using their land for productive purposes.
Taxpayer groups continue to advocate for the elimination of Proposition 13 and implementation of the Split Roll. The Split Roll seeks to tax commercial properties heavily than the residential properties. The primary concern for those who propose the elimination of the Proposition 13 is that different taxation policies should govern domestic and commercial properties.
Intended and unintended consequences
Intended Consequences
Fairness in taxation
Implementation of the Split Roll Tax system will lead to fairness since commercial properties will pay higher taxes than residential owners. Under the Proposition 13, there is no fairness in taxation since 72% of taxes are paid by individuals who own residential properties while business owners only pay 28% (A SPLIT ROLL PROPERTY, 2015). Hence, the burden of high taxes will be shifted to business owners who realize huge revenues and profits. The residents who earn low incomes will have a chance to improve their living standards due to the decrease in taxation.
Increased revenue for the California government
The government of California will realize increased revenue since owners of commercial properties will pay high taxes. Thus, the state will be in a position to invest in the provision of social programs and services. The state will be more stable since it will have more money at its disposal.
Increased investments and developments
Individuals who own undeveloped land will tend to develop their property because they will be required to pay high taxes. Also, the increase in rents may appeal property owners to improve their properties in a bid to enjoy increased profits. Potential investors may also invest in California since they are sure of higher returns.
Rise of commercial zoning
Implementation of Split Roll taxation system will encourage individuals’ to put their land to commercial use instead of personal purpose since they are sure of high revenues. People who use large tracks of land for personal purposes will shift to commercial leading to more development.
Unintended consequences
An increase in tax affects business adversely, and most business people seem to avoid high taxes. A 1% raise in state tax would lead to a 0.25% to 0.31% decrease in the economic activities (Alberro & Hamm, 2008). The reduction in economic activities would consequently result in high rates of unemployment. In California, a 1% rise in tax rates would lead to losing of approximately 43, 000 jobs (Alberro & Hamm, 2008). However, the effect of tax increase for the commercial property depends on how the business can transfer the tax burden to the customers. Additionally, the impact may vary depending on how the company passes the tax burden to workers through low salaries. Businesses that are not able to adapt to the state’s taxation system may alter their operations or even shift to other places where tax schemes are fair. It’s clear that business persons will likely avoid the Shift Roll taxes by shifting the burden to their employees and customers. The unintended consequences of the Split Roll Tax system would be;
High rents
The Split Roll taxation system would significantly affect families and other individuals through high rents. Ideally, a rise in commercial property taxes will be directed to the individuals who rely on rental houses. “Triple net leases” is the direct way through which property owners will shift the burden of taxes to renters. Also, the fact that rent rates are way below the market rates would justify the increase in rent. The reluctance of commercial property owners to raise rent due to the fear that they would lose loyal tenants to competitors will debilitate because all property owners will tend to charge the same amounts. The residents of California, who earn low incomes, will bear the high taxes since they tend to live in rental property.
Reduction in investments and fewer jobs
Since the increase in tax would be passed to business owners through high rents, they will not have sufficient capital for investment. Also, California business owners will have insufficient funds to re-invest in their operations. In some cases, potential investors may fail to invest in California due to the high tax rates. Few or lack of investment means decrease in job opportunities. Some firms may even retrench their employees as a way of cutting down the cost of operation. In the long run, workers will migrate to other states to search for better employment opportunities.
Reduction in salaries
High taxes on the commercial property will increase the cost of operation for the businesses in California. In turn, the business owners will shift the burden of taxes to employees through reduced wages. High taxes will also lower the productivity of business which may force most companies to cut salaries. Reduced salaries will enable the business to keep up with the taxes and still be in a position to purchase inputs.
Increased prices of products and services
The prices of products and services should cover the cost production including taxes, cost of labor and raw materials. Thus, an increase in taxes will force the business to shift the burden to consumers through increased prices. Some consumers may cut their expenditure when the prices of products are high or spend more on essentials. The economy would be adversely affected because the high prices of goods will make California less competitive (SPLIT ROLL PROPERTY TAX, 2013). Ideally, Split Roll would make California less competitive in the international market.
Hurts Retirees
If even business shifts the burden of high taxes to consumers, renters and employees, the California economy will still be affected. Retirees who have invested their fund in California will be affected negatively when the value drops. In 2012, the retirees had invested about $5.3 billion in property (SPLIT ROLL PROPERTY TAX, 2013). In case the Split Roll system is adopted, this value will decrease negatively affecting the retirees.
How the benefits of the taxes are shared
If the Split Roll taxation system is implemented, the California state will realize increased revenue. The government will have more money to invest on development, provision of social services and to support security programs. Hence, low-income earners will benefit more from the increased taxation of the commercial properties. People who face unemployment will also be beneficiaries of Split Roll taxes since they will receive compensations.
Who will bear the largest burden?
Small business owners will bear the biggest burden since they tend to rent operation spaces. The increase in tax can also lead to failure and closure of the small businesses. Some small business owners may also shift to other states where operational cost is low. Consumers will also bear the high taxation through high prices of goods and services. Additionally, employees may face retrenchment or pay cut due to increased taxes. That is because companies will strive to stay in business while still earning significant revenue and profits. The business owners are less likely to bear the high costs due to increased taxation. Some businesses may even close their operation in a bid to evade the increased taxes.
Alternatives to split roll taxes
California can use other techniques to lower taxation of the residential properties rather than Split Roll. For instance, homestead exemption offers tax relief to low incomes earners since it reduces the taxable value. Under this taxation system, residential property owners will face fairness in tax payment. Further, the administration can establish “circuit breaker” to lower the amount of tax for individuals who own earn low wages (Institute on Taxation and Economic Policy, 2007). These two alternatives are great choices if California wants to avoid the severe consequences of the Split Roll taxation system. Also, the government of California will realize increased revenue if it uses these tax schemes. Also, it will be at to invest in the provision of social services. Most importantly, the administration should seek to create tax reliefs other than shifting the burden to the business owners.
Conclusion
I don’t support the Split Roll taxation system since it will adversely affect the consumers and employees. The high taxes will be passed to the consumers in the form of high prices of products and good. Also, employees may be retrenched, or get a pay cut as the businesses strive to stay in operation. In worse situations business will shift to other states where the cost of running is small. Retirees will also be affected adversely when the value of their investments decreases. However, California may realize positive results from the Split Roll system. Some of the intended impacts include increased investments, government revenue and the shift of residential land to commercial utilization.
“Homestead exemption” and “circuit breaker” are the best alternatives to Split Roll. These options will offer relief to low-income earners without shifting the burden of taxation to business people. Nevertheless, if the administration is concerned with establishing fairness in taxation, the Split Roll system may be ideal.
References
Alberro, J., & Hamm, W. G. (2008). The economic effects of California adopting a split roll property tax. Retrieved from <http://cbpa.com/documents/split_roll_final_report.pdf>
A SPLIT ROLL PROPERTY TAX PRIMER: TAX & FISCAL FACTS. (2015). . Retrieved from http://www.caltaxfoundation.org/reports/20150709-SplitRollPrimer.pdf
SPLIT ROLL PROPERTY TAX. (2013). . Retrieved from <http://www.caltax.org/SplitRollFactSheet.pdf>
