Even in a strong economy, proposing the largest property tax increase in California history seemed ill-advised. Now, coupled with the impacts of the COVID-19 pandemic and a national recession, it seems untenable.
Yet, proponents of a California split-roll tax initiative—estimated by state analysts to raise commercial property taxes by an astounding $12 billion per year—have waged a multiyear, multimillion-dollar campaign to push a November statewide ballot measure, and they show no signs of slowing down. Fortunately, they are being met by a broad and bipartisan coalition of business, community, civil rights and social justice groups that are lining up to oppose the tax hike and citing concerns about a rising cost of living for families and an increased burden on small businesses already fighting to stay afloat. And, while California’s property tax system may be unique among the 50 states, the measure, if adopted, would have ramifications and provide a negative precedent for the rest of the country.
This massive showdown surrounds an initiative (Proposition 15) that proposes to dismantle long-standing property tax protections, opening up the certainty of stunningly large tax increases. It would require reassessments of office and industrial properties, creating a split-roll tax because it would separate commercial from residential property in its treatment by the state.
Supporters have reported raising millions of dollars toward the initiative, buoyed by broad support for funding schools, although the actual outcomes of the measure are debatable at best.
The state’s existing property tax protections, well-known in California as Proposition 13, were overwhelmingly passed by state voters in 1978, a time when many Californians were being forced from their homes, farms and businesses because they couldn’t afford massive increases in their property taxes every year. This led to bipartisan support for property tax reform, and nearly two-thirds of voters passed Prop 13 to cap property tax increases for residential and business assets and provide some degree of certainty for future property tax bills. Specifically, Prop 13 limits annual increases in property taxes to 2 percent per year until an asset changes ownership, preventing sharp increases, which is especially significant in a state where property values can rise quickly.
INITIATIVE DETAILS
If passed, the ballot measure would be devastating to the state’s commercial real estate industry and small business sector, and it would trigger painful effects for family budgets and the community at large. Following are a few key arguments against the measure:
- Supporters of the measure point to increased funding for schools, but only 40 cents of every new tax dollar would go to school districts, while 60 cents—the majority—would go to local governments with no strings attached. And, this is only after administrative expenses to implement the measure are paid, which are estimated to be enormous.
- While the effects of the COVID-19 emergency on state and local budgets will be pronounced, California is in a stronger position than many states. Over the past 10 years, the state has had an unprecedented run of economic growth, millions of jobs have been added and state lawmakers have opted to build a rainy day fund. In 2019, California had a budget surplus of $21 billion, making the plea for new revenue ring hollow. If the schools are in need of money, many observers cannot help but believe the problem revolves around spending, not revenue.
- Proponents claim the measure provides protections for small businesses, and that they would not face tax increases. But, the proposition defines the term "small business" so narrowly that it is effectively impossible to meet the definition. Additionally, many small businesses rent the property where they operate and have lease agreements to pay property taxes. The tax hike would mean skyrocketing rents at a time when governments are trying to provide relief to small businesses. The increase would then force many small businesses to make difficult decisions, including raising consumer prices, laying off employees, moving out of state or even shutting their doors.
- The initiative also would be a nightmare for local governments to implement and administer. According to the California Assessors’ Association (CAA), it would create more than a billion dollars in new administrative expenses over three years, which must be paid first before any new tax revenue can go toward the initiative’s stated purpose. These costs include assessment, appeals, legal counsel, auditing and enforcement. County assessor offices, which already face hiring difficulties given the job’s required level of expertise, would need to hire and train as many as 900 new appraisers and support personnel, and do so quickly.
As opposed to these numerous hurdles, the existing Prop 13 protections provide certainty to every taxpayer who buys real estate, guarding them from runaway property taxes that could force many to sell their homes or lose their businesses. Prop 13 also creates stability and predictability for local governments, which helps them plan for the future.
REASON FOR OPTIMISM
Here’s the good news: A vast coalition—Californians to Save Prop 13 and Stop Higher Property Taxes—has formed to push back against the ballot initiative. The group includes the California Business Properties Association and BOMA California, both of which have helped lead the way in forming an effective opposition campaign. In fact, all BOMA local associations in California also have made commitments to raise funds and support the effort. In addition, BOMA International has committed $100,000 through its Industry Defense Fund (IDF)—the largest award in the history of the IDF—signaling how important this fight is to the broader industry.
The list of coalition members is long and includes varied interests, ranging from civil rights and veterans groups to associations, which represent everything from small businesses to agriculture. Even the CAA voted to oppose the measure, citing serious concerns about the feasibility of its implementation and doubting that it would achieve its stated goals.
While defeating the measure will be difficult—it only needs a majority vote to pass—there are several reasons to believe victory is possible.
First, the opposition coalition against Prop 15 continues to grow and cites several encouraging signs, including polling that reveals surprisingly weak support for the initiative and demonstrates that basic explanations of the counter arguments have a profound impact. The coalition also believes that Californians are wary of tax increases generally; they understand how a tax increase on commercial real estate would eventually pass on costs, and they justifiably fear that this attack on commercial properties opens the door to lifting protections on residential properties.
In addition, the measure’s proponents tipped their hand that they fear a difficult battle, opting to undertake the highly unusual step of withdrawing their original proposal after it had already qualified to appear on the ballot and replacing it with a substitute. The original measure ran into serious concerns—despite the unassuming title, California Schools and Local Communities Funding Act of 2018—so organizers spent millions of dollars to start the process over again. While they gathered enough signatures to get it back on the ballot, the new revisions, ostensibly providing additional small business protections, have proven unconvincing, while estimates of the tax increase actually have grown.
Finally, opponents can point to the defeat last year of Measure EE in Los Angeles, a ballot initiative that would have raised local property taxes to benefit the city’s public schools. Despite widespread understanding of school district needs, the tax increase was soundly rejected as the solution, garnering only 46.3 percent of the vote despite needing a two-thirds majority to pass.
No matter how well-intentioned, the split-roll ballot measure is clearly, painfully, the wrong solution. Unless defeated by voters, it will trigger the largest property tax hike in state history and will devastate California businesses already struggling to keep their doors open.
As the economy tries to rebound, unfettered increases in property taxes would crush economic growth, eliminate jobs and harm families across the state. If property values stay depressed, the measure would raise far less revenue than predicted. Understandably, some Californians are starting to call this ballot initiative a "no-win proposal."
Visit the coalition website at www.StopHigherPropertyTaxes.org for additional information.
This article was originally published in the July/August 2020 issue of BOMA Magazine.