A California ballot initiative to increase taxes on business properties has qualified for the 2020 election, setting the stage for a high-stakes fight over the so-called third rail of California politics, Proposition 13.
According to the secretary of state's office, as of October 15 random sampling had determined the ballot initiative (the California Schools and Local Communities Funding Act of 2018) had over 643,948 projected valid signatures, the amount necessary to qualify using that method.
The initiative would amend the state constitution to allow commercial and industrial properties and vacant land not intended for housing or used for farming to be taxed based on their current assessed market values. The initiative would exempt from market-value assessment property used by the owner to run a business, provided that "the total fair market value of all property owned by the taxpayer in the state on which the business operates is less than two million dollars." The measure would also exempt from property tax $500,000 of the value of a business’s personal property, and all personal property owned by businesses with less than 50 employees.
California’s 1978 landmark tax reform law, Proposition 13, capped the property tax rate at 1 percent — not counting some smaller local rates approved by voters — and based a property's taxable value on its purchase price, with an annual increase of the lesser of 2 percent or the rate of inflation, resulting in many properties being taxed at well below their actual values.
According to the Schools and Communities First campaign, which includes groups such as the League of Women Voters of California and the California Federation of Teachers, the state “can no longer afford to keep giving billions of dollars in tax breaks to millionaires, billionaires, and big corporations.” Creating a split-roll property tax “restores $11 billion for schools, community colleges, and other vital community services.”
The California Legislative Analyst’s Office projects that the split-roll proposal would generate roughly $6.5 billion to $10.5 billion in additional annual revenue, which would be divvied up between schools and local governments after the cost of enforcement was recovered and the estimated reduction in personal and corporate income tax revenue caused by the property tax hike was reimbursed to the state.
The Schools and Communities First campaign argued that the state shouldn’t provide the same property tax protections provided to homeowners to businesses, and that even with the proposed change, California commercial property taxes would still be among the lowest in the nation. Helen Hutchison, president of the California League of Women Voters, told Tax Notes October 17 that the property tax protections ushered in with Proposition 13 have for decades hurt the stability of state revenue by forcing California to rely heavily on volatile income taxes.
“From the league’s point of view, the major thing is we’re looking for a stable source of funding for services,” Hutchison said. “We have this huge variability.”
Hutchison said the measure's proponents believe it makes the most sense to tackle Proposition 13 reform by focusing on businesses, rather than homeowners. She also said that assessing commercial properties based on market value would not only generate additional revenue, but also create fairer competition.
“Residential property on average in California turns over once every 10 years; business property does not turn over as rapidly,” Hutchison said. The ballot measure “levels the playing field for businesses, so new businesses that are paying a higher property tax [amount] don’t have to compete with . . . established businesses” with artificially lower taxes based on outdated property values.
Tackling Proposition 13 reform is a big lift; the law is often referred to as the “third rail” of California politics. Hutchison said the initiative was the product of years of work, which include a canceled ballot campaign in 2015 and an unsuccessful constitutional amendment floated in the Legislature. She said their proposal had to be modified to address previously raised concerns, including “making sure that we defined residences as any place someone lives” to ensure the amendment didn’t accidentally drive up the cost of residential facilities that could be defined as businesses, such as nursing homes for the elderly.
Hutchison said the initiative was originally intended for the 2018 ballot, but that backers ultimately decided to wait until 2020. The campaign expects to be outspent, but “we’re confident we can win this one,” Hutchison said.
But the initiative's opponents, including Proposition 13's primary defender, the Howard Jarvis Taxpayers Association, have vowed to fight back.
“Our coalition in opposition has already been meeting, and we plan an extremely well-funded, aggressive campaign” featuring a broad coalition of businesses and taxpayer advocates, said Howard Jarvis President Jon Coupal. “I feel comfortable we will be able to defeat it.”
The initiative's opponents have argued against prior split-roll proposals by warning that they would adversely impact the cost of doing business in the state and result in higher prices and reduced employment. They’ve also said that a split roll could have unintended consequences for small businesses, many of which lease property from large business owners.
Coupal said split-roll proponents have previously highlighted a "loophole" allowing larger property owners to “break up” sales of property through various limited liability companies and partnerships so that a single owner never takes over a majority of the property, allowing the property to not be reassessed. He said that despite Howard Jarvis's effort years ago to fix that workaround legislatively, split-roll proponents scuttled the effort to keep the loophole as a talking point.
“We have always been willing — the business community and the taxpayer groups — to look at some very minor changes,” Coupal said. “But I don’t think these people want [that] . . . they’re going to go full-blown split roll.”
Coupal said in addition to fighting the measure, the association may introduce its own initiative, but declined to provide any details.