An initiative to increase commercial property taxes in California will likely be included on the November ballot, but it’s unclear what effect the COVID-19 pandemic will have on the measure’s chances.
Backers of the California Schools and Local Communities Funding Act of 2020 submitted more than 1.7 million signatures earlier this month, likely more than enough to ensure the initiative receives the 997,139 verified signatures it needs to qualify for the ballot.
Alex Stack with Schools and Communities First, the campaign behind the initiative, told Tax Notes April 21 that he believes voters will support the measure. “Honestly, we need this now more than ever,” Stack said. He noted that the pandemic has stressed state and local government budgets and suppressed tax revenues.
“You look across the state, and a lot of these city and county and school district budgets . . . are going to be pretty drained,” Stack said. The pandemic “has pretty much put this into focus” that “we can’t afford these corporate tax loopholes,” he added.
The initiative would increase property taxes on businesses by roughly $12 billion annually through amending the state’s constitution to require commercial and industrial properties to be assessed based on their market value rather than under the rules approved via 1978’s Proposition 13. The initiative would help increase funding for public schools and community colleges, as well as local governments.
Backers include education supporters, public sector unions, and progressive groups that have long been critical of Proposition 13, which requires property tax to be assessed based on a property’s most recent purchase price — or its 1975 value if it hasn't been sold since Proposition 13 passed — with an allowed annual increase to the property's taxable value, capped at the lesser of 2 percent or the rate of inflation.
The initiative is effectively an amended version of the proponents' existing ballot initiative to tax commercial and industrial properties on their fair market value, which qualified in 2018. However, the new initiative differs from the original measure in several ways and, if qualified, would replace it in the November election.
The initiative includes an exemption for residential and agricultural properties and an exemption for commercial and industrial properties with a combined fair market value of no more than $3 million. The $3 million cap would increase every two years with inflation. The initiative would also provide a personal property tax exemption for small businesses and exempt the first $500,000 of personal property from taxation for other businesses.
However, even if it qualifies for the general election, it’s not clear whether the measure will succeed on the ballot, and the economic effects caused by the COVID-19 pandemic are a potential wild card.
Opponents argue that the ballot measure would negatively affect small businesses. One group said the economic effects of the pandemic could deter voters from supporting higher property tax assessments in November.
Noting that local governmental budgets will be "decimated" by the pandemic, Jon Coupal, president of the Howard Jarvis Taxpayers Association, said family budgets will also be affected. "It seems to us that now is not the time to be asking for a $12 billion property tax hike."
Coupal said that even though the proposed tax would exempt smaller commercial property owners, larger property owners that would face higher assessments often lease their properties to small businesses, so the tax would be passed on to smaller businesses in the form of rent increases, and then on to consumers through higher prices. He also argued that the reduction in personal property taxes wouldn’t offset the cost increase for many businesses.
“The vast majority of small businesses rent,” he said. “Small businesses have taken a hard stand against this, [including] the National Federation of Independent Business.”
But the campaign argues that small businesses would benefit from the property tax cut and that the initiative would ensure that larger commercial land owners pay taxes linked to the actual value of their properties. Stack noted that the property tax rate would still be capped at 1 percent.
He also argued that the ballot measure would end the practice of businesses transferring ownership of properties without triggering reassessment under Proposition 13.
“There’s a specific corporate loophole where corporations can structure a deal in which it doesn’t transfer majority ownership to one party,” Stack said, adding that Proposition 13 doesn't require commercial property to be reassessed in that situation. "We're going to close that corporate loophole" by setting the value of commercial property at its fair market value, he said.
Stack also cited a recent study by the University of Southern California that found that taxing commercial properties based on their FMV would generate 78 percent of additional revenue from 6 percent of properties in the state — those worth over $5 million.
Coupal argued that voters are loath to support any reforms to Proposition 13. He pointed to a recent school bond measure with the same title, which failed to garner enough votes during the state's March 3 primary. Proponents have suggested it might have failed because voters confused it with an effort to amend the 1978 Proposition 13.
“The polls are negative toward split roll,” Coupal added.
However, Coupal agreed that given the number of signatures provided by proponents, it’s almost a dead lock that the new measure will go before voters. “They’ve turned in 1.7 million raw signatures,” he said. “We’re anticipating they will qualify.”