SACRAMENTO, Calif. (CN) — Years in the making, a plan to tinker with California’s iconic property tax code and raise fees for commercial landlords wasn’t hatched as a pandemic fix or budget liberator. But much like any experienced politician, the group testing framework often referred to as the “third rail” of California politics isn’t letting a crisis go to waste.
With major cities facing eight and nine-figure deficits and the state itself in an incomparable $54 billion hole, the tax reformers are hoping to rescue local governments by putting the squeeze on corporations and large commercial property owners.
“Proposition 15 is one of the most transformative items on the ballot,” said Oakland Mayor Libby Schaaf in an interview.
Schaaf and the proponents estimate the initiative could spur up to $11.5 billion in new tax revenues earmarked for cash-strapped cities, counties and school districts. As the pandemic and recession wages on, the proponents say the effort is gaining steam thanks to a flurry of major endorsements and favorable polling.
The simmering clash between the proponents and business groups that claim the timing of the proposed tax hike couldn’t be worse, is finally headed to voters.
History lesson: Proposition 13
At stake is one of the main tenets of a measure that has stabilized annual taxes for property owners in the Golden State for decades.
Seeking to make taxes more predictable and stable, 63% voted in 1978 to amend the state constitution in order to slow tax increases for both commercial and residential property.
Advocates credit the system with preventing runaway bills during times of extreme property value growth. Jon Coupal, president of the Howard Jarvis Taxpayers Association — named after the author of the original ballot measure — says Proposition 13’s legacy is indisputable.
“It’s done for the business community precisely what it’s done for homeowners: provided predictability and stability in being able to budget costs in the future,” said Coupal.
Critics counter the system has created unfair scenarios where property owners in the same business park or neighborhood pay radically different tax bills. Property taxes currently raise about $65 billion annually for local governments and schools, according to the state Legislative Analyst’s Office.
Proposition 13 has remained largely unchanged despite the fact it’s long been a target of some of the state’s most influential labor unions. Former lawmakers and governors, even during previous economic downturns, have hardly dared to challenge the tax code, wary of its popularity.
For example, Governor Jerry Brown, who was in office when the measure passed, called Proposition 13 “sacred” 36 years later while running for a fourth term.
The reform and its supporters
Coined “Schools and Communities First” by the supporting labor unions, special interest groups and elected officials, the proposed constitutional amendment would increase how often some commercial properties are reassessed and erase a 2% cap on annual tax increases. The changes would only impact properties worth more than $3 million and farmland and residential properties are exempt under the proposal.
Of the billions in predicted new revenue, 60% would go to counties and cities and 40% to schools and community colleges. If approved, the new tax code would be applied incrementally with full implementation by 2025.
The proponents claim voters have a golden opportunity to close a decades-old “corporate loophole” that has robbed local coffers of billions by mandating large industrial and commercial properties be assessed at market value rather than original purchase price.
Schaaf says the decision should be simple for voters in places like Oakland, who have watched city leaders slash over $120 million from the budget to survive the pandemic. The state Legislative Analyst’s Office projects Oakland could receive up to $63 million in new revenues if California switches to a split-roll property tax scheme.
“Now more than ever people see how important local government is,” Schaaf said in a phone interview.
Schaff added that the “reclaimed” revenues could help cities patch their deficits and lead to the hiring of teachers, public health officials and firefighters, along with a boost for social service programs.
A variety of other mayors have endorsed Proposition 15, including Los Angeles Mayor Eric Garcetti, San Francisco Mayor London Breed and Sacramento Mayor Darrell Steinberg. The big-city mayors have been lobbying Governor Gavin Newsom for months to officially back the initiative, and last week their efforts paid off.
“It’s a fair, phased-in and long-overdue reform to state tax policy,” Newsom said, diving into the property tax fight. “It’s consistent with California’s progressive fiscal values, it will exempt small businesses and residential property owners, it will fund essential services such as public schools and public safety, and, most importantly, it will be decided by a vote of the people.”
Other prominent sponsors include former Vice President Joe Biden and his 2020 presidential running mate, California Senator Kamala Harris, Senators Elizabeth Warren and Bernie Sanders, Service Employees International Union and a nonprofit run by Facebook CEO Mark Zuckerberg and his wife Priscilla Chan.
Proposition 15 also would allow companies to forgo paying taxes on up to $500,000 worth of equipment and the proponents claim the wealthiest property owners will contribute the lion’s share of the new taxes, leaving most property owners under the current framework. It also includes implementation funding for counties, allowing them to prepare and boost staffing at reassesor departments.
Uniting against the proposal are a collection of prominent business groups, taxpayers associations and the agricultural industry who paint the reform as a “death knell” for Main Street.
The opponents argue Proposition 15 would amount to the “largest property tax increase in California history” and come at a time when businesses are on life support after months of closures mandated by Newsom and county public health officers.
Forced to close dining rooms and bars over the last six months, the restaurant industry has arguably been hit hardest by the pandemic. In order to keep workers and pay rent — as the vast majority of restaurants are also tenants — owners have been forced to rely on Paycheck Protection Program loans to stay afloat.
If a majority of voters this fall approve the split-roll initiative, the California Restaurant Association warns landlords will simply pass the costs down to restaurant owners in the form of increased rent. It claims the passage of Proposition 15 will ultimately lead to one of two things: mass restaurant closures or spiking menu prices.
“Even before Covid fell on all of us, there was a looming rent crisis on the horizon for our industry,” said Jot Condie, president of the restaurant association. “Owners are going to have to make some tough decisions.”
Condie noted that rent is almost always the largest fixed cost for restaurants, especially those operating in downtown locations and popular tourist destinations. He says most of the restaurant closures caused by the pandemic were rent-related and that 65% of the association’s members are at risk of being evicted.
If restaurants and other businesses continue to go under, the opponents argue the reform won’t produce the advertised tax haul in the first place since assessors won’t be able to accurately ascribe value to vacant buildings.
To illuminate the presumed risk to business owners and workers, the opponents have recruited former Los Angeles Mayor Antonio Villaraigosa.
“Because Prop. 15 raises property taxes, those higher taxes will get passed on to small business tenants, who rent. These businesses, in turn, will pass higher costs on to consumers in the form of increased prices on everything we buy — groceries, fuel, utilities, clothing and health care. California’s cost of living is already among the nation’s highest,” Villaraigosa summed up the No on Prop 15’s argument in a recent op-ed.
Some influential agricultural groups are also pushing back on Proposition 15, including the California Farm Bureau Association, Western United Dairies and the California Association of Winegrape Growers. They contend the split-roll system could trigger new taxes on expensive buildings like barns, dairies and even vineyards.
With over $50 million raised between the two campaigns, the advertisements are beginning to pour in around the state.
“What’s got corporate CEOs hot under the collar? Prop 15,” states a proponent ad. “Relax hotshot, you can afford to pay your share.”
The proponents’ website also features a “debunking the scare tactics” section that highlights the fact a state judge last month ruled parts of the opponents’ ballot argument regarding the possibility of higher residential tax levies were “false and misleading.” He ordered various changes, noting the proposition’s language clearly states that people operating businesses out of their home won’t fall under the umbrella of the new reassessment process.
“You are going to suffer from Proposition 15,” warns Joe Petersen, a Central Valley farmer. “It will create inflation…it’s a lose-lose for California.”
Polls & studies
On top of Newsom’s endorsement, the proponents are celebrating a poll released Wednesday showing Proposition 15 would pass narrowly thanks to large support from Democratic voters.
Among likely voters in the Golden State, 51% said they support Proposition 15 while 40% oppose it, according to a statewide survey by the Public Policy Institute of California. Nearly half (45%) of likely voters said the final outcome was very important. The narrow majority does fall within the poll’s 3.5% sampling error.
Democrats and independents are more likely to back split-roll, with 72% and 46%, respectively, saying they support the measure, while only 17% of Republicans say they’re in favor of it. The poll found tepid support among homeowners, as 47%, responded they would vote yes, compared with 56% of renters.
“They know that if Proposition 13 protections are eliminated for businesses, their homes are next,” the opposition campaign said in response to the PPIC poll.
There may be clear Democratic support for the tax reform, but businesses remain wholeheartedly against it.
The National Federation of Independent Business recently polled its 15,000 California members and found just 4% favored of Proposition 15.
Even amid a presidential election, Mayor Schaaf says split-roll could be the most crucial and lasting decision voters must make as the state will likely be digging out of the recession for years to come.
“This is truly a gift for future generations,” Schaaf said. “Now is the year for this to pass.”