Property Tax Overhaul Initiative Qualifies for California Ballot

Los Angeles skyline at night. (Minh Thai for Courthouse News Service)

SACRAMENTO, Calif. (CN) — The coronavirus pandemic and California’s shattered finances have injected urgency into an initiative that qualified for the November ballot Friday which — if passed — would reform the state’s landmark property tax code to raise billions for cash-strapped schools and counties.

California Secretary of State Alex Padilla announced the group looking to revise Proposition 13 and raise commercial property tax rates has surpassed the required 997,000 signatures needed to put their bid before voters this fall.

The announcement primes a simmering clash between a coalition of labor unions, educators and mayors pushing for tax reform and business groups hoping to preserve the decades-old and voter-approved framework. The sides have been preparing and fundraising for the fight for nearly two years but are amplifying their efforts due to the pandemic. 

“We were all in this for the right reasons before the pandemic happened, but now it’s just that much more critical,” said Alex Stack on behalf of the proponents’ coalition Schools & Communities First. “It’s really more important now than ever.” 

Instead of a budget-liberator, the opposition claims the new tax burden would equate to a death knell for Main Street and the small businesses lucky enough to survive the pandemic-induced shutdown. 

Rachel Michelin, president of the California Retailers Association, says property owners will undoubtedly raise rents if the measure is approved, leaving businesses with no choice but to pass costs to customers.

“There’s two ways you’re going to make up the income; you’re going to cut expenses and jobs, or you’re going to have to increase prices to consumers,” Michelin said.

The proponents are looking to stash a central tenet of Proposition 13 that caps property taxes at 1% of purchase price and a complimentary anti-inflation clause limiting annual increases from exceeding 2%. Right now, if a property is sold, it is reassessed at current cash value, meaning properties on the same street can have vastly different taxable value depending on when they were last sold.

Critics claim the “tax loophole” has robbed the state of billions in revenue over the decades and are pushing to revert from the current acquisition value system to a market rate tax scheme.

Seeking to make property taxes more predictable and stable, nearly 63% of voters in 1978 agreed to amend the state constitution and slow tax increases for both commercial and residential property. The idea was to brace owners from runaway tax bills caused by increased property values. To top off the anti-tax package, Proposition 13 required new state tax hikes be approved by two-thirds of the Legislature and local measures by majority vote.

In the decades since, politicians have routinely resisted calls to alter Proposition 13 even during bad economic times, including recently when former Gov. Jerry Brown called the measure “sacred” as he guided the state’s Great Recession recovery.

Even with the state facing a potential record-high $54 billion deficit and bracing for sweeping cuts to education and social services, Gov. Gavin Newsom has refused to fully wade into the fight over the future of Proposition 13.

The November ballot measure would install a “split-roll property tax” where commercial properties with values over $3 million would be reassessed every three years at market value while smaller businesses, farming properties and residential homes would be exempt and remain under the current framework.

Proponents claim the change could produce up to $12 billion annually, with 60% of the windfall earmarked for local governments and 40% for education. Schools and cities could start benefitting from the new revenue stream as soon as fiscal year 2021-22, according to a study by the University of Southern California.   

The split-roll system wasn’t specifically devised to help with the current pandemic, but the mayors of some of California’s largest cities are unsurprisingly encouraging voters to embrace the reform due to the ongoing crisis. They say raising taxes on the state’s largest businesses and corporations will prevent cities from making critical cuts post-Covid-19 and help curtail looming budget deficits.

“This is a choice between perpetuating a tax break for the wealthiest corporations in our state or expanding the critical local services to reduce homelessness, reduce emergency wait times and improve our neighborhoods — at zero cost to residents,” Los Angeles Mayor Eric Garcetti said this month.

San Francisco Mayor London Breed says local officials who shun the ballot measure will “have a tough time explaining to their constituents why, in the midst of this crisis, they didn’t support closing corporate tax loopholes,” while Stockton Mayor Michael Tubbs — whose city filed for bankruptcy in 2012 — added the reform will ensure cities can continue “investing in the things that will make our communities great.”

Other supporters include various labor unions, education officials and a nonprofit ran by Facebook CEO Mark Zuckerberg and his wife Priscilla Chan. The California Democratic Party has also endorsed the initiative and former Vice President Joe Biden offered his support for the overhaul last fall. 

The proponents counter predictions of devastation to mom-and-pop shops by pointing to the USC study which estimated the bulk of the new taxes on the state’s 1.27 million commercial parcels would be paid by the owners of properties valued at $5 million or more. The study also predicts Los Angeles ($3.4 billion), Santa Clara ($1.2 billion) and Orange ($1 billion) counties would be the main benefactors of raising commercial property taxes.

The fact the property tax code has remained for over 40 years reflects Proposition 13’s staying power, but recent polling suggests at least the Golden State’s Democratic voters are warming to the split-roll concept.

According to an April education poll by the Public Policy Institute of California, 53% of respondents said they would support the proposed ballot measure. Over 70% of likely Democratic voters said they would vote yes compared to just 24% of Republicans.

Stack said while the proponents are encouraged by the PPIC results, their internal polling of registered voters pegs support closer to 60%. He said along with the education funding, the added money will help public health departments prepare for future pandemics knowing the added tax revenues are coming down the pipeline.

The anti-tax group Howard Jarvis Taxpayers Association, named after Proposition 13’s author, said it wasn’t overly concerned with a poll taken over seven months before the election.

Jon Coupal, association president, noted that voters in March rejected a statewide school bond for the first time since 1994 and will be hesitant to embrace a measure he calls “horribly flawed.” He says voters have been fed up with new taxes and bonds prior to the pandemic and questioned the timing of the measure.

“The notion that voters are in some sort of mood for higher taxes, I think runs contrary to the narrative of the pro split-roll campaign,” Coupal said. “Voters perceive that California is not using their tax dollars wisely and that is why they are rejecting tax increases.”

Joining the retailers and taxpayers association in opposition are groups such as the California Chamber of Commerce, California Farm Bureau Federation and California Bankers Association.

The final number of citizen-initiated measures that qualify for November’s ballot remains to be seen, but one thing is for certain: the property tax reform promises to be the headliner. Both sides are well-funded and campaign spending could exceed the $100 million mark.

“We are fighting for small business to survive in California,” said Michelin with the retailers association. 

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