Authored Articles & Publications Sep 05, 2018

Best in Law: Possible Prop. 13 Changes Will Impact Businesses

Partner Gregory Snarr Discusses Potential Ballot Measure

Best in Law: Possible Prop. 13 Changes Will Impact Businesses

By Gregory Snarr

In 2020, California voters will likely have the opportunity to change a provision of Proposition 13 that will substantially impact California businesses.

Prop. 13 is the 1978 ballot measure passed by voters that placed a 1-2 percent property tax limit on all types of California properties, which are reassessed only when properties are sold.

A coalition of groups are likely to qualify a measure for the 2020 ballot that, if passed, will raise public funds by increasing property taxes — but only for California businesses. The initiative would change Prop. 13 to treat California commercial property different than residential property, a concept in the Prop. 13 world known as “split roll.”

Under the proposal, businesses would have their properties reassessed to market values every 3 years or less. In addition, commercial properties would still be taxed at 1 percent of their value. Nothing would change for residential properties.

Currently, California treats commercial and residential property essentially the same when it comes to property taxes. Prop. 13 generally allows properties to be reassessed for tax purposes only when they are sold to a new buyer. That means that the homeowner and the property-owning business both pay taxes on the value of the property when they bought it, regardless of its current market value.

The impacts of assessments are not as significant to property that is held for longer periods of time. For example, many large businesses occupy their land for decades. For those businesses that purchased their property 30 or 40 years ago (like many businesses in Inland Empire commercial districts), their assessed value is still based on a 1970s or 1980s purchase price. If passed, the 2020 initiative would change that.

While the 2020 initiative would significantly increase property taxes on California businesses (roughly $11 billion per year), its purpose is to generate revenue for local and state governments, including an allocation to schools. Since Prop. 13 passed, school spending as a share of personal income in California has declined, while it has generally increased in the rest of the United States. Proponents of the initiative assert that it is time to increase funding for schools by changing the way businesses pay for property taxes.

Backers include government and social justice groups and some prominent state and local teachers’ unions. Big money has also come from philanthropic organizations.

On the other hand, critics of the initiative and many California businesses argue that, at best, the increased property taxes would simply pass the financial burden to consumers (making California that much more expensive for low- and middle-class families), and, at worst, businesses would reduce employment, move out of state or shut their doors entirely.

The cost of doing business in California is already high, and critics argue this would make it more difficult to make a profit in this state. It is reported that a large contributor to Prop. 13’s success in 1978 was the sentiment that older Californians should not be priced out of their homes through high taxes.

The proposition is often called the “third rail” (meaning “untouchable subject”) of California politics and, historically, it has not a politically popular move for lawmakers to attempt to change it. However, the “untouchable” portion of Prop. 13 mainly concerned residential properties

As this initiative does not “touch” residential but rather only commercial properties, voters may decide it’s finally time to change at least one aspect of the measure.

This article first appeared in The Press-Enterprise and other Southern California Newspaper Group publications online on Sept. 2, 2018. Republished with permission.

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