The Initiative: California Schools and Local Communities Funding Act of 2018
In 1978, California voters passed Proposition 13 (“Prop 13”) to limit increases in both residential and commercial property taxes. A measure on the state ballot in 2020 aims to create a split roll tax structure and thus alter the way Prop 13 is applied to commercial real estate.
Proposition 13, passed in California in 1978, caps the annual increase in property taxes on residential and commercial property. Prior to Prop 13’s passage, local jurisdictions had the power to raise property taxes, and rapid, dramatic increases by some localities resulted in some homeowners losing their residences. A taxpayer revolt ensued, leading to passage of Prop 13, which shifted the responsibility for property taxes to the state, and limited annual tax increases. Property tax increases are now limited to the lesser of the rate of inflation or 2 percent each year, based on the current property assessment. When a property is sold or undergoes significant new construction, it is reassessed to its current market value. In a state known for its high tax rates, Prop 13 has protected residential and commercial property owners from the unexpected increases that led to its passage.
The November 2020 election will include a state ballot initiative that would significantly change the way Proposition 13 is applied to commercial real estate. The initiative, called the “California Schools and Local Communities Funding Act of 2018,” would separate the tax treatment of residential property from that of commercial property by reassessing all commercial property to 2020 values and making that the new base year. The 2 percent cap would then be in place until the commercial property was assessed again, which would happen at least once every three years. That would create a “split roll” structure, with commercial property treated differently from residential housing.
Increasing property taxes has an impact on small- and family-owned businesses in particular. These businesses comprise a significant portion of the tenants in commercial developments.
The level and predictability of property tax rates are important considerations when investors are deciding on where to locate a business or where to develop commercial projects.
Increasing property taxes would impede economic growth and job creation, and ultimately could force companies to move out of state, eroding the tax base.
If Proposition 13 is amended, there are national implications for the cost of doing business for anyone who owns, invests or receives professional services from California business. In addition, investors in commercial property in California would suffer negative effects.
Split roll would unfairly target commercial real estate and harm economic development. Instead, residential tax payers and commercial tax payers should remain protected by Proposition 13.