Tax Alert – Proposition 15 Raises Property Taxes!

Amid an unprecedented economic crisis, special interests are pushing Prop 15 on the November 2020 statewide ballot to begin the process of eroding Propositions 13’s property tax protections. This is estimated to be the largest property tax increase in California history.

Proposition 15, also known as the “Split-roll initiative” is the first of several planned statewide property tax proposals intended to erode the property tax protections provided by Howard Jarvis’, Prop 13, officially named the “Peoples Initiative to Limit Property Taxation”. Proposition 13 amended the California Constitution in 1978 and was held constitutional by the United States Supreme Court in 1992.

California’s Proposition 13, limited property taxes to 1% of the sale price, and limited tax increases to a maximum of 2% per year. The assessed value resets when the property is sold. Proposition 15 would mandate the reassessment of commercial properties based on their market value at least once every three years.

The key provisions of Proposition 15 include the following:

Requires Frequent Reassessment of Commercial and Industrial Properties. The new tax would be effective beginning with the 2022-2023 fiscal year, and requires affected commercial and industrial real property to be reassessed based on market value at least once every three years. The Legislature would be required to establish a task force to establish a phased-in approach for the new tax by which a certain percentage of commercial and industrial real property within each county would be reassessed each year over a three-year period beginning with the 2022-2023 fiscal year. For properties reassessed in the first year of the three-year phase-in period, the lien date for that fiscal year would be January 1, 2022, and the first installment of property taxes under the reassessed value would be due November 1, 2022. After the initial reassessment, commercial and industrial real property would be periodically reassessed at market value at least every three years.

Deferred Operative Date for Some Properties. Commercial and industrial real property with at least 50% of the occupied square footage occupied by “small businesses,” would not be reassessed until the lien date for the 2025-26 fiscal year.

Mixed-Used Property Provisions. For mixed-use property used for residential and commercial purposes, the Legislature would be required to provide that only the portion of the property used for commercial or industrial purposes would be assessed based on market value. The Legislature would also be allowed to provide an exclusion from reassessment for the commercial portion of the property if 75% or more of the property by square footage or value is used for residential purposes.

Limited Exemptions:

    • Residential Property. Residential property would be exempt from annual reassessment to full market value, and would continue being assessed under the current system. Residential property is defined as “property used as residential property, including both single-family and multi-unit structures, and the land on which those structures are constructed or placed.”
    • Commercial Agricultural Property. Land that is used for producing commercial agricultural commodities would be exempt from annual reassessment to full market value.
    • Small Business Property. Owners of commercial and industrial property with an aggregate full-market value of less than $3 million would be exempt from annual reassessment to full market value.
    • Business Personal Property. Small business taxpayers would be given a complete exemption from the property tax on business tangible personal property (computers, desks, copiers, etc., that is subject to annual property tax). For all other taxpayers, an exemption up to $500,000 would be granted for business tangible personal property.

Changes to the Appeals Process. The Legislature would also be required to develop a process for hearing appeals resulting from the reassessment of properties subject to the new tax. This new appeals process would include drastic changes to the current appeals process, including placing the burden of proof on the taxpayer to prove that the property was not properly valued by the assessor, and repealing the rule that the owner’s estimate of value is deemed to be correct if the appeal is not decided within two years of being filed.

The Legislative Analyst’s Office has estimated that, upon full implementation, Proposition 15 would generate between $8 billion and $12.5 billion in revenue per year. The revenue from the revised tax on commercial and industrial properties would be earmarked as follows: 60% to local governments and special districts, and 40% would be distributed to school districts and community colleges, after “administrative and general fund distributions”.