Quick Guide: Proposition 15, the proposed ’split-roll’ tax on commercial property

California voters will decide on Election Day what’s been perpetually talked about for decades but never, until now, put on the ballot: amending Proposition 13, the anti-tax initiative that has molded tax policy and school funding since voters passed it by a nearly two-thirds majority in 1978.
To see how much your school district or charter school would receive if Prop. 15 were fully implemented, go here.
Proposition 15, the proposed reform, would require reassessing commercial properties every three years at market value. That change would significantly raise businesses’ property taxes. That’s why between now and Nov. 3, Prop 15 will be an all-out, expensive battle between business and anti-tax groups on one side and on the other, education advocates, county and city government interests and tax reformers who argue the initiative would force big corporations to pay a “fair share” of taxes they have avoided under Prop. 13.
What follows are some details about Prop. 15 (read the full text of the initiative here).
What would Prop. 15 do?
It would create a “split-roll tax” by changing Prop. 13’s rules for assessing commercial and industrial properties while leaving intact the rules for assessing all residential properties and agricultural land. The changes would produce billions of dollars in new revenue for schools and community colleges, as well as for county and local governments.
How would the rules change?
A reminder: Worried that higher taxes from fast-rising property values in the 1970s were driving older residents out of their homes, voters approved Prop. 13, which froze the value of taxable property and limited taxes to 1% of the assessed value. Prop. 13 limits yearly tax increases to 2%. Only when a property is sold is a new taxable value established.
Prop. 15 would require that commercial properties be reassessed at market value at least every three years. The tax of 1% of value, with 2% annual increases, would still apply. There would be no change in Prop. 13’s rules for residential properties.
Who put Prop. 15 on the ballot?
Schools and Communities First, a coalition of social justice, faith-based organizations and labor organizations, including Inner City Struggle and the Community Coalition in Los Angeles, the League of Women Voters, Service Employees International Union and the California Teachers Association, which put up the most money to gather signatures.
Would small businesses be exempt?
Business owners whose total number of properties are assessed at less than $3 million would be exempt from the new rule. Properties valued less than $3 million comprise 90% of 1 million-plus commercial property owners in the state, according to researchers for the USC Dornsife Program for Environmental and Regional Equity, which conducts research on social and environmental justice and immigration issues.
Commercial property owners are also currently taxed for personal property, which includes machinery and equipment. Prop. 15 would exempt all of personal property of small businesses, defined as those with fewer than 50 employees, and the first $500,000 of other businesses’ personal property.
The Legislative Analyst’s Office projects that would cut revenue by several hundred million dollars. David Goldberg, vice president of the California Teachers Association, called it “the single biggest tax cut for small business in a generation” in a recent debate sponsored by the Public Policy Institute of California.
How much revenue would Prop. 15 raise?
USC Dornsife estimated Prop. 15 would raise between $10.3 billion and $12.6 billion per year, with $11.4 billion as the midpoint. The Legislative Analyst’s Office estimated revenue between $6.5 billion and $11.5 billion annually. It’s the net figure after deducting several hundred million dollars in county assessors’ projected expenses for reassessments and tax appeals. The wide range in estimates points to how hard it is to predict market conditions and the value of big properties that haven’t been assessed in decades.
How would the money be allocated?
Of the total, 60% would stay local. Counties would collect and distribute revenue to county and city governments and to special districts providing fire protection, recreation and other services. The remaining 40% would go into a statewide pot for K-12 schools and community colleges.
The education portion would be split 89% to K-12 schools and 11% to community colleges. The K-12 money would be disbursed according to the Local Control Funding Formula. The formula provides extra funding based on the enrollment of English learners, low-income, homeless and foster children.  The revenue for community colleges would be distributed through the Student Centered Funding Formula, which provides supplemental grants based on the enrollment of low income students. The LAO estimates community colleges and K-12 schools would receive between $2.6 billion and $4.6 billion annually.
When will the revenue arrive?
Not right away, contrary to whatever you are hearing. To give assessors time to do their work, revenue will be gradual, starting in 2022-23, with full implementation in 2025-26. The last properties to be reassessed would be businesses with 50 or fewer employees. The phase-in period undercuts the arguments of both sides — supporters, who imply that Prop. 15 would rescue schools and governments from immediate budget cuts, and opponents, who argue that a tax increase would be the worst response to a pandemic, in which thousands of small businesses are in desperate straits.
Neither side knows what the state of the economy and the pandemic will be in five years, when the tax is fully implemented. Opponents argue that passage of Prop. 15 immediately will create uncertainty dampening businesses’ plans moving forward.
What about money for basic-aid districts?
Basic-aid school districts are property-wealthy districts that don’t receive money from the Local Control Funding Formula because they raise more revenue through property taxes than they would get in state funding — often thousands of dollars per student more. Currently, they comprise about 15% of school districts and are concentrated in the Bay Area and coastal Southern California. They would receive only $100 more per student under Prop. 15, less than a 0.5% increase for many of those districts. Additional money they would have gotten will be shared with less wealthy districts through the funding formula.
Would Prop. 15 affect parcel taxes and bonds?
No, because parcel taxes, which school district voters pass to provide additional operating money, must be the same amount per property, regardless of its assessed value. But Prop. 15 could affect a school district’s ability to issue school construction bonds. Higher commercial assessments would increase the tax base, enabling a district to issue new or bigger bonds.
Who will pay most of the tax increases?
A relatively small group of corporations with valuable properties. Blue Sky Consulting Group in Emeryville, hired by Schools and Communities First, projects that only 10.5% of commercial properties would generate 92% of Prop. 15’s revenue — data consistent with USC Dornsife’s estimates.
They generally are companies and landholders that have benefited from developing land decades ago in counties where land values have soared: They include Disneyland and the Irvine Company in Orange County, studio and theme parks like Paramount and Universal Studios in Los Angeles and, in Santa Clara County, Intel, IBM and big land developers like The Sobrato Organization. Also, Chevron refineries in Richmond and El Segundo and the BNSF Railway.
Blue Sky estimates nearly 50% of revenue will come from properties that haven’t been assessed since 2000 and 25% of revenue from properties that haven’t been assessed in at least 30 years.
The bulk of the annual revenue would flow to a handful of counties: Los Angeles ($3.4 billion), Santa Clara ($1.2 billion) and Orange ($994 million) would reap nearly half of the total, according to the USC estimates. Some of the tiniest, rural counties with few qualifying commercial properties — like Sierra, Trinity and Calaveras — could see a net loss because of cuts in taxes on personal property.
What are the primary arguments for Prop. 15?
• By protecting small businesses, Prop. 15 makes a long-needed structural reform to Prop. 13 and forces big corporations to pay more for needed services.
“Much of what ails California — crumbling roads, under-resourced schools and inadequate social services — can be traced to Proposition 13 and related anti-tax measures,” the Los Angeles Times said in an editorial. “Proposition 15 would start to fill the revenue gap.”
“Like President Trump’s tax cut, Prop. 13 was supposed to help the middle class but led to a windfall for corporate landowners,” said Professor Manuel Pastor, director of USC Dornsife’s Program for Environmental and Regional Equity and co-author of the USC study.
• Prop. 15 ends a loophole in which companies manipulate the purchase of a property to avoid reassessment by having no single buyer own a majority interest. Billionaire Michael Dell’s purchase of the Fairmont Miramar Hotel is the poster child.
• Prop.15 promotes competition, eliminating a tax advantage that established companies have over new entrants in the market.
Counter argument
Raising taxes is a perverse way of enhancing competition. The corporate loophole over property transfers does exist but is overstated and can be fixed through legislation; business groups say they favor the change.
What are the primary arguments against Prop.15?
• Most small businesses rent, rather than own, properties, and would directly bear Prop. 15’s burden under a standard lease agreement, in which renters pay property taxes. Higher costs would either force them under or be passed on to consumers.
• California is, on balance, a high-cost state for business, and the economy will remain fragile for years. Hotels and the hospitality industry will be especially vulnerable to increased costs. The revenue from Prop. 15 could be close to the amount of revenue from the state corporate tax — and so “would nearly double businesses’ burden in one fell swoop,” said Dan Kostenbauder, vice president for tax policy for the Silicon Valley Leadership Group, a business association.
• Prop. 15 would be expensive and unwieldy to implement, which is why the California Assessors’ Association opposes it. There’s already a shortage of commercial assessors, said Santa Clara County Assessor Lawrence Stone, and he’d have to immediately double his staff. He projects time-consuming, expensive commercial appeals to soar from 2,000 to 25,000 per year from businesses, some of which might see tax bills quadruple.
“Trying to fix 42 years of inequity with a single ballot measure that is convoluted will fail in implementation,” Stone said. He agrees Prop. 13 should be fixed — but not this way.
Counter argument
Market prices, not property taxes, will determine rent. “It’s amazing to hear opponents’ argument. Until recently, rents were going up even though no costs were changing, and they’ll likely go down, because that’s the market,” Pastor said.
An analysis of the impact on rents from the sale of commercial properties in 12 counties, released Sept. 24, backs up Pastor’s assertion. The report by Beacon Economics, commissioned by the Silicon Valley Community Foundation, concluded that reassessing a commercial property after 20 years could cause a one-time 2% rent increase for an office space renter. “Most claims about Proposition 15’s impacts on small businesses are unfounded,” said Christopher Thornberg, founding partner of Beacon Economics. “Entrepreneurs will want to remain part of California’s high-performing, innovation economy and, should it pass, this initiative won’t change that.”
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