(Bloomberg) — Californians are deciding whether to make the most significant change to the state’s signature tax-limitation law, a shift that would roil its politics as well as major businesses and real estate investing.
Approval of Proposition 15 would allow property taxes on most commercial buildings worth more than $3 million to increase by pegging the levy to market value, rather than its purchase price. Polls show the outcome as far from clear, even as big names including Governor Gavin Newsom, billionaire Mark Zuckerberg and Democratic presidential nominee Joe Biden support its passage.
Currently, under the state’s Proposition 13, property taxes on both homes and businesses are limited to 1% of the purchase price and annual assessed taxable valuation increases are capped at 2%.
Proposition 13 has long been popular with homeowners and changing it has been considered a third rail in California politics. It not only capped property taxes but made it more difficult to raise other levies too. Its passage in 1978 set off a national wave of other tax limitation measures.
Backers of this year’s measure say Proposition 13 has shortchanged schools and created an unequal system benefiting large corporations such as Walt Disney Co., which pays taxes on Disneyland based on the 1970s but charges customers 2020 fees. Switching the assessment to market value, which would take effect starting in 2022, could generate as much as $11.5 billion annually for local governments, schools and community colleges, according to the nonpartisan Legislative Analyst’s Office.
Opponents say it would increase the cost of living for everyone as businesses would likely pass along the higher levies. They also argue that changing the commercial portion of Proposition 13 is a stepping stone to easing its limits on residential property tax increases.
Surveys from the Public Policy Institute of California and the Berkeley Institute of Government Studies show that the outcome is too close to call, indicative of both the popularity of Proposition 13 and the uncertainty voters feel as they grapple with a pandemic and recession battering state and local finances.
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“Just the fact that the voters have a willingness to go in and make changes to something that has just become a fundamental aspect of the tax system in California would send a signal that we’re in a different place as a state than we have been in the past,” Mark Baldassare, president and chief executive officer of the Public Policy Institute of California, said about implications of passage.
The pandemic-fueled downturn, which resulted in less state funding for schools, underscores the need to adjust the property tax law, said Jeff Freitas, president of the California Federation of Teachers. He pointed to the campaign’s analysis showing that 10% of commercial and industrial properties would generate 92% of the new revenue from the change, called a split roll because it would treat commercial and residential properties differently.
“Prop 13 was sold as the grandmother that’s going to be evicted. But what happened was corporations are actually the ones that won out,” he said. “The corporations that are making billions of dollars in the state of California, it’s their time to reinvest in our schools and our communities.”
Californians will also weigh a measure expanding rent control and another allowing qualified homeowners who move to save on their property taxes while limiting tax breaks on residences used as rentals. In San Francisco, voters will decide whether to increase the transfer tax rate on all properties valued at $10 million and more.
Measures such as Proposition 15 make it more difficult for companies to do business in California, said Eugene F. Reilly, chief investment officer at Prologis Inc., the world’s largest industrial REIT, according to a transcript of an earnings call this month. The San Francisco-based company donated $15,000 to the campaign against the measure, state records show.
Reilly said his business can absorb the changes and that California continues to be the center of innovation. Still, “the politicians are making it very difficult for this economy to remain competitive,” he said.
Increased costs of doing business could accelerate the trend of money and people leaving relatively high-tax states such as California, said Joel Marcus, chief executive officer of Alexandria Real Estate Equities Inc., a Pasadena-based REIT that invests in laboratory space.
“When you raise taxes, people think that’s really a great thing because it provides you — whether it’s the city or the state or even the national government — with greater resources,” Marcus said in a Bloomberg Television interview Wednesday. “But what they don’t see is what it does is causes flight of capital and flight of talented people, the human capital.”
Proponents of the campaign have raised $80 million, led by labor unions such as the California Teachers Association and SEIU California State Council. But some prominent businesses show support. Zuckerberg’s foundation, the Chan Zuckerberg Initiative Advocacy, is a major contributor to the campaign, and Salesforce.com Inc. donated $400,000.
Opponents have raised $70 million, led by business and taxpayer groups such as the California Business Roundtable and California Taxpayers Association.
“This certainly ranks as one of the most significant threats to Proposition 13,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, which was founded by the leader of the campaign for the landmark law.
Freitas called it a “lie” that this year’s measure would lead to dismantling the tax system for homeowners, and said that it would close a “loophole” for corporations. “There’s no next step,” he said.
The Public Policy Institute of California poll showed 49% of likely voters supported the measure while 6% were undecided. Since voters find it easier to say no to propositions, the burden is on the proponents to press their case, Baldassare said.
“People find tax measures to be very complicated to vote on,” Baldassare said. “Particularly in this time in California, when we’re facing not just one but a multitude of crisis now, voters want to do the right thing. And they’re not quite sure what the right thing is in this case.”
(Updates with quotes from REIT chief executive in 14th and 15th paragraphs)
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