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Prop. 15 Defeated

California Owners Reject Initiative to Raise Commercial Property Taxes

   Prop. 15 Defeated

December 8, 2020

Selina Sounakhene

Election Day 2020 showcased a very close race between the two presidential candidates – Donald Trump and Joe Biden. The final results were 51.3% to Biden and 47% to Trump, but that was not the only thing on the ballot that barely squeezed out a win. On California’s ballot, Prop 15 nearly didn’t pass, with margins similar to that of the presidential race – 48.2% voted for the measure and 51.8% against.

Back in 1978, California voters passed Proposition 13 which provided a huge tax cut for landowners. Previously, properties were taxed based on their current price. Prop. 13 reset the system and based taxes on the purchase price of the property, rather than the market value. It also prevented property taxes from being able to increase more than 2% annually.

Referred to as the “split-roll” tax, Prop 15 would have split commercial and industrial properties from residential properties and put them on a different tax roll. This would have caused commercial landlords to be stripped of their protections from Prop 13 leading to an increase in property taxes. Without Prop 13’s protections, commercial properties would be reassessed every three years. This would have had a huge impact on large commercial properties that hadn’t been reassessed in decades, specifically in the Bay Area and Los Angeles. Businesses with less than $3 million of property and farmers would have been exempt from Prop. 15.

It was anticipated that the hike in property taxes would bring in $10.6 to $12.3 billion. The revenue from the taxes would have been split 60% to local governments and 40% to schools and community colleges. Supporters of Prop. 15 believed that funding from the initiative would have been able to provide a high-quality learning environment for all students and saw this as an investment in Californians. COVID-19 has led to less funding to schools from the government, leading to a struggle with reopenings and a lack of resources to those in lower income areas.

Opposers of Prop. 15 believed it was a bad idea to pass one of the biggest tax increases in California history in the middle of a recession. Though small property owners were exempt, they believed that large landlords would end up passing the costs to their tenants and customers. This would have likely been done through their rents, which would be detrimental, especially at a time when many small business owners are already suffering losses due to COVID-19. What supporters failed to promote was that Prop. 15 wouldn’t be phased in until 2022-23, meaning there would be no immediate relief to schools and local governments affected by the pandemic.

For over a year, Prop. 15 was leading in most polls, just below 50% with a significant percentage of undecided voters, but a huge Labor Day TV ad campaign may have swayed those votes. Real estate interests and business owners believed in educating voters on the effect Prop. 15 would have. Landlords with a huge increase in property taxes would likely increase rents to tenants, causing tenants to have to raise prices of their goods in order to keep their doors open, which would directly affect consumers.

With the recent defeat of Prop. 15, commercial real estate agents, small business owners, and consumers can breathe a sigh of relief… for now. Prop. 15’s defeat likely won’t discourage future efforts to change Prop. 13, but those in support have hopes that younger and middle-age voters born after its passage may not view Prop. 13 as the third rail of state politics. The close margins may mean that perhaps a more palatable version of Prop. 15 could rise again someday.

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