This November, there are twelve certified ballot measures that California voters will be asked to ratify or reject. Among them are Propositions 15 and 19, both dealing with California property tax reform, one for commercial and industrial property and the other for residential. Proposition 15 is designed to separate commercial and industrial property valuation from Prop 13. Proposition 19 should seem familiar as it resurrects Proposition 5 that was on the November 2018 ballot and was rejected by voters.
In 1978, the landmark passage of Proposition 13 by two thirds of California voters provided a level of confidence regarding future property tax liability. It achieved this by limiting increases in the “taxable value” of property to a maximum of two percent annually rather than reassessing to current market value. Residential and commercial property and the associated taxes would be reassessed to market value only when that property changed hands.
Assembly Constitutional Amendment No. 11 (ACA11), approved by the California Legislature, will appear on the November 3, 2020 ballot as Proposition 19. This measure has two primary aspects of residential California property tax reform. The first would eliminate what is seen by many as a tax loophole created by Proposition 58, passed in 1986. Prop 58 permits parents to transfer ownership of a home valued up to $1 million to their children without incurring a reassessment. The heir would also benefit from maintaining the property tax basis enjoyed by their parents, even if the inherited property was used as a rental. The goal of Prop 19 is to eliminate this property tax break if the residence is used as a rental property.
Additionally, Proposition 19 revives Prop 5, which would expand on Propositions 60 and 90, enabling homeowners 55 years and older to transfer their property tax value to a new home anywhere in California an unlimited number of times. The idea behind Prop 5 was to encourage longtime homeowners with low property taxes to be able to move to another home without incurring large property tax increases. This would enable affordable downsizing and would free up larger homes to be acquired by younger families. Voters emphatically vetoed this portable tax basis measure in 2018.
In its most recent iteration as Prop 19, residential property owners could transfer their property tax basis to any county in the state up to three times (versus an unlimited number) to a home of any cost. If the new home is worth more than the previous home, the tax basis would be determined by the new home purchase price minus the sale price of the prior house. This version also negates the ability of state counties to opt out of this program, which was allowed by Prop 90.
This measure is designed to separate property tax rules for commercial and residential property that were merged under Prop 13 over four decades ago. Otherwise known as the Tax on Commercial and Industrial Properties for Educational and Local Government Funding Initiative, Prop 15 would extract these properties from under Prop 13, establishing new assessment parameters.
If passed, Prop 15 would tax commercial and industrial property at market value instead of its initial purchase price, as outlined in Prop 13. Reassessment of value would occur every three years beginning in 2022-2023. Exceptions include businesses with holdings of $3 million or or less, those who own property and have 50 or less employees, and commercial agriculture. The proposition also allows for a $500,000 exemption on personal tangible property.
The thought behind this pre-pandemic initiative was to have large and especially longtime commercial property owners within the state, such as Disneyland, contribute their share of taxes. Although small businesses were supposed to be largely immune from the influence of Prop 15, the cost of this initiative would most likely be passed down from big business to small, especially to those businesses who are contractually obligated under triple net leases. With an average preliminary term of ten or more years, triple net leaseholders pay all expenses including rent, property taxes, insurance, and maintenance. Of added concern is that all businesses have been financially impacted since the shutdown and implementing such a measure could generate even more financial burden for businesses both big and small.
However you chose to vote on Propositions 15 and 19 as well as other ballot measures, we strongly encourage you to make your civic voice heard. For more information about the November 2020 initiates, visit CalMatters, a nonpartisan, nonprofit journalism venture “committed to meaningfully informing Californians about the players, politics, and interests that shape the issues that affect their lives.”