California Voters Narrowly Reject Split-Roll Initiative, but Approve Changes to Property Tax Exemptions; San Francisco Voters Approve Higher Taxes on Businesses

Allen Matkins

Allen Matkins

On November 3, 2020, voters across the State of California were asked to consider various state and local ballot measures. The hardest fought campaign, Proposition 15, asked voters whether to rescind property-tax rules applicable to commercial and industrial property that generally require counties to assess property at its acquisition value, which rules were implemented in 1978 by Proposition 13. As of November 12, 2020, with roughly 91% of the votes tallied, the Associated Press has announced that voters rejected that initiative, but approved another property tax initiative, Proposition 19. Proposition 19 is a complex initiative that provides certain increased property tax benefits to certain California residents when they move their primary residence, and reduces certain property tax benefits for intergenerational real property transfers.

Voters in the City of San Francisco (the City) approved multiple tax-related ballot measures, which will have the effect of increasing tax on businesses within the City through a higher tax on real property transfers, a higher gross receipts tax on conducting business in the city, and a tax on high executive compensation.

Below is a summary of the significant tax-related ballot measures.



The current property tax regime generally provides that real property is taxed at one percent of its assessed value. Unless a property undergoes a change of ownership or there is new construction on the property, the property’s assessed value equals the property’s “base value” (i.e., the property’s value at the time of purchase), plus an inflation factor that cannot exceed two percent per year. Under the current property tax regime, a property's base value can be lower than its current fair market value, which in turn can reduce the amount of property tax that might otherwise be owed, but provides the owner with some certainty as to what the owner's expected tax liability will be with respect to the ownership of such property.

Proposition 15 was an attempt to create a "split roll." Under the proposed split roll, commercial and industrial property with a fair market value in excess of $3 million would be reassessed at its current fair market value at least every three years. For properties that had not undergone a change in ownership for a long period of time, it likely would have had the effect of increasing the property tax burden significantly for those owners. In an attempt to garner the support needed, Proposition 15 excluded both residential (both single-family and multi-family) and agricultural property.

Voters narrowly rejected Proposition 15 and for now, all real property in California will remain subject to the current property tax regime. Because of the way the current property tax regime was created in California, any significant changes must be approved by a majority of California voters.


Under the property tax rules discussed above, when property changes ownership, it is reassessed and the property's base value is reset to its then-current fair market value. Current California law provides that the transfer of a principal residence from a parent to child (and in certain cases, from a grandparent to grandchild), may be exempt from reassessment regardless of the current fair market value of the property, and regardless of whether the transferred property is subsequently used by the child as the child’s principal residence, or for some other purpose, such as a rental property. Additionally, current law provides that the first $1 million of the assessed value (not market value) of any property that is not the parent's principal residence (i.e. vacation homes, and rental/investment properties) may be transferred from parent to child without triggering a property tax reassessment. Those exemptions are generally referred to collectively as the "parent/child exemption."

Proposition 19 severely limits the "parent/child exemption." More specifically, Proposition 19 provides that the parent/child exemption will be limited to transfers of a principal residence provided that (i) the child uses the transferred property as his or her principal residence and (ii) the difference between the assessed value and current market value of the transferred property does not exceed $1 million. If the difference between the assessed value and current market value of the transferred property exceeds $1 million, a partial reassessment will be triggered. Additionally, the ability to transfer an additional $1 million of assessed value without causing a reassessment will be eliminated. Voters have narrowly approved Proposition 19, and the updates to the “parent/child exemption” will apply to transfers made on or after February 16, 2021.

Proposition 19 also increases certain property tax benefits. It provides that homeowners over the age of 55, those that have severe disabilities, or those that are victims of natural disasters may transfer their assessed value for property tax purposes to a different primary residence anywhere in the state, up to three times. If the new primary residence is more valuable than the prior primary residence, the assessed value only increases by that difference. This will be a change from current law, which provides that such individuals may transfer their assessed value only if the replacement home is of equal or lesser value, and located in the same county or in a county that accepts inter-county transfers, and may do so only once. These updated provisions will apply to transfers made on or after April 1, 2021.



Proposition I increases the transfer tax imposed on transfers of real property located in the City in excess of $10 million. Specifically, the transfer tax rates will be increased from 2.75% to 5% for transfers of properties located in the City with fair market values of at least $10 million and less than $25 million, and from 3% to 6% for transfers of properties located in the City with a fair market value of $25 million or greater. The events that trigger transfer tax remain unchanged, and a sale, even for a loss, will trigger a significant transfer tax liability.

Proposition I has passed and the updated tax rates will become operative on January 1, 2021.


Proposition F is a reform of the City's business tax, and primarily will (1) significantly increase tax rates of the existing gross receipts tax imposed by the City; (2) repeal the payroll expense tax imposed by the City; (3) reduce the annual business registration fee for businesses with $1 million or less in gross receipts attributable to the City; (4) increase the small business exemption ceiling for the gross receipts tax to $2 million; and (5) increase the annual business registration fee on businesses benefiting from the forgoing increased exemption ceiling. Because of ongoing litigation regarding the validity of Proposition C passed in 2018, which created additional gross receipts for large businesses as well as gross receipts on commercial rents, Proposition F also contains a backstop to reinstate those taxes created by Proposition C if the existing litigation were to invalidate Proposition C.

Proposition F has passed and the updated tax rates will apply for tax years beginning on or after January 1, 2021.


Proposition L will impose an additional gross receipts tax on each person engaging in business within the City if the executive pay ratio for the tax year of such person (or combined group) exceeds 100:1. The term "executive pay ratio" means the ratio of the annual compensation paid to a person's (or combined group's) highest-paid managerial employee for a tax year and the median compensation paid to a person's (combined group's) employees based within the City for that tax year. The highest-paid managerial employee need not be based within the City. "Compensation" is a broad term that encompasses wages, commissions, bonuses, and property issued in exchange for services, and specifically includes compensation for services paid to owners of pass-through entities. The tax imposed by Proposition L is not limited to large or publicly traded companies, and since the tax is imposed on gross receipts (as opposed to profits), even businesses generating a loss may incur significant tax liability. The tax rate imposed by Proposition L will range from 0.1% to 0.6% on a business or combined group's taxable gross receipts attributable to the City for executive pay ratios ranging from 100:1 to 600:1. In the event a person engages in business within the City as an "administrative office," the tax rate imposed will range from 0.4% to 2.4% of such person or combined group's total payroll expense attributable to the City for executive pay ratios ranging from 100:1 to 600:1. Engaging in business within the City as an "administrative office" is a term of art for the City and generally means providing internal support services on an enterprise-wide basis, such as executive office oversight, company business strategy, record keeping, risk management, personnel administration, legal, accounting, market research and analysis, and training services. It does not include sales personnel or personnel actively engaged in marketing, research and development, direct customer service, and product support services. Companies previously categorized as administrative offices by the City would be subject to this tax rate.

Proposition L has passed and will go into effect for tax years beginning on or after January 1, 2022.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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