Property Tax Initiative Qualifies for Ballot and Could Partially Undo California's Proposition 13

Holland & Knight LLP

Holland & Knight LLP

Proposition 13, California's long-standing property tax law, is at risk of being partially unraveled, and along with it, property owners would incur a substantial increase in property taxes. On May 29, 2020, the initiative, which is being called the "split-roll" initiative, passed its last barrier to appear on the ballot this November. If successful, this new initiative would change how California assesses property taxes on certain commercial properties.

In 1978, California passed Proposition 13 tax reform that froze property taxes at the 1976 assessed value. The law limits when the state can reassess properties to increase its property taxes. Reassessments are allowed only when the property is transferred to a new owner or undergoes development, and reassessment is limited to 1 percent of the sale price. Additionally, annual property taxes can only increase by an inflationary rate that cannot exceed two percent per year.

The split-roll initiative would undo these limitations on property tax increases for commercial and industrial properties worth more than $3 million and assess taxes on those properties at their market value. Single-family and multi-family residential properties, as well as real property used for commercial agricultural production, would continue to be protected under the existing Proposition 13 regime. The initiative also includes exemptions for small businesses (defined as those independently owned and operated with 50 or fewer full-time employees). The initiative gives retail centers whose occupants are 50 percent or more small businesses more time before being taxed at market value.

A similar effort that did not include the exclusion based on the value of the commercial property and that did not include the small business exemption was attempted in 2018. The California Chamber of Commerce board of directors said that even with the new additions the proposal still "would be the largest tax increase in California ever" and states that property taxes could rise by 25 percent for affected businesses.

Proponents of the initiative claim that the funds collected from the increase in taxes would be allocated to schools and other local governments. State analysts anticipate that as much as $12.5 billion in new tax dollars could be produced each year if the initiative is implemented.

On the other hand, opponents of the initiative argue that the small business exemption is not enough and that eventually the cost of rent for small businesses will increase. Additionally, opponents claim that businesses are already struggling during this new recession and will not be able to afford the significant tax increase that the initiative will produce.

Although the split-roll initiative has been cleared for the November ballot, lawmakers and proponents of the measure could still cut a deal to remove it before the June 25 deadline. California Gov. Gavin Newsom has expressed interest in striking a deal.

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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