Revised Proposition 13 Ballot Initiative Closer to Qualifying for November 2020 Ballot

Public Finance Alert

California Ballot Initiative 19-0008, The California Schools and Local Communities Funding Act of 2020, (also known as the “Schools & Communities First” measure) has received over 1 million signatures in support of inclusion on the November 3, 2020 statewide general election. In order to be included on the ballot, the measure requires 997,139 signatures to be validated. Provided enough signatures are verified, the measure will replace the previously qualified Initiative 17-0055, addressed in our Client Alert dated March 6, 2018. As with the prior measure, this new initiative proposes to revoke Proposition 13 protections for commercial and industrial real properties, such that properties are taxed at their current fair market values, with future reassessments occurring at least every three years. The measure also eliminates the tax on tangible personal property for small businesses and exempts from taxation up to $500,000 of tangible personal property for all other taxpayers.

The measure would not affect the existing tax treatment for the following:

  • Residential Properties. Real property used as residential property, including both single-family and multi-unit structures, and the land on which the structures are placed. For mixed-use properties, only the portion of the property used for commercial and industrial purposes would be subject to the new reassessment regime. Limited commercial use of residential properties, such as home offices, home-based businesses and short-term rentals would not trigger reassessment. In addition, the state legislature would have the ability to exclude from reassessment the commercial share of mixed-use properties where seventy-five percent or more of the property’s square footage or value is residential.
  • Agricultural Properties. Real property used or zoned for commercial agricultural production.
  • Open Spaces. Vacant land zoned for open space and residential uses.
  • Aggregate Properties Valued Under Three Million Dollars. Commercial and industrial properties would not be subject to reassessment provided the value of such property, and all other commercial or industrial properties owned directly or indirectly by the owners have a fair market value of $3 million or less.

The new split-roll system would be phased in over two or more years for most properties, starting with the 2022-2023 fiscal year lien date. Properties owned by small businesses would not be reassessed until at least the 2025-26 fiscal year. Properties qualify for the deferral when owned by independently owned and operated businesses with fewer than 50 employees in which the business is operated on 50% or more of the occupied square footage of the property.

The California Legislative Analyst’s Office calculates that the reassessment change would increase annual real property taxes by $7.5 billion to $12 billion in most years, and the personal property exemption would decrease tax revenues by several hundred million dollars per year. Tax revenues would first be allocated to the state’s general tax fund to offset reductions in income tax revenues resulting from higher property tax deductions and to compensate counties and cities for administrative costs. Remaining funds would be allocated 60 percent to cities, counties and special districts and 40 percent to local public and charter schools (89 percent) and community colleges (11 percent). The Legislative Analyst’s Office calculates that between $6.5 billion and $11.5 billion in net funds raised would be available for the 60/40 allocation in most years. As the California legislature will control the phase-in process, the exact timing of the impact on taxpayers and the governmental agencies slated to receive the additional tax revenues is uncertain.

Only a simple majority vote is required for the measure to pass. The Public Policy Institute of California’s statewide survey released November 2019 reports that 46 percent of likely voters favor taxing commercial properties at their fair market value, 45 percent oppose, and 9 percent do not know. A recent poll conducted by the proponents of the measure found that 58 percent of voters supported the measure, with 29 percent opposing.