Endorsement: Yes on Proposition 15. It’s one small step toward fixing California’s broken tax system

Proposition 15 is arguably the most consequential measure facing California voters on the Nov. 3 ballot. By creating a “split-roll” system that taxes commercial and industrial property differently from homes, it would transfer as much as $11.5 billion annually from businesses to local governments and schools.

There are two ways to look this measure. The first is through a filter of fear. How can we even contemplate imposing a heavier tax burden on businesses at a time when the COVID-19 pandemic has forced some to shut down and when the fires, heat waves and epic air pollution have caused people to wonder if it is time to flee California for good? (Although, as former Gov. Jerry Brown quipped recently, “Where are you going to go?”)

The other way that one could, and we argue should, view Proposition 15 is through a lens of hope. At long last there is a tangible fix in sight for one of California’s most intractable problems: a wildly unfair and lopsided property tax system that for four decades has starved local governments of the revenue they need to provide services and that has distorted the cost of buying a house and starting a business, to the detriment of young families and entrepreneurs.

It’s not a complete fix, but a crucial first step to undo some of the damage wrought by Proposition 13, the 1978 “tax revolt” initiative that rolled back property taxes in California and capped them at 1% of the purchase price, with annual increases in the assessed value limited to 2%. Local governments and school districts rely on property tax revenue to pay for services like street repair, law enforcement and classroom instruction. After Proposition 13 passed, property tax payments dropped by about 60%. They’ve been struggling to catch up ever since.

Indeed, much of what ails California — crumbling roads, under-resourced schools and inadequate social services — can be traced to Proposition 13 and related anti-tax measures. Proposition 13 also shifted the local tax burden, as cities, counties and school districts increasingly turned to other levies, such as sales, hotel and utility taxes, to make up the lost revenue.

It hasn’t been enough. In 1977, counties and cities collected $790 per person in tax revenue, but only about $640 per person nearly 40 years later, according to the nonpartisan Legislative Analyst’s Office. Meanwhile, California residents demand even more services than they enjoyed 40 years ago. It’s unsustainable.

Proposition 15 would start to fill the revenue gap by reassessing commercial and industrial land at least every three years and basing the tax on what the improved property could be sold for at the time of the appraisal. Property valued at less than $3 million would be exempted. The tax would still be capped at 1% of value — with no more than a 2% increase in years that the property is not assessed. Residential property would not be affected under Proposition 15, nor would agricultural land (though agricultural facilities would be subject to reassessment).

By no means is Proposition 15 perfect. It has unavoidable costs and will have unintended consequences. We would have preferred a more comprehensive package of reforms that created a fairer property tax system for everyone, not just businesses, and overhauled our entire system, including sales and income taxes, to build a modern and less volatile revenue stream for state and local governments. But politics have stalled even incremental reforms. This is the best shot we’ve seen to start the reform process.

To be sure, there would be winners and losers under Proposition 15, just as there are now under Proposition 13. The losers would be the companies that have enjoyed artificially low property taxes simply because they had the good fortune to purchase land earlier than their competitors — or because they’ve managed to exploit loopholes that allow them to avoid paying their fair share. Schemes such as structuring purchases to give each partner less than a 49% interest in the purchased property allow businesses to skirt reassessment. Proposition 15 would effectively eliminate these loopholes.

The opponents of the measure, which include taxpayer groups and state business associations, say that Proposition 15 would devastate businesses in California and lead to massive jobs losses, shuttered restaurants and stores, and higher prices for consumers. The proponents counter that it is only a small percentage of large property owners who will be hit up with new tax bills and that the protections built into Proposition 15 will shield small business from harm.

We’re skeptical of both arguments. Not all businesses would be impacted, only those that haven’t changed hands recently. At the same time, it’s disingenuous to suggest that commercial landlords wouldn’t pass through costs to the businesses that lease space, or that exempting property worth less than $3 million is a major concession in this hot real estate market.

There’s no way of getting around the fact that Proposition 15 would have substantial costs, likely in the form of job losses, higher prices for consumers and steeper monthly costs for businesses that rent space. It may also discourage investment in commercial and manufacturing properties that would be subject to a larger tax increase than could be offset by the proposed $500,000 exemption for business personal property.

But we support Proposition 15 because we believe it would ultimately create more winners than losers. Not only would it raise desperately needed money for public services, it would create a more competitive business environment and keep California on the innovative edge.

Currently, new start-ups must compete with companies that are subject to the same market forces for products and services, but the start-ups have to pay substantially higher land purchase costs and annual property taxes. Proposition 15 would narrow that gap. And if the split roll went into effect, it’s possible that some businesses whose incomes dip as a result of higher taxes may even see their assessed valuation decrease, because business income can be a factor in determining how much the property is worth.

Proposition 15 may even lead to more job opportunities, and not just for the many new commercial property appraisers that counties will need to hire. An analysis of the split-roll tax proposal commissioned by the California Tax Foundation estimates that after initial losses, there may be potential net gain of 20,000 new public and private sector jobs due to increased government spending. However, the study was completed before the pandemic forced business shutdowns, so that may have changed possible outcomes.

And while the opponents also say the measure will lead to higher prices on everything from food to healthcare to the cost of a Disneyland ticket, spreading out the cost so the burden falls more broadly on Californians is actually a selling point of Proposition 15. More revenue for government services benefits everyone. Even so, it’s not clear that the measure will cause prices to go up. A group of economists supporting the split-roll measure contends that supply and demand are the primary drivers of prices, and that a higher property tax is more likely to reduce profits than lead to price increases.

In any case, the effects of Proposition 15 wouldn’t be felt right away, which should reduce concerns about squeezing businesses that are currently struggling with government-ordered shutdowns to slow the spread of COVID-19 (a condition that has also produced a number of business winners and losers). The reassessments wouldn’t begin until 2022 at the earliest, and even then would likely be rolled out in phases through 2025 so that not all properties would be affected in the same year. Also, the measure empowers the Legislature to delay implementation as needed, and it probably would be needed in Los Angeles County, which would have to hire 500 additional commercial appraisers to undertake such a massive new responsibility.

Proposition 15 would begin to pave the way toward a fairer tax system and provide the means to start rebuilding the foundation of a once-great state whose glory has been fading over the last 42 years. In these dark times, it’s tough to imagine that there can be a bright future ahead for California. It’s possible, but only if we act without fear today.

Be fearless. Vote yes on Proposition 15.