Proposition 15: COVID-19 heightens debate over business property tax measure

Intel has long been a bellwether, founded more than 50 years ago
to produce the very product that gave Silicon Valley its name. Now,
the chipmaker and dozens of the region’s other old-guard
companies are among the California businesses that could become a
huge source of additional tax money for local government, schools
and community colleges.

Proposition 15 would change the way commercial property is
taxed. Instead of paying property taxes based on the value when
their land was purchased, many businesses would pay rates based on
a parcel’s current value if voters approve the measure in
November. Older landowners such as Intel, which bought much of its
property back when it was a bargain, would face bigger hikes.
Relative newcomers such as Apple would see smaller increases.

It’s a return to the way commercial property used to be taxed,
before 1978’s Proposition 13 transformed the landscape and
crystallized a nationwide taxpayers’ revolt.

With the pandemic and growing inequality as a backdrop,
arguments on both sides are fierce, and the campaign is expected to
be one of this election’s most expensive.

Supporters argue the new measure will help close corporate
loopholes that have made California a real estate tax haven while
depriving residents of more funding for essential government
services. By targeting properties worth at least $3 million, they
say, it will protect smaller owners of commercial property at a
critical time.

“We’re becoming kind of like a place where outside folks,
where billionaires from all over, park their money and pay no taxes
on it, or very little taxes,” said David Goldberg, a
vice-president at the California Teachers Association, which is
backing the measure. “It’s devastating us.”

But opponents, which include the state’s chamber of commerce,
the California Retailers Association and the Howard Jarvis
Taxpayers Association, counter that Prop. 15 is a potentially
devastating new tax in a state that’s already expensive for
businesses. Plus, they worry that bigger commercial landlords could
pass increased costs on to struggling small businesses through
higher fees at a time when many are barely hanging on or have shut
down during COVID-19.

“The impact from Prop 15 is going to be felt throughout the
economy, especially by small businesses and ultimately by the
consumers because these increased costs are going to land on the
pocketbook of the consumer,” said Matthew Mahood, CEO of the
Silicon Valley Organization, the region’s chamber of
commerce.

Currently, commercial and industrial property owners benefit
from the same Proposition 13-era rules homeowners do: Their
property taxes are based on what the value was when they bought the
property, not what it’s worth today. Increases are limited to 2
percent a year, protecting long-term owners in particular from a
meteoric real estate market. If Prop. 15 is passed, its impact will
be felt more heavily by companies such as Intel, which bought much
of its property between 1980 and 1994 at prices far lower than
today’s market rates. The company paid $12.1 million in Santa
Clara County property taxes in 2020.

Apple, meanwhile, paid $66 million in property taxes this year.
That’s partly due to its most valuable holding, its new Spaceship
headquarters, which was assessed at almost $4.2 billion after it
opened in 2017. Most of the company’s other 31 parcels in Santa
Clara County were purchased after 2001, a real estate lifetime
after Intel bought its land.

Proponents say reassessing commercial and industrial property in
California could bring in as much as $11.5 billion in taxes to be
split 60-40 between local governments and K-12 schools and
community colleges. Prop. 15 would do that by creating a split
roll, leaving intact homeowner’s Proposition 13 protections while
changing the rules for commercial owners.

Supporters point to a report from Blue Sky Consulting that found
92 percent of the new tax would be paid by just 10 percent of
commercial property owners, thanks to several provisions they say
shield small-business owners from a sudden tax increase and even
offer some tax breaks on commercial equipment. “This is really
going after a targeted group of folks,” Goldberg said.

Prop. 15 has the support of the California Democratic Party,
Gov. Gavin Newsom and vice-presidential candidate Sen. Kamala
Harris, various school districts and multiple labor unions
representing teachers and other municipal workers. The Yes on 15
committee has raised more than $40 million since 2018, including
nearly $6.4 million from the Chan Zuckerberg Initiative, about
$11.8 million from the California Teachers Association and more
than $12.3 million from local and statewide chapters of the Service
Employees International Union. The No on Prop. 15 campaign has
raised $25 million, more than $13 million of that from the
California Business Roundtable.

Opponents say many small businesses lease but don’t own
property, and some have lease agreements in which tenants pay for
any increases in property taxes. Supporters counter that
protections in the measure could delay any increases for some
small-business tenants by several years, giving them time to
renegotiate payments.

It’s possible the ongoing recession could bolster the
proposition’s chances as voters consider the impact of a slowing
economy on strained state and local budgets. If so, it would be the
culmination of decades of work from activists hoping to roll back
some of Prop. 13’s restrictions.

“It’s been a long time in the making and I think it’s here
and given the state of finances in California and the need for new
revenues by the schools … it’s probably coming at a good
time,” said Mark DiCamillo, director of the Berkeley IGS Poll,
which in September found 49 percent of likely voters support the
proposition, 34 percent oppose it and 17 percent are undecided.

“It’s not a direct tax for most people,” he said. “When
it comes to taxes, voters have a mindset of, ‘Don’t tax me, tax
that guy behind that tree, tax somebody else.’ “

Source: FS – All – Real Estate News 1
Proposition 15: COVID-19 heightens debate over business
property tax measure