One proposition that didn’t receive as much coverage as others during the 2020 election was the proposal of Proposition 15 in California. This proposition is particularly interesting for commercial real estate (CRE) professionals, as it would have rolled back property tax increase restrictions for the first time in more than four decades.
It begs the question, though: how would this have impacted commercial real estate lease taxes? Let’s take a look to see what could have been (and what may be possible in the future).
Revised Proposition 13
For starters, Proposition 15 would have revised part of Proposition 13, which was passed in California in 1978. According to the California government, Proposition 13 “provides three very important functions in property tax assessments in California. Under Prop 13, all real property has established base year values, a restricted rate of increase on assessments of no greater than 2% each year, and a limit on property taxes to 1% of the assessed value (plus additional voter-approved taxes).” Since the proposal was rejected, Proposition 13 will remain the same.
Increased Taxes for $3M+ Properties
Proposition 15 would also have increased taxes for properties valued at $3 million or more. It wouldn’t have affected private properties or small businesses, which would still be taxed based on their purchase price. For commercial properties that qualify for tax increases under Proposition 15, they would have been taxed based on their market value (aka a “split roll.”) With the rejection of Proposition 15, CRE properties will continue to be taxed based on the purchase price of the property.
More Revenues for the State
California officials have been trying to figure out a way to increase tax revenues for some time now—without causing a taxpayer uprising. It’s estimated that Proposition 15 would have increased tax revenue by $8-12 billion annually for the state, with most of the money going to schools and local governments. Now, the state will have to find a new source of revenue.
Raised Cost of Living
It’s easy to see how Proposition 15 also would have possibly contributed to a higher cost of living for California residents. CRE landlords would be forced to charge higher rent for small businesses to offset the cost, which would then be passed along directly to consumers. Instead, the resulting effect of no tax increase on these commercial real estate properties should have the same net effect on the end consumer – no increased cost of living.
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