They say all politics are local. While the election on November 3rd includes an opportunity to cast your vote for the United States president, you must also pay close attention to the local Propositions. Critical among these is Prop 15. This Proposition is commonly referred to as the split-roll initiative. Its official title is the Increases Funding Sources for Public Schools, Community Colleges, and Local Government Services by Changing Tax Assessment of Commercial and Industrial Property.
In plain language, Proposition 15 is the most massive annual property tax increase in California history. It will increase property taxes on commercial property worth over $3 million. The new property taxes will be based on the property’s current market value instead of the original purchase price. If passed, the Proposition will reverse the 1978 Prop 13 property tax protections for businesses.
Understanding Prop 15
I first wrote about Prop 15 in May of 2019 and again in March of 2020. I have devoted a lot of time and energy to this topic because I know the devastating impact this will have on most of our association members. PIASC has many long-time business owners and multi-generational owners that will be directly impacted by this vote. We also have many small members who rent a storefront and other small commercial properties that will be affected indirectly.
In addition to the printing industry, there are businesses throughout the State that will feel the pain. Prop 15 is a tax increase on properties worth over $3 million. As these taxes rise, the prices for these companies’ products and services will also rise.
If you haven’t already seen the television commercials, below you’ll find one pro-Prop 15 and one No on Prop 15 commercial. Watch and listen to each video carefully.
Yes on Prop 15
No on Prop 15
In the pro-Prop 15 video, the proponents make it sound like only large corporations will pay the new tax. The truth is, if your building is worth more than $3 million, you will see a tax increase. What does $3 million worth of commercial real estate look like in California?
- 9,634 sq. ft Industrial Building Long Beach $3,000,000
- 3,453 sq. ft. Industrial Building La Puente $2,987,500
- 8,050 sq. ft. Industrial Building Burbank $3,300,000
As you can see, depending on location, even a small building will see a tax increase. That increase will include both an initial massive tax increase for the difference between the property’s original purchase price and the current year, then another tax increase every two years.
Do Small Businesses Really Get a Break?
What about small businesses that rent? In the world of commercial real estate, business leases usually come with a triple net lease. That means the individual or company leasing the property, shop, or office space is responsible for covering increases in a property’s insurance, maintenance, and taxes. Thus these small businesses are contractually liable for the tax increase passed on to them by the leaseholder. Understand, three-fourths of California small businesses do not own their property. Most of these properties are worth more than $3 million. Imagine what will happen to the rent each of these printing companies, restaurants, barbershops, and dry cleaners if Proposition 15 passes. For instance, the Association has just been notified that if Prop 15 passes, our monthly rent will increase $1,809 per month on 12,904 of rental square feet.
When the rent goes up on small businesses, they have no choice but to pass this on to the consumer or cut costs, which, more likely than not, will come from workforce reductions. “They don’t understand that many of our small businesses rent,” said Tracy Hernandez, CEO of the L.A. County Business Federation. “It’s a crazy tax increase at this time when we’re just trying to survive.”
Owners of large commercial properties like shopping centers will pass the tax increase on to smaller tenants in higher rents and fees. That’s why groups such as the California NAACP and the California Black Chamber of Commerce have also come out against Prop 15. Alice Huffman, President, California State Conference of the NAACP, says, “Too many families have been priced out of their neighborhoods because of the rising cost of living.” She believes that Prop. 15 will both raise the cost of living for California families and “will especially hurt lower-income communities.”
Do the Schools Need More Money?
Californians are a generous people when it comes to education. In 1988, we passed Prop 98, which guaranteed 40 percent of the State’s operating budget to go to schools and community colleges. In the decade from 1998 to 2008, two-thirds of local school bond proposals in California were approved. Eighty-four percent of local school bond proposals were approved in California from 2008 through 2019. Yet schools don’t have enough money.
According to the U.S. Department of Education National Center for Education Statistics, the State Nonfiscal Survey of Public Elementary/Secondary Educationreported that California had 6,248,610 public elementary and secondary school students during the 2000-01 school year. That same publication said California had 6,226,737 public elementary and secondary school students in the 2015-16 school year. That’s nearly 22,000 fewer students in California schools, yet the Teacher’s Unions and other educational organizations ask for more money.
The Prop 15 proponents also emphasize that the money raised from increasing taxes on businesses will help children and schools. According to the California General Election Official Voter Information Guide, $1 billion each year will first go to counties to pay for their costs of carrying out the measure. We’re talking bureaucrats who will spend the higher property tax revenue on anything they want, including administrative expenses, outside consultants, and pay raises. Then 60 percent of the balance will go to cities, counties, and special districts. The 40 percent of what’s left goes to schools and community colleges. So, the schools come last.
Is This the Best Time to be Raising Commercial Property Taxes?
On September 16th, 2020, Yelp, the app that connects people with local businesses, released data that showed that 60% of business closures nationwide due to the coronavirus pandemic are now permanent. According to an article from CNBC, Los Angeles has seen 15,000 business closures, half of which are permanent. Now is not the time to raise property taxes and rents on companies trying to survive a global pandemic.
I have personally seen what COVID-19 has done to the printing industry in the past six months. The impact of the pandemic has been a loss of 60%-70% of production. There are signs that the recovery is returning. Still, it is prolonged, and most economists and their crystal balls say that the full recovery is 12-18 months away. In most cases, the PPP funding that propped up operating capital is gone, and now, without the sales to support the business, we see companies closing, and a new round of layoffs beginning.
The Big Picture
I’ve had the opportunity to share my thoughts with several members of the Association and other business owners. The majority hold the opinion that Prop 15 is bad for business. A minority believe that Prop 15 will level the playing field and bring everyone’s property tax burden to the same relative level. While I may not like the minority view, I cannot disagree. The real overarching problem is that the system of taxation in California is broken. Special interest groups are now focused on commercial property taxes, but the same problem exists with residential property taxes. One only has to look to residential areas where one homeowner is paying taxes on a relatively current assessment only to have a neighbor who is a 2nd or 3rd generation family owner paying property taxes based on the 1975 assessment that was passed from one generation to another. If the theme is that everyone needs to pay their fair share, how does residential property taxes escape change? All indications are that residential properties will not escape. Once business owners lose Prop 13 protections, homeowners will be next.
In California, we have a habit of picking one component or another of the tax code and changing it to achieve a particular revenue goal. In the end, we created a fragmented system of taxation that’s so complex it takes an army of attorneys and accountants to figure it out. I suggest we put a team of non-partisan business leaders together in a room to design a system of taxation that will result in sufficient revenues for government and schools to exist. Then create a simple tax system with no loopholes resulting in a level playing field. I know! Keep dreaming. I fear that without concrete action, at some point, the system is going to collapse.
Let’s face it. The problem is not just a “top line” issue. There is a huge cost issue. It’s uncomfortable in many circles to talk about the out of control spending that cannot possibly be sustained. We cannot keep “kicking the can down the road” and pointing the finger of blame at one party or another. Our kids are going to inherit this mess.
It is time that we, the voters, stand up and address the problem.
– How many out of control high-speed trains are we going to build?
– How many computer tablets for all students are we going to purchase?
– How many DMV and payroll systems are we going to blow money on?
I have said this before, but at some point, revenues will not keep up with spending, and governmental entities will be forced to file bankruptcy. We have seen examples of this in our State in Stockton and San Bernardino and other states like Michigan with Detroit. It’s high time that we face the realities, put our partisan ways behind us, leave our egos at the door and get down to the real business of cleaning up this mess so we can all prosper!
Beyond Prop 15
This November, on Election Day, California voters will decide on many Propositions that will affect each person in the State. In addition to the Prop 15 increased tax assessment of commercial and industrial property, there are other Propositions to consider. These include:
- Certain homeowners property tax rules (Prop 19)
- Parole for certain offenses (Prop 20)
- Enacting rent control on residential property (Prop 21)
- App-based transportation and delivery companies (Prop 22)
- California’s money bail system (Prop 25)
Voting is a privilege that we enjoy as citizens of the United States. Please make the time to vote, but before you cast your ballot, educate yourself on these Propositions. Get a copy of your Voter Information Guide here: https://voterguide.sos.ca.gov/