California has the population, economic might, and ambitions of a country. But it often doesn’t have a rational tax system to match.
Case in point is Prop 13. In 1978, property taxes were increasing too fast for many homeowners to pay, so voters passed this proposition to severely limit both property tax rates (to 1%) and their rate of increase (no more than 2% a year). While proponents mostly talked about the impact on homeowners, Prop 13 applied not only to homes but to commercial and industrial properties used by businesses.
While most homeowners will eventually sell their house, triggering a fair assessment of the property’s value, most non-residential properties are owned by corporations, so there is no reason to sell—just sell the corporation instead. Many properties in California (for example, Disneyland) are actually taxed based on less than their 1978 value, adjusting for inflation (which grows faster than 2% a year). As a result, since Prop 13 passed, the property tax burden has shifted from primarily on commercial properties to primarily on residential ones. Prop 13 has also created an uneven playing field between California businesses; a business can be more “competitive” simply because it occupies commercial property that hasn’t changed hands in a while, distorting the market.
Prop 15 restores the original intent of Prop 13, restoring market-rate taxes for commercial and industrial properties while leaving property taxes on residential and agricultural property untouched. It also excludes properties less than $3 million and is phased in starting in 2022, or for properties leased to small businesses. It also reduces property taxes on business equipment—the first $500,000 is exempt.
Nobody likes paying more taxes (least of all the property owners funding the No on 15 campaign), but an irrational, unfair property tax system like the one Prop 13 created means that while some commercial property owners receive windfalls, other businesses and other taxpayers have to bear the burden. Ultimately, the public pays the price through underfunded schools and other basic government services.
California’s state and local governments are the only democracy we have, and we should not be afraid to fully fund them by picking the low hanging fruit and creating a level playing field for California businesses. And it could not come at a better time. In the midst of a Covid-fueled recession, with a federal government we cannot count on to save us, passing Prop 15 would generate $6.5-$11.5 billion a year in new funding for local governments and schools.