October 27, 2020

California Taxes in Focus: Proposition 15

Proposition 15 will result in increases in property taxes for businesses in California. The proposition is aimed at businesses owning commercial and/or industrial property with a fair market value of at least $3 million. If you’re a Californian, you know that a $3 million dollar property, especially in the context of commercial real estate, isn’t a very high bar. Proposition 15 will be on the ballot on Election Day on November 3rd.

Essentially, Proposition 15 would require any business that has commercial and/or industrial properties with an aggregate fair market value of at least $3 million to adjust the taxable value of their properties every 3 years to fair market value, which would then be multiplied by the property tax rate applicable in a given jurisdiction. The existing law allows businesses to pay property taxes based the purchase price of the property. As Californians are all too aware, property values have increased dramatically for decades. Thus, the result is that many businesses would be paying substantially higher property taxes because of the appreciation of their properties. The obvious problem is that paper gains don't equate to profitability or cash flow of a business. A business could very well have a substantially appreciated property AND a failing business.

San Diego County Assessor Ernie Dronenburg estimates that half of commercial properties in San Diego are valued over $3 million. The same (or worse) is likely true among the other population centers across the state. The impact of this Proposition would be to increase the cost of doing business in California. Unlike taxes on net income, this tax will be levied on businesses that have net operating losses solely because they chose to own their properties as opposed to renting them. And, if they did rent them, the additional taxes paid by the landlord would ultimately result in higher rents for the renting business. Our friends at the Tax Foundation have written a great article that dives deeper into the specifics of Proposition 15.

When the cost of doing business increases, businesses either raise their prices, cut their staffing or some combination of both. Also, it could be part of the equation for a business either shutting down or moving out of state. This equation includes the myriad other tax increases that are being contemplated (such as AB1253). Be mindful when you vote. These measures do not exist in a vacuum and will not just affect the wealthy.

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