State & Local Tax Bulletin (December 2009)
California Ballot Measures
A. Becker and
L. Hoenig, tax partners in
the Palo Alto office of Pillsbury Winthrop
Shaw Pittman LLP.
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On November 5, 2009, two ballot initiatives to remove certain Proposition 13 property tax protections for California commercial property were filed with the state's Attorney General.
- The first initiative, titled the "Protect the Homeowners and Close Corporate Tax Loopholes Act" (No. 09-0077, the "Reassessment Initiative"), would remove the Proposition 13 limits on assessed value of commercial real property and subject such property to reassessment at fair market value at least once every three years.
- The second initiative, titled the "Education and Taxpayer Fairness Act" (No. 09-0078, the "Rate Initiative"), would raise the property tax rate on commercial real property by 55 percent (from 1 percent to 1.55 percent) and reserve the incremental property tax revenue for California public schools.
Neither initiative would change any of the existing Proposition 13 protections for residential real property.
The California Teacher's Association (CTA) is likely the principal sponsor of both these initiatives. Before either initiative can be put on any statewide ballot, the proponents must first collect petitions with 694,354 (certified) signatures. For the initiatives to be placed on the November 2, 2010 ballot, certain analyses and summaries at the state level and then collection of signatures and the requisite certification would need to be completed by June 24, 2010. Majority approval of the voters would be required to pass any initiative that made it to a statewide ballot. Cal.Const. Art. II, § 10(a).
Background on California's Proposition 13
California's Proposition 13 (Article XIII A of the California constitution) provides, among other rules, two significant restrictions on California property taxation.
- The assessed value of California real property on each lien date must be the lesser of the property's fair market value or its indexed base year value. The indexed base year value is the property's fair market value as of its last change of ownership (plus increases to reflect the value of any new construction), increased by an annual inflation factor of no more than 2 percent. Cal.Const. Art. XIII A, § 2(b).
- The property tax rate applied to the above determined assessed value of California real property cannot exceed 1 percent. Cal.Const. Art. XIII A, § 1(a).
The Reassessment Initiative would remove the base year value assessment limit, requiring that commercial real property be reassessed at its fair market value no less often than every third lien date. The Rate Initiative would subject commercial real property to a 1.55 percent annual property tax rate, instead of the 1 percent rate otherwise applicable under Proposition 13.
Common Provisions in the Two Proposed Initiatives
B oth initiatives apply their respective higher property tax structure only to commercial real property. Both define commercial real property as "non-residential real property that is not used for commercial agricultural purposes." More specifically, the initiatives provide that the higher taxing structure would not apply to either:
- Property used and zoned for commercial agricultural production.
- Single family or multi-family dwelling units used as a permanent residence (including residential rental property), or zoned to be used as a permanent residence, including the underlying land.[fn. 1]
Both initiatives provide businesses an annual exemption from property taxes for the first $1 million of tangible personal property, but specify that the exemption does not extend to boats and airplanes not used in the daily operation of the business.[fn. 2]
Both initiatives double the annual homeowner's exemption (from $7,000 to $14,000), and double the maximum income tax credit for renters (from $120 to $240).[fn. 3]
Both initiatives specify that the incremental revenue will first be used to reimburse counties for lost revenue from the increased exemptions. In the case of the Reassessment Initiative, local assessors would also be reimbursed for the increased cost of regularly reassessing commercial real property. In the case of the Rate Initiative, the state's general fund revenues would be reimbursed for lost state income tax revenue from increased property tax deductions.
Differences Between the Two Proposed Initiatives
The Rate Initiative would apply a higher property tax rate (1.55 percent, rather than 1 percent) to the existing Proposition 13 valuation standards for commercial property (i.e., assessed values set at the lower of the indexed base year value and fair market value).[fn. 4] The incremental tax revenues (after reimbursements for lost revenue from increased exemptions and increased income tax deductions) would be segregated in a separate trust fund to be used solely for California public schools. 78 percent of the net incremental property tax revenue would go to K-12 public schools, and the remaining 22 percent would be split equally between California community colleges and California State University System. The Rate Initiative also includes additional provisions attempting to insure that California schools continue to receive the same funding from existing revenue sources, so that the new funding from the proposed higher tax rate is indeed new additional revenue for the California schools. The higher tax rate would first take effect as of the January 1, 2011 lien date, and apply to the 2011-12 fiscal year.
The Reassessment Initiative would preserve the existing 1 percent property tax rate. However, it would require that all commercial real property be reassessed up to (or down to) its current fair market value at least once every three years, thereby removing the current Proposition 13 protection limiting assessed values to a property's indexed base year value.[fn. 5] County assessors would require substantially more staff to perform these periodic appraisals, which in turn would lead to a larger volume of assessment appeals, particularly on larger properties. Incremental revenue from this initiative would be included with all other general property tax revenues and allocated among existing governmental uses (including the public schools). The required three-year cycle of commercial property reassessments would commence on the January 1, 2012 lien date.
Nothing precludes passage of both initiatives. As noted above, each initiative addresses a separate Proposition 13 protection for commercial real property, and both initiatives otherwise use consistent definitions and provide for consistent increased exemptions. Accordingly, if both were passed, commercial real property would be regularly reassessed at its fair market value, and would also be taxed at the higher 1.55 percent rate.
Implications for Commercial Real Estate
If passed, these initiatives would create added tax property tax burdens on the owners and tenants of California commercial real estate. Property owners, tenants, and prospective tenants will want to monitor the progress of these ballot initiatives for purposes of current and future lease negotiations. They will want to pay very close attention to property tax pass-through clauses, both on triple net leases and on gross leases with expense stops, in order to specify which party would bear the costs of these potential property tax increases.
- 09-0078 Prop.Cal.Const. Art. XIII A, §§ 1(b), (d)(1); 09-0077 Prop.Cal.Const. Art. XIII A, §§ 2.5(a), (b)(1).
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- Prop.Cal.Const. Art. XIII, § 2, Prop.Cal.Rev.& Tax.Code § 210.
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- Prop.Cal.Const. Art. XIII, § 3(k), Prop.Cal.Rev.& Tax.Code § 218(a).
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- 09-0078 Prop.Cal.Const. Art. XIII A, § 1(b).
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- 09-0077 Prop.Cal.Const. Art. XIII A, § 2.5(a), Prop.Cal.Rev.& Tax.Code § 405.6.
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This material is not intended to constitute a complete analysis of all
tax considerations. Internal Revenue Service regulations generally
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