Understanding property taxes and ‘Frankenstein's monster of propositions’

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Proposition 15 would amend the California State Constitution to require that some commercial and industrial properties be reassessed and taxed on their market value. Photo by Pixabay

Decades ago, voters passed Prop 13, which tied property taxes to the purchase price of homes and commercial properties. This year’s Prop 15 would remove that protection from some commercial properties. Both sides are well-funded, with tens of millions of dollars spent for and against. Business leaders, teachers, and Facebook CEO Mark Zuckerberg are getting in on the spending. 

KCRW follows the money with Ben Christopher, who covers California politics and elections for CalMatters.

KCRW: What would Prop 15 do in general?

Ben Christopher: “The big picture question is whether voters want to raise property taxes on large and medium sized businesses in order to raise what would be billions of dollars, in between $6-11.5 billion, for local governments and schools. 

But to sort of understand how this works in practice, you do have to kind of get into the weeds of this other very contentious property tax measure from 1978 … Prop 13. 

And so Prop 13 … it capped property taxes across the state. And the main way it did that was by setting property taxes based on how much a property was purchased for, rather than its current market value, which is unusual. Most states, I think maybe every other state, doesn't do it that way. … The longer that someone owns a piece of property — assuming that property values go up and up, which in California is a safe bet — the bigger the tax break they get. And it's a tax break that applies to both homeowners, but also commercial and industrial property owners. 

And so what Prop 15 would do this year — is to take that tax break away from business property owners with some exceptions.” 

This wouldn't touch residential property, only commercial property?

“Right. If you're a homeowner, you would retain the Prop 13 protection.”

Is it all commercial property? Or is there a minimum amount?

“Yeah, there are some key exemptions. And so the biggest one is what the proponents of Prop 15 call small business exemption, which the proposition defines is any property owner that owns less than $3 million worth of property in California. 

And so, I've heard from some readers from Beverly Hills and San Francisco saying, ‘$3 million, that's nothing.’ So depending on where you are in your state ... that might mean very different things. But essentially, if you are within this small business exemption, you would be able to keep your Prop 13 protection.”

But for everyone else, their rates would go up to the current fair market value immediately?

“Right, which it could be a lot, it could be a little. It kind of depends on the last time that the property was assessed. And so say you own a big store in California, right now you pay your property taxes based on however much that store was purchased for. And so if you purchased the store last year, then you're not really going to see a property tax increase. 

But if you purchased in 1980, and Prop 15 passes, then the store is going to be reassessed to that new market value, which could be a very large increase.”

That kind of changes now that we're in a pandemic, right? I wonder if these businesses are thinking, ‘Look, this is the last thing we need. We're barely hanging on. And if you increase our property taxes, that's it for us.’

“Oh, they're definitely thinking that. … They're saying, ‘Look, we're in the middle of a pandemic. … California already has fairly high business costs. So is this really what we need?’

On the other hand, from the proponents, you also see sort of the shifting political rhetoric around the pandemic saying, ‘Hey, look at schools, look at local governments, they're being financially gutted. They could really use some extra funding right now.’”

Why is Mark Zuckerberg and Facebook getting involved in this?

“The Chan Zuckerberg Initiative is actually a private company that was set up by Mark Zuckerberg and his wife, Priscilla Chan. But it sort of operates as this philanthropic organization that contributes to various initiatives. … They are one of the top funders for Proposition 15. 

It's sort of unusual because for the most part, this is a standoff between organized labor and progressive groups and business groups who really don't want to see Proposition 15 passed. 

But the Chan Zuckerberg Initiative is one exception to that rule. … If you ask them, it's because they believe that this is good policy. And it does maybe align with the fact that Silicon Valley tends to be a bit more liberal, at least on some issues, and Mark Zuckerberg himself is kind of hard to pinpoint politically sometimes. 

But I think there's the belief that this would be very helpful to raise all this additional funding for schools and local governments. 

But I think there's also a context here, which is that again, because if Prop 15 passes, it would raise property taxes, particularly on businesses that had been sitting on property for decades. And if you are in the tech sector, particularly if you're Facebook or Salesforce, you actually haven't been owning your campus for all that long. And so actually, there's an argument to be made that perhaps they don't have as much to lose if Prop 15 passes.”

Prop 19 would tweak property tax laws. It's tangentially related in that it would affect older homeowners, and they could transfer their property tax base — the presumably low rate that they have because they've been living in their homes for so long — to a new property if they move. Is that the essential reading of Prop 19?

“Yeah, I mean, so what makes this a little bit complicated is that it's sort of a Frankenstein's monster of propositions in the sense that the main issue is the one that you just described, where it would provide this tax break to particularly empty nesters, older homeowners, homeowners who are permanently disabled, homeowners who have been the victims of natural disaster. 

And it would allow them to sell their home and move to a new one without having to take this really large tax increase. Because they'd have to pay a property tax based on the new, probably higher property tax. So that's sort of the main provision. 

And it's something that actually the California realtors have been pushing for a really long time. And so this year, they're putting this measure back on the ballot. But they've added a few sort of sweeteners to the deal. 

So there's also the second provision that would increase property taxes on people who inherit homes, particularly if they inherit homes that they don't use as their permanent residence. 

And in fact, there was the story in the Los Angeles Times a couple years ago that pointed out that Jeff Bridges, the actor, was taking advantage of this tax break. And so sometimes you hear this called the Lebowski loophole. So it would close the Lebowski loophole. 

And then … any difference that the proposition raises between this tax break and the tax increase, which is estimated to be about $1 billion, that would go to wildfire fighting. 

And so these extra goodies were added in order to get the Democratic Party onboard, in order to get firefighters onboard. And so now you have this sort of like Frankenstein's monster of these three very sort of related policy proposals that have just kind of been grafted onto each other. And that's how we have Prop 19.”

— Written by Amy Ta, produced by Brian Hardzinski