Split-Roll Property Tax

Prop 15 assesses property taxes for certain commercial buildings based on current market value rather than its purchase price, generating between $6.5 billion and $11.5 billion annually for local governments and schools. It creates a “split-roll” property taxation system, where residential properties, agricultural properties, and commercial properties worth under $3 million would be taxed on their purchase price (plus an increase of up to two percent per year), and commercial properties worth more than $3 million would be taxed on current market value. Tax rates would continue to be capped at 1 percent due to 1978’s Prop 13, which also capped annual increases by 2 percent for all properties.

Prop 15 would bring revenue to every local government and school district in the state. Many of these entities were struggling financially before the pandemic, and are now facing catastrophic budget cuts. Its remedy is to stop giving incumbency property tax breaks to owners of valuable commercial property, putting new businesses on the same footing as legacies. For example, today a new grocery store would pay multiple times the property taxes of one that’s been on its location since 1980. This anti-newcomer property tax regime discourages entrepreneurship and starves governments of funds.

That said, Prop 15 is not without its risks. While pro-housing groups support Prop 15, one housing-related concern has been that split-roll property taxation may encourage local governments to zone land for commercial over residential use, since commercial properties would pay more taxes than residential properties over time. Research from the Bay Area think tank, SPUR, gives credence to this suspicion around land use fiscalization, finding that cities that retain more property tax revenue (compared to the state, thanks to clauses of 1978 Prop 13) produce more housing. However, an analysis from the Urban Institute found that a small share of residential parcels could be plausibly rezoned to commercial use, and that the opposite incentive---for commercial property owners to convert their property to multifamily housing when it’s zoned for both, given lower property tax increases---is significantly larger in magnitude. As authors of the Urban study acknowledge, those property owners would encounter difficulty going through local approval processes, and having supported housing in many such local meetings, I think their optimism may be overstated. While I’m still uncertain about the effects on housing production, their study reduced my concern.

Consumers and workers would also bear some of the costs, given the evidence that commercial tenants bear a significant share of commercial property tax burdens. However, the types of commercial properties that would be affected, large legacy businesses with an artificial advantage over competitors, are likely to be less productive than newcomer peers, so consumers and workers would likely have better options if Prop 15 gave these new entrepreneurs an opportunity to compete. And on net, extra taxes of this form would be more than compensated by greater public spending, making the reform progressive on the whole.

Finally, there’s a political risk that carving out the least sympathetic beneficiaries of 1978 Prop 13---large commercial property owners---makes a grand bargain that includes residential property tax reform less likely. Residential Prop 13 benefits make California resemble an aristocracy, with newcomers subsidizing the public services used by longtime incumbents through higher property taxes and higher income taxes, needed to offset the low property tax revenue. However, defeating parts of Prop 13 through split-roll and cutting its inheritability, could give it the momentum needed to chip away over time.

Overall, Prop 15’s benefits are clear: billions in revenue for local governments and schools as we dig our way out of a historic recession, funded by incumbent businesses who’ve had a nativist property tax break for too long. The risks around housing production, tax incidence, and political bargaining are directionally uncertain and clearly smaller than the advantages. This is one of the most consequential measures on the ballot, improving California’s tax system and fiscal situation for decades to come. Vote yes.