Los Angeles Mayor Endorses Push to Repeal California Property Tax Limits on Businesses

Los Angeles Mayor Endorses Push to Repeal California Property Tax Limits on Businesses

Proponents Say Change to Historic Proposition 13 Protects Some Commercial Property Users

Los Angeles Mayor Eric Garcetti has endorsed a partial repeal of California’s Proposition 13 regarding commercial property. (Getty Images)

The mayor of California’s largest and most populous city has officially embraced a proposed state ballot measure that would repeal a portion of the state’s landmark Proposition 13 by taxing most commercial properties at their market-rate value.

Los Angeles Mayor Eric Garcetti endorsed a modified “split roll” measure by the Schools and Communities First campaign, a coalition of unions and community groups sponsoring the initiative aimed at capturing billions in property tax revenue to fund schools and local government. The group praised Garcetti’s move as evidence that the measure “continues to gain momentum throughout California and attract the support of the state’s most influential leaders.”

“I am proud to strongly support the Schools and Communities First campaign, which prioritizes our kids and communities over corporate tax loopholes,” Garcetti said in an announcement on the group’s website. “This historic initiative will generate more than $12 billion every year for public schools and local services to house the homeless, maintain our streets and respond to emergencies, while protecting homeowners and renters and providing a critical tax break for small business owners.”

Proposition 13, passed by state voters in 1978, capped annual property tax increases on properties in California, the nation’s most populous state, at 2% with valuation reassessments allowed only when properties are sold. The law has long been criticized as draining state coffers of crucial funds for schools, emergency services and local community programs as property values skyrocket, with critics noting that California still has among the highest income, sales and gas taxes in the nation. However, all but one of the efforts to repeal the measure has failed to make the ballot because of political distaste for raising property taxes, which has been called the “third rail of California politics” for decades.

Schools and Communities First this month began efforts to collect 1.6 million signatures and secure endorsements from elected officials throughout the state after it refiled a previously submitted similar measure with the California Secretary of State in August with changes aimed at making at more palatable to voters, especially small businesses. Group leaders did not immediately return requests for comment on how many signatures they have collected since the petition drive began two weekends ago.

The original measure known as the California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative, first qualified for the Nov. 3, 2020 ballot in October 2018 after proponents collected the more than 585,000 valid signatures required by state law. However, the Schools and Communities First campaign scrapped that measure in an attempt to gain wider public support among voters, refiling a new initiative dubbed the California Schools and Local Communities Funding Act of 2020, which proponents said provides more tax relief and other protections for small businesses.

The new language exempts owners with commercial property with a combined value of $3 million or less, as well as agricultural property owners, from the required property tax reassessment, an increase from the previous $2 million threshold, according to the ballot language filed with the state. Property taxes for single-family residential homeowners would remain capped at 2% annually.

Under the new proposal, the reassessment would also be phased in for small business tenants to give them enough time to find other lease options properties if they believe their properties will be affected by the reassessment, according to the ballot language.

Challenges Ahead

Other changes are aimed at ensuring that all school districts receive equal access to the funding, and that large corporations cannot use zoning loopholes to avoid reassessment.

“Mayor Garcetti’s strong endorsement is another huge boost of momentum for the Schools and Communities First campaign to close corporate loopholes and reclaim $12 billion for our schools and local communities,” Schools and Communities First Communications Director Alex Stack said in a statement. “With the mayor of California’s largest city behind this initiative, the strength and diversity of our coalition – comprised of teachers, parents, community leaders, organized labor, leading presidential candidates, small business owners and more – is growing throughout the state.

Stack added that “mayors are on the front line of addressing many of California’s most pressing challenges” and called the measure a “historic step towards investing in our future.”

In addition to Garcetti, the revised ballot measure has been endorsed by the California Democratic Party and two politically powerful unions, the California Teachers Association and the Service Employees International Union.

However, the measure still faces many hurdles.

Under new qualification guidelines based on the record voter turnout in the November 2018 state election, organizers will need to collect 997,113 valid signatures by May 1 to reach the November 2020 ballot, more than 16.5% more than the 855,000 signatures gathered to obtain the 585,000 signatures needed to qualify the prior measure.

Los Angeles voters last June shot down a parcel tax endorsed by Garcetti that was opposed by real estate owners, anti-tax advocates and businesses groups that could have paid the largest share of the $500 million targeted annually for the country’s second-largest school district behind New York City.

California real estate groups and businesses have warned that hundreds of companies could leave California and take thousands of jobs with them to avoid paying higher state taxes, moves that could drive up commercial vacancy rates, discourage development and alter the economics of real estate investment in the state.

“I still don’t believe there will be a split roll,” Jordan Kaplan, chief executive of Santa Monica, California-based Douglas Emmett Inc., the largest office landlord in Los Angeles, told analysts last week, noting that Proposition 13 is “extremely popular” and that a split tax roll would have “tons of impacts and ramifications.”

He continued by adding that “the polling at the moment is [that] it’s a complete loser.” In response to a question from an analyst, Kaplan declined to give an estimate of how the measure, if successful, could affect Douglas Emmett’s property tax costs.

At least one other commercial real estate company has announced the sale of a property in response to the pending threat of the split-roll tax. Privately owned real estate firm Decron Properties in July sold an office and shopping center in Huntington Beach, California, as part of a plan to divest office assets in the Golden State prior to a vote on the previous version of the ballot measure that could raise property taxes on office, industrial and retail buildings.


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