November 2020 Ballot Initiatives in California Aim to Change Policy on Commercial and Residential Properties
California is in the midst of a housing crisis: High rents and home values have contributed to the nation’s highest poverty rate, causing the state to be ranked as fourth-most-unequal state in the U.S. Half of California renters are considered “rent-burdened,” spending more than 30% of their income on rent. At the same time, the public is urging change to statewide tax policies that have benefited large corporations and long-held family property. Three of the twelve measures on the November 2020 statewide ballot aim to change policy on residential rents, tax assessment of commercial properties, and inherited tax benefits on residential properties.
In 1911, Governor Hiram Johnson instituted the citizens’ initiative system in California. For the past century, Californians have voted on proposed statutes and constitutional amendments during statewide elections. California ballot measures require only a simple majority of the votes cast in order to become law. This form of “direct democracy” has as many supporters as critics. Critics believe that the initiative process, which often results in new spending, makes it difficult for the state to balance the budget. Ballot initiatives are often complicated, and pithy campaign slogans may mislead voters. Residents who generally distrust the legislature, however, appreciate that ballot initiatives give direct voice to the voters.
Californians have used the process to bring about major policy change: Proposition (or Prop) 13 (1978), proposed by the Howard Jarvis Taxpayers Association, created limits on tax assessments for residential and commercial properties; Prop 59 (2004) amended the state constitution to include the public’s right to access public records; Prop 11 (2008) and Prop 20 (2010) created the independent commission to determine the boundaries of districts for political offices; and Prop 14 (2010) established the top-two (“jungle”) primary system in California.
Citizen initiatives unfortunately have also been used to advance discriminatory policy changes. The California Real Estate Association sponsored Prop 14 (1964) in an attempt to repeal the Rumford Fair Housing Act of 1962, which helped end racial discrimination by property owners and landlords. Prop 14 was passed by voters but was eventually nullified by the California Supreme Court, and the nullification affirmed by the U.S. Supreme Court.
Proposition 15: “Split Roll” Tax Proposal on Commercial and Industrial Property
The proponents of this measure are citizens, backed by SEIU California, the California Teachers Association, and the Chan Zuckerberg Initiative. This proposed constitutional amendment—a partial repeal of Prop 13—would tax some commercial property based on its market value, rather than the price at which it was purchased. Under the measure, commercial properties would be reassessed every three years. Companies with fewer than 50 employees and less than $3 million in property would be exempt. This measure does not affect how agricultural land is assessed.
Supporters of this measure argue that Prop 13 has allowed hugely profitable Fortune 500 companies to pay taxes based on outrageously low assessed land values, resulting in a paucity of funding for local government and public education. It is estimated that if Prop 15 is successful, the new policy would generate $6.5–11.5 billion per year. This additional revenue would fund K–12 schools, community colleges, and local government—all which have suffered from budget cuts. California is somewhere near 40th in the nation in per pupil spending currently.
The current policy allows longtime commercial property owners to have an overwhelming advantage over start-up businesses, thereby stemming innovation in the state. It is estimated that Prop 15 would disincentivize commercial property owners who have kept empty storefronts because their tax burden was so low.
Proposition 19: Property Tax Breaks and Closing the “Lebowski Loophole”
This constitutional amendment was placed on the ballot by the state legislature, via a bill by San Mateo Assemblymember Kevin Mullin, and sponsored by the California Association of Realtors. As the law stands today, parents are able to transfer a primary residence of any value to their children without the property being reassessed at market value for property tax purposes. If successful, this measure would limit the ability of a beneficiary to keep their parents’ (or grandparents’) low property tax payments. This measure would also allow homeowners who are over 55 years old, disabled, or victims of natural disaster to take a portion of their property tax base with them when they sell their home and buy a new one. Most of the additional money raised from higher property taxes would go toward a state fire response fund.
This measure includes a provision that holds that anyone who inherits a home from parents (or grandparents) would only be allowed to keep the low property taxes if (1) they use the home as their primary residence, and (2) only on the first $1 million between the home’s original purchase price and its market value. The inspiration for this caveat likely came from an August 2018 L.A. Times article which highlighted how actors Jeff and Beau Bridges inherited a beachfront Malibu home that their parents bought in the 1950s. The Big Lebowski star advertises his Malibu rental for nearly $16,000/month but pays less than half that in annual taxes.
An effect of California’s residential property tax policy has been that it creates generational inequalities between those who have owned homes and those who have not. The law currently does not place a limit on how many generations of descendants can take advantage of the inherited benefit. As is becoming more widely known, for decades discriminatory racial covenants blocked homeownership for non-White families, which means that very few Black and Latinx descendants have been able to benefit from this inheritance tax break.
In 1992, the U.S. Supreme Court heard a challenge on California’s property tax policy. During argument, Justice Harry Blackmun questioned why the children of homeowners received tax breaks, if the original fear was that elderly would no longer be able to afford to stay in their homes. “They get the same benefit and they’re not elderly, as I understand it. They’re just sort of a class of nobility in California. They inherit this tax break and it goes on through generation to generation.” In his dissent for Nordlinger v. Hahn, Justice John Paul Stevens wrote that the inheritance provision “establishes a privilege of a medieval character: two families with equal needs and equal resources are treated differently solely because of their different heritage.”
Proposition 21: Expand Local Government Authority to Enact Rent Control
This proposition was placed on the ballot largely through the funding of the AIDS Healthcare Foundation. This proposition does not mandate rent control throughout the state, rather it allows cities to introduce new rent control laws or expand existing ones. The Costa-Hawkins Rental Housing Act (1995) currently places limits on local rent control ordinances. If Prop 21 goes into effect, it will allow cities to apply new rent control ordinances only to homes that are at least 15 years old. It would also exempt single-family homes owned by landlords with no more than two properties. The proposition does not change California law that provides that rent-control policies may not violate a landlords’ right to a fair financial return on their property.
Last year, the state legislature passed an “anti-rent-gouging” bill (AB 1482) which created a ceiling of a 5% annual increase in rent, plus the rate of inflation (typically 2-3%). That law also requires that landlords provide a “just cause” for evictions.
Rent control is intended to mitigate the disruptive effect of escalating or fluctuating prices in the residential market. The Bay Area is particularly affected by high residential rents. In recent years, the Bay Area has added eight new jobs for every one new residential unit built. Rent control can give stability to those already in housing but does not help those seeking housing—only increased housing supply can do that. Some economists believe that rent control actually keeps overall rents artificially high by disincentivizing new construction. Rent control also leads to people staying in rental units that no longer fit their needs—i.e., empty nesters staying in multi-room unit well after their children have left just because the rent is so affordable.
Conclusion
Whether these propositions prove successful on the November ballot or not, property taxes and access to rental properties are bound to be hot political topics in California for the foreseeable future. The coronavirus pandemic, its impact on employment for Californians, and the health of the economy, are only further exacerbating issues relating to property and state revenues.
Kelsey L. Campbell
Briscoe Ivester & Bazel LLP
235 Montgomery Street, Suite 935
San Francisco, CA 94104
Telephone: (415) 402-2700
Fax: (415) 398-5630
