FREQUENTLY ASKED QUESTIONS
Isn’t this the first step toward raising taxes on residential property?
No. Prop 15 itself will have zero impact on residential property taxes. The only changes will affect commercial property. Passing Prop 15 will make it no more or less likely that residential property taxes might change at some point in the uncertain future. In fact, the burden of taxation will shift away from homeowners and renters toward commercial properties that are not paying their fair share of taxes.
There is an assumption underlying Proposition 15 that more money will result in better schools in California. Is there any evidence to support that?
Yes. The Learning Policy Institute came out with a report about this, citing that a 21.7% increase in per-pupil spending throughout all 12 school-age years for children from low-income families is large enough to eliminate the education attainment gap between children from low-income and non-poor families.
How do we know the schools will spend the new funds appropriately?
The funds are allocated to the school districts using the Local Control Funding Formula, which provides more funding to districts that serve more disadvantaged students. Each school district under LCFF has their own Local Control Accountability Plan (LCAP), which they were required to set up when LCFF was put in place in order to show how the funding would be used. Districts are accountable to the state to show that they are serving disadvantaged students with the funding in greater ways than previously.
Has anyone studied the probable effects on small businesses of the additional tax burden and the tenants who run small businesses.
It is important to understand that rents are not driven primarily by the property tax rate, as there are multiple other factors that help to determine market rents. That means landlords are not free to simply pass on increased taxes to tenants — those tenants have the option of moving to other spaces that reflect prevailing rents. One should always keep in mind that Prop 13 is heavily distorting the commercial property market — tenants are charged market rates for comparable properties, even though their landlords might have taxes based on wildly differing assessment values, solely because of the year of purchase. Overall, this puts newer owners at a disadvantage versus those who have owned for a long time — they cannot charge more than market rent, or they will fail to attract tenants. What this means in effect is that long-term owners have been raking in higher profits for years (and not passing these along in the form of below-market rents to their tenants). When Prop 15 goes into effect, these landlords will face a choice: accept lower profit margins or have empty space they cannot rent. Most experts anticipate they by and large will choose continued income and lower profits.
What about small, owner-occupied businesses? How will they be able to afford increased property taxes?
Prop 15 specifically excludes owners of commercial properties valued at no more than $3 million in total from any increase in assessments or taxes. The authors of Prop 15 worked very hard to determine what threshold would get as close to possible to exempting small (and owner occupied) businesses. They worked with commercial property experts -- the types of folks who help people buy commercial property -- to determine at what level, in terms of property value, they could set the threshold to make sure as many smaller businesses as possible will not be affected. That number came in at around $3 million. It's not perfect, but the commercial property experts think it probably errs in the direction of exempting some larger businesses in order to protect small businesses.
Has anyone studied whether the additional tax would be passed along to consumers generally and, if so, what effect that would have? We know that the Covid crisis has had significant impacts on consumer finances and this would be another blow to them.
First, because of the phase in period, no commercial property owner would face higher property taxes due to Prop 15 until 2022 at the earliest. The Covid crisis will be long behind us by that point (and, if there is other unexpected economic turbulence in 2022, the measure authorizes the Legislature to further put off implementation). Second, in order for the higher taxes to pass on to consumers the costs would have to be passed on from commercial property owners to tenants and then from the tenants (if they are retailers, restaurants, etc.) to consumers. So, you have to first deal with the issue discussed above, which is to say that the extent to which the costs will get passed on to tenants is overstated, and therefore the extent to which consumers will see price increases is also being blown out of proportion. This is not to say there won't be some marginal effect -- at most -- but there is likely to be no conclusive effect. And, here again, this is largely because the market sets prices across a host of factors, not solely responding to increases in taxes or rents.