Teenage Students Raising Hands

RESOURCES

FAQ'S

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. Even smaller levels of spending made a significant difference in educational outcomes, including test scores and graduation rates. The study determined that Increasing per-pupil spending by 10% in all 12 school-age years increases probability of high school graduation by 7 percentage points for all students, and by roughly 10 percentage points for non-poor children.” It is also worthwhile to note that the fact many parents choose private schools for their children tends to support the notion that having additional resources improves education. Otherwise, that choice makes little sense. Finally, California performed something of a reverse study on this issue with the passage of Prop 13. California schools were well-funded (top 10 and often top 5 nationally) and also very highly regarded. Since 1978, funding has plummeted to bottom 10 nationally, and we know that the quality of our schools has suffered. In academic parlance, this would be correlation rather than causation, but common sense tells us that starving something of adequate resources tends to harm performance.




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. Some of the funding will go to teaching (which means teacher salaries and pensions). Charter schools will receive some of the funding -- charter schools receive a share of state funding for schools now under LCFF. Private and religious schools that do not operate under the state's charter system will not receive funding.




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.




Is this the best time to move forward with Proposition 15? Economically, many corporate and business entities in the state and around the nation are financially hurting. How might the implementation of this initiative over the next several years further weaken the recovery of these institutions?


Based on a variety of factors, yes, this is a good time to proceed. First, Prop 15 contains a phase in period, such that it will not affect any commercial property owner until 2022 at the earliest (and those who rent to small businesses have an extended phase in so that their property taxes will be unaffected until at least 2025). So, the current economic circumstances aren’t relevant to the question of how the economy will be doing at the time of implementation. Second, our public schools and universities are bearing the brunt of the current economic downturn in terms of proposed budget cuts that, unless there is a substantial Federal bailout of states, will devastate them. So, now really is the time to invest in these needed resources. Third, Proposition 13 has been law for 42 years and this is the first realistic attempt to reform the mistakes embedded within it. It is quite possibly the only chance we will have in our lifetimes to redress the inequities it has caused, so putting it off because of transient economic concerns (even serious ones) would in effect waste our best chance at real reform. Fourth, even after Prop 15 goes into effect, commercial property owners will still be paying property taxes at a lower rate than they were prior to Prop 13’s passage in 1978 because they will continue to benefit from Prop 13’s 1% cap on the property tax rate. As a result, their property tax burden will still rank in the bottom fifty percent of US states. Finally, up to 90% of Prop 15 will fall on the largest corporations, which are estimated to be sitting on over $1 trillion in un-utilized capital assets. All corporations in California benefit from a series of tax cuts that have slashed their tax obligations by more than fifty percent since the 1980s, and also received a windfall from the 2017 Federal tax changes and recent COVID-19 relief bills. As a share of income, California corporations face only 35th highest tax burden compared to companies in other states.