Prop 15: Taxes on Commercial Property
Should the California Constitution be amended so that most commercial and industrial property is reassessed on a regular basis?
Taxes based on the value of commercial and industrial property are a major source of funding for counties, cities, schools, and special districts. Each year a property owner pays a tax equal to the property’s assessed value times the applicable tax rate. Proposition 13 limits property tax valuation and rates. The tax rate is capped at 1% of the assessed value plus smaller, voter-approved rates, to finance local infrastructure.
A property’s market value is the value at which it could be sold today. A property is reassessed to market value when it is purchased or when ownership changes hands. After that, the assessed value can be increased by no more than 2% per year. Because the value of property has typically increased much faster than 2% per year, the assessed value of most property in the state is less than its market value. This is particularly true of commercial and industrial property, which changes ownership less often than residential property.
Each county’s property tax receipts from the 1% tax are distributed to local governments and schools using a formula that has been in place for many years.
If passed, Proposition 15 would generally require that commercial property be reassessed to market value on a periodic basis. There would be no changes in the rules for reassessment of residential (both owner-occupied and rental) and farm property. If all of the property owned by a business has a fair market value of $3 million or less, that property would continue to be assessed based on purchase price, as adjusted.
Reassessment of commercial property would be phased in starting with the tax year 2022-2023.
Under Proposition 15, a small business would not pay any tax on personal property. A small business is defined as one having fewer than 50 employees. Other businesses would not pay taxes on the first $500,000 of their personal property.
Reassessment of commercial and industrial property to market value would increase the property taxes collected in each county. After paying for the costs of administering this measure and reimbursing the state for any loss of income tax receipts, the balance of the additional revenue would be used to fund local governments and schools. The money for local governments (about 60% of the total) would be distributed according to the existing formula. The money for schools (about 40% of the total) would be deposited into a state fund and allocated among school districts generally using the same per-pupil funding formulas the State currently uses. This allocation would provide money over and above the current constitutional minimum funding requirement.
The Office of the Legislative Analyst of California estimates that Proposition 15 would produce about $6.5 to $11.5 billion per year in additional property tax revenues for local services. Of this amount approximately 60% would be distributed to local governments ($3.9 - $6.9B). The remainder ($2.6 - $4.6 B) would go to schools and community colleges.