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Voters in California headed to the polls (or mailboxes) this Election Day not only to choose the next president of the United States but also to make decisions on a range of tax policy questions. From removing property tax protections for commercial properties to imposing new and increased business gross receipts taxes in San Francisco, voters weighed in on a range of significant tax measures in the Golden State. Below is a summary of the significant tax ballot measures and the latest results.
Will likely fail. California Proposition 15 proposes to create a split-roll property tax system by carving out commercial and industrial property worth more than $3,000,000 from the state constitution’s property tax limitations. The initiative does not change the way residential property is valued and assessed for property tax purposes. Commercial and industrial property, however, will now be reassessed at least once every three years at full market value (with certain exceptions) regardless of whether there is a change of ownership. Revenues generated by the measure will be used to fund local governments and schools.
Results: will likely fail. Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results being as follows:
Fiscal Impact: proposed to raise up to $11.5 billion annually for local governments and schools and increase California property tax collections by about 20%.
This initiative removes commercial and industrial properties from property tax limitations established by Proposition 13 in 1978, which essentially froze property taxes in place throughout the state until an owner sold their land or property. The measure is meant to apply to large commercial and industrial properties, as businesses with less than $3 million in aggregate real estate holdings in the state would not be subject to the new valuation method. In addition to the significant opposition this measure received from the business community, the California Assessors’ Association also opposed the measure (talk about strange bedfellows), stating that county assessors are not equipped to handle the change in methodology from the historic approach under Proposition 13 to valuing commercial and industrial properties at fair market value on a regular basis.
Will likely pass. California Proposition 19 amends the state constitution to allow California property owners who are over the age of 55, severely disabled, or victims of a wildfire or natural disaster to transfer their base-year value to replacement properties without regard for the replacement property’s location or value. The proposition also limits the parent-child and grandparent-grandchild exclusion from change-in-ownership reassessment, thus increasing property tax revenues in the state. The net revenue gain generated by this property tax increase is earmarked for fire services and reimbursement of counties with “negative gain” resulting from the amendment.
Results: will likely pass. Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results being as follows:
Fiscal Impact: while some parts of the measure increase property taxes and others decrease property taxes, it is estimated that overall, the measure would result in a net gain and that property taxes for local governments and schools would increase by tens of millions of dollars each year and grow to a few hundred million dollars per year.
Passed. California Proposition 22 considers app-based drivers for rideshare and delivery companies to be independent contractors and not employees or agents and adopts labor and wage policies specific to app-based drivers and companies, including requiring rideshare and delivery companies to provide minimum hourly earnings guarantees, healthcare contributions, and occupational and accident insurance for drivers. This initiative was proposed in response to legislation passed last year that extended employee classification to gig workers.
Results: passed. Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results being as follows:
Fiscal Impact: the initiative’s analysis states that there will be “[m]inor increases in state income taxes paid by rideshare and delivery company drivers and investors.”
Local Ballot Measures
Passed. San Francisco, California Proposition F repeals the City’s Payroll Expense Tax and increases the Gross Receipts Tax rates applicable to various business activities. The proposition also creates two “backstop” taxes, which would be imposed if pending judicial decisions invalidate certain taxes enacted by ballot initiative in 2018. The proposition also amends the Charter of the City and County of San Francisco to reduce the annual registration fee for businesses with $1,000,000 or less in gross receipts. Lastly, the charter amendment also expands the small business exemption to include businesses with $2,000,000 or less in gross receipts, but increases the registration fee for businesses with $1,500,000.01 to $2,000,000 in gross receipts who benefit from the small business exemption.
Results: passed (100% reporting)
Fiscal Impact: estimated to generate approximately $97 million annually once fully implemented.
San Francisco is currently litigating the validity of two local ordinances passed by a simple majority in 2018 – the Homelessness Gross Receipts Tax Ordinance and the Early Care and Education Commercial Rents Tax Ordinance. See our prior coverage here. In the event the City loses these law suits, the backstop taxes under Proposition F are meant to provide sufficient additional general fund revenue for the City to refund businesses as necessary and provide ongoing revenue. One backstop tax would increase the gross receipts tax on certain taxpayers for 20 years if the Homelessness Gross Receipts Tax Ordinance is invalidated in court. The other backstop tax would impose a new general tax on the gross receipts from the lease of certain commercial space for 20 years if the Early Care and Education Commercial Rents Tax Ordinance is invalidated in court.
Passed. San Francisco, California Proposition I amends the Business and Tax Regulations Code to double the real property transfer tax rate from 2.75% to 5.5% on transfers of property with a consideration or value of at least $10,000,000 and less than $25,000,000. The initiative also doubles the real property transfer tax rate from 3% to 6% on transfers of property with a consideration or value of at least $25,000,000.
Fiscal Impact: estimated to generate tax revenues of approximately $196 million a year.
Passed. San Francisco, California Proposition J repeals the parcel tax included in the Living Wage for Educators Act of 2018 (Proposition G) – which is the subject of pending litigation – on July 1, 2021 and replaces it with a $288 parcel tax to be spent by the San Francisco Unified School District for educators’ compensation and educational improvements.
Fiscal Impact: estimated to generate tax revenues of approximately $48.1 million a year.
Passed. San Francisco, California Proposition L (CEO Tax) amends the Business and Tax Regulations Code to impose an additional gross receipts tax (between 0.1% – 0.6% of gross receipts) or an administrative office tax (between 0.4% to 2.4% of payroll) on businesses with a greater than a 100:1 ratio of the compensation of the business’s highest paid managerial employee to the median compensation paid to the business’s employees based in San Francisco. Additionally, the ordinance increases San Francisco’s appropriations limit by the amount collected under the additional tax for four years beginning November 3, 2020.
Fiscal Impact: estimated revenue between $60 million and $140 million a year. The revenue impact varies due to the volatility of the tax (e.g., narrow base of expected payers, fluctuations and variances in executive compensation, etc.).
In addition to increasing a business’ tax liability, this measure is likely to create significant compliance challenges as it involves calculating a compensation ratio required for no other state or local tax filing. Consequently, businesses affected by this tax likely will question their presence in San Francisco and evaluate the benefits of relocation. Even the San Francisco Controller’s analysis for Proposition L notes the risk of potential relocation by businesses associated with the tax increase from the CEO Tax. Considering the compliance burden and based on how the additional tax ultimately impacts business, legal challenges are also possible.
Please check back for our full alert on the tax-related ballot initiatives results across the country.