In 1978, California voters approved Proposition 13 which mandated that property be reassessed when such property is sold, transferred, or undergoes significant improvements. The purchase price is the tax basis. This law applied to residential property and commercial property alike and was limited to no more than 1% of the purchase price with an annual adjustment equal to the rate of inflation or 2%, whichever is greater. Proposition 13 was sold as a way to create stable and predictable property tax bills, particularly with regard to seniors on fixed incomes. Critics of the law, however, have long argued that large corporations have unfairly benefitted as the property they hold is rarely sold or transferred allowing such property to have property values well below market rates resulting in a loss of revenue for schools and local government.

Proposition 15 would amend the California State Constitution to create a “split” property tax roll. Basically, what this means is that commercial and industrial properties (with certain exceptions) would be subject to tax based on their fair market value while residential property would continue to be subject to tax based on historic purchase price. If passed, the change in assessed value for industrial and commercial properties would be phased-in over three years beginning with the 2022-2023 fiscal year. Properties whose occupants are at least 50% small businesses would be reassessed beginning in fiscal year 2025-2026 (or possibly a later date as determined by the legislature).

Exceptions would exist for owners of California commercial and industrial property with a combined value of $3 million or less. Agricultural property would also be exempt. The initiative would also exempt from tax the tangible personal property of small businesses and the first $500,000 in value of such property belonging to other businesses.

Proposition 15 is being financed primarily by the California Teachers Association and other unions and is projected to raise between $6.5 and $11.5 billion dollars in revenue each year. Forty percent of that revenue would go to K-12 schools and community colleges. Fifty percent of that revenue is projected to come from properties that have not been reassessed in the last twenty years or more.

Critics of the proposition believe that the final version of the measure will harm many small businesses as property tax costs would be passed through from property owners to renters. However, as set forth above, many of those assessments would be deferred until the 2025-2026 fiscal year.

If passed, the legislature will be tasked with defining the parameters of the law including the frequency of assessments and the appeals process.