The justifications that only the biggest corporations will pay the tax and the implication that small businesses are protected are easily refuted.
By Joel Fox, Special to CalMatters
Joel Fox publishes FoxandHoundsDaily.com on California politics and is an adjunct professor at Pepperdine University’s Graduate School of Public Policy, firstname.lastname@example.org.
Fifteen California mayors, including mayors of some of California’s biggest cities, signed a letter to Gov. Gavin Newsom urging him to endorse Proposition 15, the commercial property tax increase on the November ballot. However, the main reasons the mayors used to support their position don’t stand up to a real-world examination of the facts.
The justifications that only a handful of the “biggest and wealthiest corporations” will pay the tax, the implication that small businesses are protected and will be unscathed by the property tax increase, the argument that agriculture is not subjected to the tax, and the idea that the property tax increase will help schools and local governments deal with the immediate budget strains due to the pandemic are easily refuted.
The mayors argue that 10% of the commercial properties in the state will pay 92% of the $12 billion property tax increase. Unfortunately, it is small businesses, desperately trying to hang on in difficult times, that will be the biggest victims of this property tax expansion.
That is because more than three-fourths of California small businesses do not own their property. They lease shops and office space. In the commercial world, business leases most often contain a triple net lease which means that the lessee is responsible to cover increases in a property’s insurance, maintenance and taxes. Small businesses are therefore contractually liable for the tax increase that is passed on to them by the leaseholder and will carry the load if this property tax increase passes – those that survive as the result of the pandemic.
Many small businesses already have closed their doors because of COVID-19. Many small businesses in California are minority- and women-owned. How many more small businesses trying to rise even when the pandemic eases will succumb if an additional financial burden is placed on them via this tax increase?
Because many small businesses will definitely be subject to the tax through leases, the argument put forth by the mayors that small businesses are somehow protected under this initiative is not correct. Small businesses are concerned enough about the consequences and liabilities that this property tax proposal carries that major California small business organizations such as the California Small Business Association and the National Federation of Independent Business, along with the Black Chamber of Commerce, the Hispanic Chambers of Commerce and the Asian Pacific Chamber of Commerce among other business affiliated groups all oppose Prop. 15.
While the mayors say agriculture concerns will be spared by the tax, that is not correct. Agricultural land may not be taxed, but facilities associated with running a farm from barns to processing plants will be taxed higher, meaning the cost of food will go up.
The mayors argue that they are facing dire economic circumstances and their governments need the monies from the Prop. 15 tax increase to deal with the difficulties caused by the pandemic. The problem with this argument is even if Prop. 15 passes there will be no money produced by the tax change for a number of years.
The initiative itself says it does not go into effect until 2022. However, full effect will not happen until 2025 according to the state Legislative Analyst. If even then. The California Assessors Association is opposed to Prop. 15 because, as a member of the association testified before a legislative hearing, it is “impossible” to implement the initiative’s new tax rules under current circumstances dealing with staffing and resources.
If a small business is obligated to cover a property tax increase, difficult choices have to be made to raise prices adding to California’s high cost of living or reducing jobs increasing the state’s staggering unemployment rate. As the California economy attempts to rise from the ashes of the pandemic, anchoring down the business community with the largest property tax increase in the state’s history is a destructive formula.