California Voters Rejected Prop 15. What Now For Property Tax Reform?

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Proposition 15 came close, but it failed to win enough support from California voters to carry out an ambitious overhaul of the state's commercial property tax system.

The measure is currently trailing, 51.8% to 48.2%. Votes are still being counted, but the Associated Press called the race on Tuesday.

As a result of Prop 15's defeat, businesses will continue to pay property taxes based on rules laid out under Proposition 13, the historic tax-cutting measure passed in 1978.

Prop 13 has been popular for decades, but it's also been a target for progressive reformers for just as long. Despite this loss, some say the results show that millions of California voters favor changes to create a more equitable property tax system.

"[Prop 15] touched the third rail of California politics, and came closer than anybody ever has before -- perhaps closer than a lot of political figures could have predicted," said USC sociology professor Manuel Pastor.

But for business groups that opposed the initiative, the result is a resounding defeat for reform efforts.

Prop 15's defeat "should send a clear message to the proponents and warn all politicians that voters will continue to reject attempts to dismantle Prop 13," California Business Roundtable president Rob Lapsley said in a statement.

PROP 15 WOULD HAVE RAISED BILLIONS IN NEW REVENUE

Under Prop 13, property tax bills are generally based on what businesses originally paid for their properties -- not on the current market value of those properties. These rules give lucrative tax advantages to long-term property owners. Beneficiaries include legacy companies like Disney, Intel and the owners of the high-end Orange County shopping mall South Coast Plaza.

Prop 15 would have instead taxed commercial and industrial properties on their current market value, with some exemptions for small businesses. That change could have raised an estimated $6.5 to $11.5 billion a year in new tax revenue for public schools and local governments.

The Yes on 15 campaign's big funders included public sector labor unions and Facebook CEO Mark Zuckerberg's Chan Zuckerberg Initiative. Major donors to the No on 15 effort included private equity giant Blackstone and large office landlords such as Douglas Emmett Properties.

BAD TIMING COULD HAVE PLAYED A ROLE

The measure performed better locally, with about 53% support among L.A. County voters.

"California's challenges are not going anywhere, and this election result has shown that there is strong public demand for closing the corporate tax loopholes which cost our local communities billions every year," Yes on 15 campaign spokesperson Alex Stack said in a statement.

Tax policy experts said Prop 13 protections remain popular with many voters. For others, bad timing may have been a factor. The measure would not have taken effect until 2022, but some voters may have been turned off by the idea of raising taxes during a pandemic-induced recession.

"This was probably viewed as a big sweeping change to Prop 13, and it triggered risk aversion in a certain component of the electorate," said UCLA tax law professor Kirk Stark. "Rarely do people, in the face of uncertainty, embrace change."

With the state facing revenue shortfalls for some time to come, USC's Pastor said state legislators may have to consider raising marginal income tax rates for California's wealthiest residents (who already face the highest state income taxes in the nation) or introducing new sales taxes, which would fall more heavily on lower-income residents.

Or, Pastor said, "The state legislature itself may go back and start to take a look at what it can do with regard to property taxes."