Jon Coupal, Prop 13 Changes and 2020 Elections

Jon Coupal, Prop 13 Changes and 2020 Elections

The Pacific Grove Chamber of Commerce recently honored four business owners and one resident at the Chamber’s Annual Membership Luncheon at the Inn at Spanish Bay. The luncheon confers awards of excellence in business on Chamber members in various industries each year including retail, services, food & beverage, and non-profit work. The luncheon typically features a business-oriented speaker and video presentation as part of the program and also offers member’s a chance to network with one another and discover more about businesses in the Chamber’s membership. The speakers typically speak on issues related to small-businesses in California or of doing business in Pacific Grove. That portion of the programming is essential to the success of the lunch, delivering valuable information on our local and regional business climate to a large and diverse swath of the Chamber’s membership.

The Speaker this year was Mr. Jon Coupal, longtime President of the Howard Jarvis Taxpayers Association and author of Prop 218 (1996) which required a public vote on local and municipal tax measures, among other changes to state and local tax law. He detailed the current political climate around Proposition 13, a decades-old and popular law that limited property tax increases to no more than 2% per year as long as the property was not sold.

Prop 13: What Does It Do?

When most pieces of property in California are sold, a measurement to determine their market value is taken, typically by a county official, and this measurement is called an assessment. The number determined in the assessment process is the property’s value and forms the basis for determining how much a property owner will pay in taxes on the property they just bought. For example, if a property is assessed at $500,000 when sold, the rules established by Prop 13 stipulate that taxes collected based on that value can be up to 1% of the purchase price, or for that homeowner, $5,000. Under Prop 13 this value can increase up to 2% per year, to keep up with inflation and may be slightly different if the city you live in collects small additional assessments. The law also ensures that property tax rates can only be re-assessed at market value when the property is sold, ensuring property owners can estimate the amount they owe from year to year with relative predictability and accuracy. So even if a property’s value changes at some point before it is next sold, the property owner will always pay tax of 1% of the purchase price as long as they own it. These protections apply equally to commercial and residential properties. Read more about Prop 13 here.

The benefits of that predictability also extend to public agencies receiving funds from property tax revenue streams. Property taxes are significant drivers of local revenues for school districts, cities and county governments in California. The changes made by Proposition 13 ensure that property tax revenues collected by public agencies year over year do not change much, including in times of economic downturn, allowing such agencies more latitude to finance and budget themselves and provide the same services in times of economic instability.

Proposed Reforms to Prop 13 and Predicted Impacts

Mr. Coupal spoke on the current political climate around Prop 13 reform, which has long been a target for reform by groups interested in increasing revenues from property taxes. One high profile effort Mr. Coupal detailed is a 2020 state ballot measure (yet to be named) that would remove some of these protections for commercial properties in order to increase property tax revenues from commercial buildings. This is commonly referred to a “splitting the roll” or a split-roll tax initiative. That ballot measure proposes that commercial and industrial properties could be re-assessed as frequently as every three years under the new law. It does provide some exemptions for small businesses however. According to the initiative text, exemptions are available for building owners who operate their business on a majority of their real property and if the total fair market value of all property owned by that taxpayer on which the business operates is less than two million dollars. Under the initiative, both conditions must be met to qualify for the exemption. Protections for homeowners detailed above would remain unchanged. Read the initiative here.

Mr. Coupal promised an “aggressive” opposition campaign to the measure and warned of the dangers to small business owners in his remarks to the group. On his active blog on the Howard Jarvis website, Coupal recently stated the risks of splitting the roll on Prop 13 would be greater to consumers and businesses “because many small business owners rent their property via “triple net” leases, they too would be subject to radical increases in the cost of doing business” as commercial property owners subject to more frequent changes in their tax rate would likely pass along those changes to their renters.  Coupal’s organization is not the only one opposing the measure. During the 2018 election cycle, the California Chamber of Commerce opposed the adoption of the proposition, stating:

“Higher taxes would likely be passed on to consumers, or would force businesses to reduce overhead costs, such as employee hours or positions. In the worst case, businesses may shut their doors or relocate to states with a less hostile tax environment.”

The California branch of National Federation of Independent Businesses also expressed concern on the measure last year, arguing such changes to Prop 13 were not necessarily business-friendly and noting the revenues collected from such a measure would depend heavily on the health of the real estate market, making the change potentially volatile” in times of economic downturn. The California Legislative Analyst’s Office summed up the potential economic impact of the measure as uncertain, warning that it had the potential stimulate business flight out of California as it could cause increases in the cost of doing business relative to other states. 

The split roll tax initiative is the first of its kind to make it to the ballot and will go before the voters on Election Day, Tuesday, November 3rd, 2020. While formal campaigns for and against the measure have yet to take definite shape, interested voters should expect to see a lot more discussions around the merits and pitfalls of Prop 13 reform as 2020 approaches.

The Pacific Grove Chamber of Commerce would like to thank Jon Coupal for attending the luncheon and encourages our members and interested third parties to consider the impact of Prop 13 reforms on business owners.