juin 02 2020

Proposition 13 and the Implications of the California Schools and Local Communities Funding Act of 2020


A proposed California ballot initiative would change how taxes are assessed on commercial real property under Proposition 13 (“Prop 13”). This Legal Update summarizes the California Schools and Local Communities Funding Act of 2020 and its proposed changes to the current real property tax system.


The California Schools and Local Communities Funding Act of 2020 (ballot initiative 19-0008) (the “Act”) is eligible to appear on the statewide ballot in the November 3, 2020, election. If passed, the Act would materially modify Prop 13, which currently limits (with some exceptions) property taxes to 1% of a property’s value and annual valuation increases to a maximum of 2% per year. The Act would create a split-roll tax changing the current tax treatment of commercial and industrial properties while leaving the tax treatment of residential and agricultural properties unchanged, resulting in significant property tax increases for affected properties.

Under the proposed Act, commercial and industrial real properties would be assessed at their current fair market value rather than their frozen “base year” value (typically, the most recent purchase price plus annual 2% increases) and be reassessed to current market value at least once every three years (which value would likely be substantially higher). Beginning with the 2022-2023 lien date, the new valuations would be phased-in over a three-year period. Property of small business owners with a statewide value of $3 million or less, with an on-site, operating business, would not be subject to the proposed change. Mixed-use properties would be valued in proportion to the amount of commercial property.


A. Changes to Prop 13

Currently, all commercial, industrial, agricultural, and residential properties are governed by Prop 13—a 1978 amendment to the California Constitution. Under Prop 13, all properties are valued/assessed at their 1975 value plus annual increases limited to a maximum of 2% (“base year” value). Base year values are frozen until a change in ownership or substantial completion of new construction occurs. If passed, the Act would materially alter the current property tax regime in three ways: (1) commercial and industrial property would be subject to reassessment to current fair market value instead of the frozen, base year value; (2) up to $500,000 of business personal property would be eligible for exemption; and (3) roughly 40% of the expected new property tax revenue (estimated to range from $7.5 to $12B per year) would be provided to schools, with virtually no restrictions on how the new revenue will be spent.1

First, requiring commercial and industrial properties to be taxed at their current fair market value rather than their base year value would “split” how commercial, industrial, residential, and agricultural properties are valued and taxed.2 Commercial and industrial property would be dramatically impacted by passage of the Act. The current, Prop 13, valuation of residential and agricultural real properties would not change. Property zoned as commercial or industrial but used as long-term residential property would be classified as residential. Only the commercial portion of a mixed-use property would be subject to reassessment to the current market value.

“Commercial and industrial real property” is defined as “any real property that is used as commercial or industrial property, or is vacant land not zoned for residential use and not used for commercial agricultural production.” This does not include properties protected for open space, parks, and recreational areas and those areas intended to preserve scenic, cultural, or historic values.

The Act excludes commercial and real properties that meet three criteria: (1) have an on-site business; (2) have a statewide fair market value of $3 million or less (adjusted for inflation every two years starting January 1, 2025); and (3) are under single ownership.

Second, the Act exempts from taxation the first $500,000 of tangible personal property (i.e., equipment and fixtures) for all businesses and eliminates tangible personal property tax for independently owned and operated businesses with 50 or fewer full-time employees.

Third, per the legislative analyst, the Act is expected to annually generate additional tax revenue ranging from $7.5 to $12 billion, roughly 40% of which would be dedicated to schools. Of the additional revenue earmarked for schools, approximately 11% would be allocated to community colleges and the remaining 89%, to public K-12 schools, charter schools, and county education offices.

B. Phased-In Taxation

Commercial and industrial real properties subject to the Act would see a tax assessment based on fair market value beginning January 1, 2022. Properties, such as retail centers, for which small businesses account for 50% or more of the occupants would be taxed based on market value beginning in fiscal year 2025-2026 or on a later date that the legislature determines.

C. Fiscal Impact

According to the Attorney General of California, a net annual increase in property tax revenues of $7.5 billion to $12 billion is expected in most years, depending on the strength of CA real estate markets. After backfilling state income tax losses related to the measure and paying for county administrative costs, the remaining $6.5 billion to $11.5 billion would be allocated to schools (approximately 40%) and other local governments (60%).3


A. Two Versions of the Ballot Initiative

In April 2020, over 1 million signatures were submitted to the state to replace the previous ballot initiative (17-0055), which qualified for the ballot on October 15, 2018. On May 29, 2020, the CA Secretary of State ratified the signatures for the revised ballot initiative (19-0008), replacing the previous version.  The initiative would need a simple majority to become law.

This revision updated the proposed timeline to implement the assessments in 2022-2023 and increased the exemption for small business owners with property valued at $3 million, up from the previous $2 million threshold. The revision also clarified that businesses that have 50 or fewer full-time employees, that are independently owned and operated, and that own real estate would continue to have their properties assessed on the base value under Prop 13.

According to Berkeley Research Group, there have been nearly two dozen attempts to modify Prop 13 and introduce a split-roll tax since Prop 13’s passage in 1978. (See the report for economic impact projections.4)

B. Stakeholders

Business-oriented advocacy groups oppose the measure, predicting small businesses may not be able to absorb rent increases due to the reassessment, and those higher rent costs may then be passed on to consumers.5 Other predictions include California businesses leaving the state, contributing to loss of employment.6 Local school districts, housing advocates, and the California Democratic Party are in favor of the Act as a mechanism to close a corporate tax loophole and generate more funding for schools and local government.7

While the California Assessors’ Association has not taken a position on this specific split-roll initiative, it has released a white paper citing concerns with administering a split-roll system without concurrent increases in resources and new technology.8



1 Text of California Schools and Local Communities Funding Act of 2020.

2 EY. “California ‘split roll’ ballot initiative would reassess commercial and industrial real property at fair market value.” 1 October 2019.

3 Attorney General of California Summary of 19-0008.

4 Berkeley Research Group. “Taxing Commercial and Industrial Property at Full Market Value.” March 2020.

5 CalChamber. “Split Roll Battle.” 20 Jan. 2020.

6 Berkeley Research Group. “Taxing Commercial and Industrial Property at Full Market Value.” March 2020.

7 Schools & Communities First. 22 May 2020.

8 California Assessors’ Association. “White Paper on a ‘Generic’ Split Roll.” 21 March 2019.

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