T +1 415 354 4798
T +1 408 346 4325
T +1 415 318 2298
T +1 213 596 8428
Jamie C. Yesnowitz
T +1 202 521 1504
T +1 312 602 8517
T +1 513 345 4540
T +1 215 814 1743
The Nov. 3, 2020 general election provided California voters an opportunity to decide a variety of important ballot initiatives involving various state and local tax issues.1
Provided below is a non-exhaustive summary of California’s election results for the more notable tax-related ballot initiatives.
Proposition 15 – Split roll property tax
Per the vote count as of Nov. 10, 2020,2
approximately 52% of voters rejected Proposition 15,3
which would have amended California’s Constitution to create a “split roll” property tax system where commercial and industrial properties would be assessed annually at fair market value, but residential property would have continued to be assessed based on its purchase price.4
Although Proposition 15 failed, it would have provided an exception for business owners that have $3 million or less in property within the state, and the “split roll” would have been phased-in beginning with the 2022-2023 fiscal year. Proposition 15 was anticipated to generate between $6.5 billion and $11.5 billion in additional tax revenue each year.
Proposition 19 – Changes to certain property tax rules
California voters approved Proposition 19 with approximately 51% of the vote.5
Proposition 19 allows certain homeowners over 55 years old or disabled to transfer their property tax basis between counties. To offset the impact of the basis transfer allowed to older Californians, Proposition 19 also limits the special rules that allow certain “inherited property” to pass to children or grandchildren without a property tax reassessment to fair market value. Under Proposition 19, the special rules allowing a carryover property tax basis will no longer apply to inherited property unless it is used as a home or for farming by the inheriting child or grandchild. Proposition 19 also expands existing tax benefits for certain individuals who are disabled or whose homes were destroyed by disaster or wildfire by permitting them to transfer their primary residence’s tax basis to a replacement residence. Homeowners who are over 55 years old or severely disabled can use these special rules up to three times.
Proposition 22 – Treatment of app-based drivers as independent contractors
Approximately 58% of California voters approved Proposition 22,6
which allows app-based transportation/rideshare and delivery drivers to be classified as “independent contractors” rather than “employees.” Proposition 22 effectively exempts app-based ride-hailing and delivery services companies from Assembly Bill No. 5 (A.B. 5),7
which beginning in 2020 created a new California standard for determining when someone is an “employee” versus an “independent contractor” not subject to various state employment laws such as minimum wage, overtime, unemployment insurance, and workers’ compensation.
As background, A.B. 5 went into effect on Jan. 1, 2020, making it more difficult for gig economy companies to classify workers as independent contractors. The new law reclassified many independent contractors meeting certain criteria as employees subject to California laws addressing withholding of income and employment taxes, healthcare, insurance, and other benefits. In October 2020, in People v. Uber Technologies, Inc.
the California Court of Appeal held that Uber Technologies, Inc. and Lyft, Inc. must treat their drivers as employees during the pendency of the litigation relating to A.B. 5 reclassifying app-based contractors as employees. The passage of Proposition 22 may render this litigation moot due to the exemption that it provides to app-based rideshare and delivery companies.
San Francisco business tax ballot initiatives
Approximately 68% of San Francisco voters approved Proposition F,9
which was characterized as a “Business Tax Overhaul.” Among other changes, Proposition F will eliminate San Francisco’s payroll expense tax effective Jan. 1, 2021, and phase in rate increases to the city’s gross receipts tax. Under Proposition F’s new rate structure, although most industries will experience a rate increase over a four-year phase-in period from 2021 to 2024, certain industries such as manufacturing, food services, accommodations, arts, and entertainment will experience a temporary rate reduction before Proposition F’s rate increases are fully implemented. Additionally, Proposition F increases the administrative office tax rate from 1.4% to 1.61% over a four-year phase-in period. Lastly, Proposition F includes a “back stop” component intended to allow the city to unlock revenue from the Homelessness Gross Receipts Tax and the Commercial Rents Tax, both of which were passed by voters as part of the 2018 election. Currently, the city is collecting but not spending money related to these 2018 ballot measures, and the “back stop” provisions of Proposition F are intended to protect against the potential for an adverse outcome in pending litigation relating to their validity.
San Francisco voters approved Proposition I with approximately 58% of the vote.10
Proposition I increases the city’s real estate transfer tax on certain high-value transactions. Under Proposition I, the city’s transfer tax rate on sales of real estate (and leases of real estate for 35 years or more) is permanently increased to 5.5% for transactions of $10 to $25 million, and 6% for transactions of $25 million or more.
Approximately 65% of San Francisco voters approved Proposition L,11
which imposes an elevated gross receipts tax rate structure in certain circumstances where businesses pay disproportionately high executive compensation in relation to other employees. Under Proposition L, an additional tax of 0.1% - 0.6% of gross receipts (or 0.4% - 2.4% of payroll expense) is imposed on businesses when the highest-paid managerial employee earns more than 100 times the median compensation paid to the business’s employees in San Francisco.
Sales tax – Local initiatives
San Francisco, San Mateo and Santa Clara County voters approved Measure RR, with approximately 73%, 71%, and 66%, respectively, of the vote.12
Measure RR authorizes a 30-year 0.125% retail transactions and use tax (i.e.
, a sales tax), to fund Caltrain rail service. The additional tax revenue is to be used exclusively to fund operating and capital expenses of Caltrain, which is currently primarily funded through passenger fares.
Alameda County voters approved Measure W by slightly more than 50% of the vote.13
Measure W authorizes a 10-year 0.5% sales tax rate increase. This increases the total sales tax rate in Alameda County from 9.25% to 9.75%.
Approximately 57% of San Bernardino voters approved Measure S,14
which allows the replacement of the expiring sales tax rate of 0.25% with a new rate of 1%.15
This increases the total state and local sales tax rate in San Bernardino from 8% to 8.75%. If Measure S had failed, the current 0.25% rate would have expired, and the total state and local sales tax rate in the City of San Bernardino would have fallen to 7.75%.
When it comes to business-related tax matters, the results of the 2020 election may potentially reflect a sense of moderation on the part of California voters. This may be signaled by the voters’ passage of Proposition 22 allowing greater flexibility in worker classification for app-based drivers, and rejection of Proposition 15, which would have placed additional burdens on businesses operating in California. On the other hand, when it comes to consumer-based taxes, voters appear to generally support ballot initiatives that fund state and local government services such as public transit, public safety and welfare programs.
While voters may have rejected California’s Proposition 15, California’s projected budget deficit of $54.3 billion in the legislature’s 2020-2021 budget may ultimately mean that the rejection of revenue raisers, such as Proposition 15, is not the end of the story. Proposition 15’s failure may well spur a more active 2021 legislative session that considers multiple new revenue-raising measures.
Although voters have sided with app-based ride-hailing and delivery services companies, it is still important to note that Proposition 22 does not address the broader implications of A.B. 5. Because Proposition 22 is limited to app-based drivers, other freelance and “gig economy” workers may potentially still be subject to the provisions of A.B. 5 causing them to be recharacterized as “employees” in California despite retaining independent contractor status for federal purposes.
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.