The FUTURE Of California Taxes and Commercial Real Estate

THE SELF STORAGE REPORT — EPISODE TRANSCRIPT Episode: The FUTURE Of California Taxes and Commercial Real Estate Guest: Robert (Rob) Lapsley — President, California Business Roundtable Host: Chris Berg — Abernathey Development Recorded: June 26, 2024 Video: https://www.youtube.com/watch?v=3PVYqX2bFxA Key topics: California Supreme Court unanimously strikes the Taxpayer Protection Act from the November 2024 ballot; 1.4 million signatures and a coalition of over 170 organizations; the revision-versus-amendment ruling and Hiram Johnson's 1906 initiative process; Prop 13, passed in 1978 by over 75% of voters, and its 1.5% to 2% annual cap; record California property tax revenues; split roll property tax headed for the 2026 ballot at $13 to $15 billion a year; a $100 billion surplus turning into a $60 billion deficit; public employee unions pushing a 20% top personal income tax rate; LA's Measure ULA mansion tax reducing revenue; Gavin Newsom's pre-recorded State of the State and approval rating in the 40s; $24 billion spent on homelessness; California unemployment above 5%; the 2026 governor's race. Note: Speaker attribution reconstructed from raw captions. Light cleanup of transcription errors only; wording preserved. Timestamps and YouTube chapter markers removed. Turns marked [attribution inferred] could not be attributed with certainty. ————————————————————————————— Chris Berg: California Supreme Court wipes the Taxpayer Protection Act off this November's ballot in a unanimous decision. So that and much more coming up here today on the Commercial Real Estate Report, the show that is empowering you to build generational wealth with real estate. I'm your host Chris Berg. We're gonna get right to it today. Join us right now, he's the President of the California Business Roundtable, Rob Lapsley. Rob, welcome back to the show, it's great to have you. Rob Lapsley: Chris, it's always a pleasure, and again thank you for what you do for the community and addressing these issues. Chris Berg: I really appreciate you saying that. A lot to discuss here. Also California Governor Gavin Newsom just wrapped up a State of the State address, we'll touch on that as well. Quickly though, for the people that aren't familiar with the Taxpayer Protection Act, two things: one, if they give us a quick debrief on that, and then maybe more importantly, what was the decision just recently made, again a unanimous decision, by the California Supreme Court? Rob Lapsley: So you know the statewide business community obviously recognizes that if they don't step up and take a leadership role on the major issues affecting the state, particularly regarding cost of living, the ability for housing, our high rate of taxes, facing the highest level of poverty, everything that's affecting the state, you know, we're not going to have a future workforce at some point if we don't help. And so the business community made the decision, with the California Business Roundtable, California Business Properties Association and the Howard Jarvis Taxpayers Association, to try and address some of the major tax issues that impacts everyday Californians, most importantly, but also provide some certainty and predictability for businesses to try and grow here, invest here, hopefully bring jobs here, and then plan for the long-term future. Rob Lapsley: So we had a lot to be able to try and reform with this measure. And what this measure did, very simply, is it gave every Californian the right to vote on future state and local taxes. That is it. Jerry Brown did that in his third term. He said he would never sign a tax from the legislature unless the people voted on it first, so it's something that's been in effect in the past. Rob Lapsley: So we wanted to go back and fix a couple court cases that had changed how some of the local special taxes work. Courts had created problems with the definition of what's a fee and what's a tax, so the people of California understood what a fee should be and what a tax should be, but also that local government can't make a huge profit on local government fees. And we also had all sorts of new transparency and accountability language, so when people went in to vote on taxes they could see exactly how much it was, how much it was going to cost them, how long they were going to pay it, and where the money was actually supposed to go. Everything you don't see now when you go in to vote at the ballot box on taxes. Rob Lapsley: So the governor, primarily the labor unions, the public employee unions in the state, the legislature, when we qualified this measure through an outstanding coalition, over 1.4 million signatures, we have a huge coalition built, over 170 organizations in California, thousands of individuals who support this measure and wanted to see it passed in November. The legislature, the governor, the unions were petrified that we would actually ensure the people of California had the right to vote on future taxes. And it's not us assuring them, it's the people themselves having the opportunity to make the decision on whether they wanted that power in the future. Essentially it was returning and ensuring power from the government back to the people on some of these issues, which is exactly what they don't want because of the spending plans for the future on progressive issues and how they intend to pay for it. There's a reason why we're the highest tax state in the country. Rob Lapsley: And so what they did is they went to the Supreme Court, they challenged our measure saying that we should not be on the ballot. The people of California, even though it's duly qualified and had been for a year and a half for the November election, should not have the fundamental basic constitutional right to vote on this. They challenged us in the Supreme Court. They said that our measure was too big, it was a revision to the Constitution, which is a different process under law, and not a change to the Constitution. Rob Lapsley: And when we went through the arguments before the court, the governor's lawyers said, and I quote, that this measure needs to be taken off the ballot because the people of California do not have the capacity to make these decisions on taxes and fees, it needs to be left in the hands of the legislature and the legislature staff who has a process to deal with this. It was singularly the biggest slap in the face to the people of California that I have literally ever heard of in my career. Rob Lapsley: And we waited for the court's decision, which came out last Thursday. And what we feared from the beginning when they filed this lawsuit, because all of the appointees of the court are either appointed by Jerry Brown or Gavin Newsom except for one left over from Arnold Schwarzenegger, we feared that we could win. We were confident that we could win, Chris, you and I talked about that in the past and had a great discussion. What we feared all along with the court was that we couldn't prevail on the politics of the court. And that's exactly what happened last Thursday. The politics of the court won out, the people of California lost out. Rob Lapsley: In what happened, they determined that it was a revision, which has only happened once before essentially in history, and the framers of our direct democracy process, the statewide initiative process, Hiram Johnson, turned over in his grave last Thursday with this decision, because they've taken the power away from the people of California on taxation matters and returned it to state government, or given it even more power at state government, and we'll never have the opportunity to get it back. Chris Berg: Couple things I want you to speak to is one, at least based on the research I did, this is the first time since 1999 that the Supreme Court has removed a ballot initiative, again in the courts. And I think one of the things that's really important, I think why you see what's happening within our country today, is many people are saying, hey, can we just make Lady Justice blind again, right? Like, we don't want political decisions. So if you want to address that. And then secondly, this is the ultimate, in my opinion, taxation by representation. Last time we didn't have taxation with representation I think there was some tea dumped in the Boston Harbor, so it's an interesting dynamic that could be taking place. Rob Lapsley: Well, again, as you see the increased spending, we went from a $100 billion surplus, you know, to a $60 billion plus deficit, literally overnight. The economy accounts for some of that, but it's the spending that's going on to be able to provide the resources for all the progressive programs. And we're not saying some of the programs aren't positive. What we're saying is, how do you continue to pay for it? Rob Lapsley: And one of the issues I think that's important to understand is that when you have a shift from a surplus to a deficit like this, there's no discussion that goes on in Sacramento about, oh my goodness, we need to do some major changes for business so that we can grow our job base to help make up for this deficit and grow our revenues in the future for future state services. All they talk about is how can we tax more. And a legislature, they want to get, and many of the public employee unions, they want to get to a personal income tax rate of 20% on high income earners. They think that's a spot where it's more fair and balanced, and that's what they intend to work on. Rob Lapsley: So by felling this initiative, they had a court that clearly is no longer independent. The court is part, or a third branch, of the progressive agenda. We have a long-term two-thirds supermajority legislature that's now going to be continuing to pursue this path. We implemented the initiative process in 1906 to stop the Southern Pacific Railroad who had too much power, and we filed this initiative to try and stop the public employee unions who today have too much power, and the court said we're going to give them more power. That's something all of business needs to understand and prepare for moving forward. Chris Berg: So I want to talk about what this decision means really for the future of California. You mentioned businesses here just a moment ago in your introduction comments, and I say that in the context of, we've seen the exodus of the state, I think 2 months in a row now California has the highest unemployment in the nation, above 5%. So what does this Supreme Court decision mean for the future of California? Rob Lapsley: So what it means is that as we, if we try to pass future reforms under this court, particularly on what we tried to do with TPA, they're going to file continued challenges at the Supreme Court level. It puts the courts right in the middle of the initiative process. They've always erred on the side of let the people decide the measure and then we'll look at the measure after it's been voted on. That's no longer the case. They're right smack in the middle of now making decisions of what should the people even vote on, and that is a direct attack on direct democracy in California. Rob Lapsley: You know, the other thing to try and put this in perspective, particularly for business and property owners, is that our measure did far less than what Prop 13 ever did in 1978. And thank God we have Prop 13 for residential homeowners, which is keeping them in their homes, and obviously for business, because it helps our overall economy while we continue to achieve record property tax revenues. And under this court, Prop 13 would have never been on the ballot in November. They would have struck Prop 13 down like they struck us down. It would have never been on the ballot, and that is exactly what is in front of business now moving forward. Chris Berg: And just so people can understand, what again is Prop 13? Rob Lapsley: So Prop 13 is singularly the only last property tax protection that we have in the state. Passed in 1978 by over 75% of the voters in a revolt, because property taxes for residential, commercial, industrial, retail property were going up too quickly and people were losing literally their homes on a month-by-month basis. It said that it establishes your property tax basis is what your purchase price is, and it can go up no more than 1.5% to 2% a year, so you have long-term predictability and certainty on what you're going to pay on your property taxes in the future while you own property. Chris Berg: And I think what's fascinating is you just mentioned, and you're so used to this but you just kind of threw it out there, is the fact that based on what you said, property taxes are at record levels right now in California, right? Rob Lapsley: Yes, record levels. Chris Berg: And I think what's so critical for people to understand, speaking to Sacramento, is that's all businesses want, is just certainty. You just mentioned the power of Prop 13. It's, again, family owners and business, is certainty. We can deal with regulations, just provide some certainty, we can make some investments and know that hey, this is going to go beyond 12 to 24 months. So anything you want to add to that? Rob Lapsley: Well, you said it perfectly, and certainty is key. Chris Berg: So let's talk about, if we could, when it comes to certainty, what's coming. Rob Lapsley: Because with this court decision there's going to be a full-scale frontal attack on Proposition 13, because the unions, their number one goal is to get rid of Prop 13 for all properties including residential. I know that sounds insane, but that's their goal, because it's going to bring in $30 billion plus dollars more a year in new taxes. So one of the... Chris Berg: Let me interrupt you for a moment, I apologize. Really important, that is, you know, pure speculation, right? And they thought the same thing with the quote unquote mansion tax in LA, like hey, this is going to generate all this revenue for the homeless, and now that they've actually implemented it, it's actually reduced the revenue dramatically. Rob Lapsley: Correct, correct, that's true. So we would have to wait and see. It's an excellent point. Remember, as we've discussed in the past, our measure would have invalidated ULA and would have had to go back out and get a [inaudible] on it to a two-thirds level. All of that is gone away right now, other than [inaudible] still, but no recourse to try and strike it down. Don't think for a second that didn't factor into the thinking of the courts. Rob Lapsley: But one of the successes that we had with our measure, TPA, was that we kept a lot of taxes off the ballot, and we kept a split roll property tax off the ballot, which is again what the unions put forward in 2020, that changed the Proposition 13 base taxation rate for commercial, industrial and retail property versus residential property so that they could get at least part of that additional tax revenue, $13 to $15 billion a year in new revenue. And the Business Roundtable, along with our coalition, we defeated that in 2020. But it's already being organized and will be on the 2026 ballot because TPA was struck down by the courts. Chris Berg: Wow. All right, let's talk about this for a few more minutes we have you. And this just sort of happened to work out, because we had booked you to join us today last week, and then this morning Governor Gavin Newsom put out his pre-recorded State of the State address. In the context of business and real estate, what's the most important thing people should take away from it? Rob Lapsley: Well, the governor this morning did this pre-recorded address. It's obviously 2 days prior to the presidential election. It was, you know, very slickly produced, but it gave the governor's definition on where California stands today and all of our successes, which is much different, without question, than where business and the average person is, and their interpretation and belief in where California is today. Rob Lapsley: There's no question that Gavin Newsom's poll ratings are going down quickly. He's down in the 40s on his approval rating. We've been watching it sink like a rock over these past 6 months because of what's been happening. Budget deficit, $24 billion spent on homeless, and his own administration could not answer the question in the legislature of how many homeless people they have served or what they have done to get results. We have things like that across the board, no matter how much money is spent. Rob Lapsley: With his State of the State today being pre-recorded, there's no tough questions from the reporters questioning his facts and what he put out in his interpretation of California. There's a lot of, obviously, things that he said that are broadly open to a lot of tough questions, so probably smart on his part to do that, not getting those questions. But I got to tell you, when you watch it, you know, is our governor truly in touch with where things are today in California? Chris Berg: Last question. I've been back here now for about 15 months. Everybody I talk to, and again maybe I'm in different bubbles, but everybody I talk to agrees the state is not going in the right direction. Kind of a twofold question. One, what do you think it's going to take to get maybe some of the cities, and Sacramento, to turn things back around, at least be more open to business, because everyone you talk to outside the state says hey, it's so punitive in California, it's tough to do business. And then secondly, if let's say after this November election there's a new Trump administration, does that make a difference for California or not? Rob Lapsley: Boy, some good questions. You know, certainly we would hope, there are certain cities as we know that are definitely open for business, but certain cities need to completely reform themselves from top to bottom. Unfortunately under this court decision there's no incentive to do that, because they're going to be able to continue to look at how they raise revenues with no changes, no reforms. So that's a concern for the future on where we go. Rob Lapsley: And in terms of looking ahead for California, you know, if Trump wins, that is going to make California, our concern is though it'll react to Trump and make it dig in even more on the progressive agenda. At the same time, if we're going to change the state, we were pushing the initiative so it would try and let the voters' voice be heard on changing the state. But now that the voters' voice won't be heard, the most important and quickest way to try and change California is who we elect as the next governor in 2026. So who that is is going to be critically important to determine if we continue to go on this same path, which is going to be taxes, deficits and all of this spending without accountability or results, or if we actually get somebody who's going to look at building our job base to fund services so that we can grow our jobs, build more houses, lower our prices, keep a check on taxes, and do everything, Chris, that you and I know we need to do to make it attractive to future business. Chris Berg: Lot to digest there, Rob. As always, I appreciate your insight. Let's do this again, and thank you for what you do. Rob Lapsley: Thank you for always the opportunity for the discussion, and we look forward to having that any time. Chris Berg: Thank you very much again. Love to know your thoughts. Please share this interview with colleagues, people in your industry. This is the Commercial Real Estate Report, empowering you to build generational wealth with real estate. — END OF TRANSCRIPT —