There is a lot wrong with Measure U1. The tax rate imposed is many times higher than that imposed on virtually all other businesses and that charged in other cities. A 3% tax on gross receipts is the equivalent of a 5% to 17% on income, depending on the degree to which the property is mortgaged. Even a die-hard believer in progressive taxes should likely find a combined federal, state and local tax rate over 70% to be a bit excessive.
Secondly, the law is bizarrely unworkable. It taxes PERSONS with five or more units in Berkeley. Two equal partners in an eight-unit building are not taxed, unless however one on them has a fifth unit elsewhere in Berkeley and then he/she is taxed while the partner is not. On the other hand, these same two owners, if married, might be subject to the tax, depending on how ownership is vested.
It is possible – even likely – that for a given building all, some or none of the partners would be taxed. To implement this tax, the city will have to determine, for every rental property in Berkeley, the legal structure of the ownership, what percent of the property each partner owns, how that translates into a number of units and how many units each partner owns elsewhere. Because the taxed entity is not rent or property but the individual person, the largest properties could well be entirely exempt.
As I read the ordinance, a 500-unit property owned by a corporate entity with say, 1000 shareholders could pay no tax at all. In this case, only a shareholder with 1% of the shares would “own” five units and be subject to the tax. Is this information even available? For this reason, many, if not most of the larger new buildings in Berkeley may never be taxed, even after their 12-year hiatus from the tax. Administering this ordinance? It virtually requires a parallel – and more complicated — tax roll for thousands of properties. Good luck with that.
Thirdly, this law is contrary to state law. It imposes an illegal INCOME tax on the affected owners and California prohibits municipalities from imposing income taxes. That this is a tax on income is clear in the ordinance. In Section 1, there is a finding that “the people of Berkeley find and declare as follows: (f) Dramatically increased rents transfer income from Berkeley residents to owners of large properties. Section 2 goes on to impose a tax on (A.) …gross receipts from the rental of five or more rental units in the City of Berkeley. It defines those subject to the tax as (B.) Every person engaged…..in the business of renting or leasing dwelling units.”
By passing this ordinance, the people of Berkeley make a formal finding there has been an income redistribution of which they disapprove. They conclude that therefore a claw-back of that income is appropriate. That is the purpose of this new law. The initiators of this ordinance have plainly said so from the beginning and the ordinance says so as well.
It is not a tax on property or rents. If it were, it would apply to ALL property and rents. It is a wealth tax on certain individuals. Rents from more than four units is used as a surrogate for that wealth. A percentage of that rent is what determines the amount of the tax but the tax is on the PERSON. State law prohibits this.
The bottom line is that this measure is excessive, is an administrative nightmare, and subject to a certain, protracted, expensive legal challenge. Please vote NO on Measure U1.
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