BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 587


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          Date of Hearing:   August 1, 2016


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                           Sebastian Ridley-Thomas, Chair





          SB  
          587 (Stone) - As Amended June 22, 2016


          Majority vote.  Tax levy.  Fiscal committee.  


          SENATE VOTE:  Not relevant


          SUBJECT:  Property taxation:  inflation factor:  senior citizens


          SUMMARY:  Eliminates the annual inflation adjustment used to  
          determine the property tax base for the principal place of  
          residence of an income-eligible taxpayer 65 years of age or  
          older.  Specifically, this bill:  


          1)Provides that, for any assessment year beginning on or after  
            January 1, 2017, the inflation factor used to calculate the  
            tax base of real property shall not apply to the principal  
            place of residence of a "qualified taxpayer".


          2)Defines a "qualified taxpayer" as a person who owns a dwelling  
            as his or her principal place of residence who is 65 years of  








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            age or older on the lien date and satisfies either of the  
            following:


             a)   If single, his or her annual household income, as  
               defined in Revenue and Taxation Code (R&TC) Section 20504,  
               is $25,000 or less; or, 


             b)   If married, his or her combined annual household income  
               is $50,000 or less.  


          3)Specifies that a qualified taxpayer who is 65 years of age or  
            older includes a married couple, one member of which is 65  
            years of age or older on the lien date.  


          4)Provides that when claiming this benefit, the claimant shall  
            provide all information required by, and answer all questions  
            contained in, an affidavit furnished by the county assessor to  
            determine the claimant's eligibility.  The assessor may  
            require additional proof of the information or answers  
            provided in the affidavit before allowing the benefit.  


          5)Extends this bill's benefits to a qualified taxpayer who owns  
            a manufactured home.  


          6)Provides that, notwithstanding existing law, the state shall  
            not reimburse local agencies for property tax revenues lost by  
            them under this bill.  


          7)Provides that, if the Commission on State Mandates determines  
            that this bill contains costs mandated by the state,  
            reimbursement for those costs shall be made, as specified.  









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          8)Takes immediate effect as a tax levy.  


          





          EXISTING LAW:


          1)Specifies that all property is taxable unless otherwise  
            provided by the California Constitution or federal law.   
            (California Constitution Article XIII, Section 1.)  


          2)Limits, as a general rule, the maximum amount of any ad  
            valorem tax on real property to 1% of the property's "full  
            cash value".  (California Constitution Article XIII A, Section  
            1(a).) 


          3)Defines the term "full cash value" as the county assessor's  
            valuation of real property as shown on the 1975-76 tax bill  
            or, thereafter, the appraised value of real property when  
            purchased or newly constructed, or when a change in ownership  
            occurs.  (California Constitution Article XIII A, Section  
            2(a).)  In addition, the full cash value base may reflect from  
            year to year an inflationary rate not to exceed 2% for any  
            given year.  (California Constitution Article XIII A, Section  
            2(b).)  


          4)Provides that, for any assessment year beginning on or after  
            January 1, 1998, the inflation factor shall be the percentage  
            change, rounded to the nearest one-thousandth of 1%, from  
            October of the prior fiscal year to October of the current  








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            fiscal year in the California Consumer Price Index for all  
            items, as determined by the California Department of  
            Industrial Relations.  (R&TC Section 51(a)(1)(C).)


          5)Provides that the taxable value of real property is the lesser  
            of its base year value compounded annually by the inflation  
            factor not to exceed 2%, as provided, or its full cash value.   
            (R&TC Section 51(a).)       


          6)Requires the Legislature to reimburse local agencies annually  
            for certain property tax revenues lost as a result of any  
            exemption or classification of property for purpuses of ad  
            valorem property taxation.  (R&TC Section 2229)   


          FISCAL EFFECT:  The State Board of Equalization (BOE) estimates  
          annual revenue losses of $27 million.  


          COMMENTS:  


          1)The author has provided the following statement in support of  
            this bill:


               Many senior citizens are on a very fixed income, with most  
               of that coming from Social Security and pensions.  With the  
               rising costs of health care and prescription drugs, and the  
               economic uncertainty taking place across the country,  
               California's senior citizens find themselves in a very  
               challenging time.  There is nothing more important than the  
               pride and freedom that comes with home ownership.  For  
               seniors at the lower end of the income spectrum, the  
               ability to stay in their own home is becoming harder and  
               harder, unless California finds ways to make holding on to  
               the American Dream more affordable.  SB 587 is a small  








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               attempt to bring financial relief to senior citizens, who  
               want to stay in their own home, by capping the property tax  
               assessment for all senior citizens (age 65 or older) who  
               meet the income requirements.  By making property taxes  
               affordable for more senior citizens on a fixed income, we  
               can empower the most vulnerable in our society.





          2)The BOE notes the following in its staff analysis of this  
            bill:


              a)   Freezes assessed values for low-income seniors 65+  :  "In  
               practical application, this bill freezes the assessed value  
               of any income-qualified person 65 years of age or older at  
               the home's factored base year value for the 2016-17 fiscal  
               year, which is the factored base year value for the January  
               1, 2016 lien date.  In addition, as other homeowners reach  
               the age of 65, their homes' assessed values also will be  
               frozen."  


              b)   Qualifying homeowners will need to take action  :   
               "Assessors do not have homeowners' age information.  The  
               bill specifies a basic requirement that a claim must be  
               filed to request this tax benefit."


              c)   Annual income verification process  :  "To implement this  
               bill, assessors will need to establish a procedure to  
               verify continued income eligibility.  The bill requires  
               that [homeowners] provide proof of income to continue to  
               receive the benefit."


              d)   The bill would apply to low income 65+ floating home  








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               owners  :  "The law provides that [R&TC] Section 110.1  
               applies to a floating home and it is to be treated the same  
               as real property for property tax assessment purposes.   
               Therefore, age and income qualified floating homeowners  
               would benefit from the bill."  


              e)   The bill does not address whether the inflation factor  
               should be eliminated for land in excess of what is  
               reasonably necessary for use of the property as a home  :   
               "For example, in other areas of law, 'residential dwelling'  
               means a dwelling occupied by the claimant as the principal  
               place of residence, and so much of the land surrounding it  
               as is reasonably necessary for use of the dwelling as a  
               home."  


          3)Committee staff comments:


              a)   California's property tax system  :  Proposition 13 (1978)  
               replaced California's market value-based system of property  
               taxation with an acquisition value-based system.  This  
               change was designed to provide property owners with greater  
               predictability regarding future property taxes.   
               Specifically, Proposition 13 rolled back the assessed  
               values of real property to 1975 market value levels and  
               limited future assessed value increases to the inflation  
               rate, not to exceed 2%, for as long as a property's  
               ownership remains unchanged and the property is not  
               substantially improved (i.e., through new construction).   
               Thus, even if a property appreciates considerably in value  
               over time, the 2% maximum inflation adjustment ensures only  
               limited increases in the property's assessed value.  In  
               this manner, Proposition 13 can result in substantial  
               property tax savings for long-term property owners.  


              b)   Base year values  : A property's "base year value" refers  








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               to the real property's protected value under Proposition  
               13.  Specifically, existing law requires county assessors  
               to establish a "base year value" for real property at its  
               1975 market value, and thereafter reset the value to the  
               current market value every time the property changes  
               ownership.  This base year value must be compounded  
               annually by an inflation factor not to exceed 2%.  The  
               property's inflation-adjusted value, in turn, is called the  
               "factored base year value."  Generally, the law requires a  
               property's assessed value to be based on its factored base  
               year value or its current market value, whichever is lower.  



               Reassessment limits and caps on inflation ensure a  
               predictable, slowly increasing tax obligation for the  
               taxpayer, as well as predictable revenues for local  
               agencies.  At the same time, however, these provisions may  
               also result in a taxable base year value for a property  
               well below the property's actual market value.  Critics, in  
               turn, contend that this system shifts the cost of public  
               services from longstanding property owners to those who  
               have only recently purchased property.        


              c)   What would this bill do  ?  This bill is designed to  
               provide property tax relief to low-income homeowners by  
               freezing assessed values once the owner turns 65.   
               Specifically, this bill provides that, for any assessment  
               year beginning on or after January 1, 2017, the percentage  
               increase for an assessment year shall not apply to the  
               principal place of residence of a "qualified taxpayer".  A  
               "qualified taxpayer", in turn, is defined as a person who  
               is 65 years of age or older on the lien date and who  
               satisfies certain income conditions.  Specifically, if the  
               qualified taxpayer is single, his or her annual household  
               income, as defined in R&TC Section 20504, is limited to  
               $25,000.  If the qualified taxpayer is married, his or her  
               combined annual household income would be limited to  








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               $50,000.  This bill provides that a qualified taxpayer who  
               is 65 years of age or older includes a married couple, one  
               member of which is 65 years of age or older on the lien  
               date.  This bill also specifies that, when claiming this  
               benefit, the taxpayer shall provide all information  
               required by an affidavit furnished by the county assessor  
               to determine that the claimant is a qualified taxpayer.  In  
               addition, the assessor is authorized to require additional  
               proof before allowing the benefit this bill provides.   
               Finally, this bill provides similar relief to owners of  
               manufactured homes.  


              d)   Existing property tax relief provisions for California  
               seniors  :  Beyond the protections afforded by Proposition  
               13, California seniors also benefit from additional  
               property tax relief measures.  For example, individuals  
               over the age of 55 may "transfer" their Proposition 13 base  
               year value from one home to another that is of equal or  
               lesser value and located within the same county or in one  
               of 11 counties that accept transfers from non-county  
               residents.  In this manner, that individual is able to  
               avoid a reassessment of the newly purchased home to its  
               current market value.  This once-in-a-lifetime benefit  
               allows seniors to pay the same level of taxes if they move  
               by avoiding Proposition 13's reassessment provisions when  
               purchasing a qualifying new home.  


               In addition, the state's property tax postponement program  
               is scheduled to resume later this year.  This program,  
               administered by the State Controller, will allow income  
               eligible individuals at least 62 years of age to postpone  
               property tax payments on their principal residence.   
               Finally, the BOE notes that prior California law provided a  
               rebate to income qualified homeowners for property taxes  
               paid up to the first $34,000 of assessed value.  Under this  
               Franchise Tax Board-administered program, the amount  
               rebated was determined according to a sliding income scale.  








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                In addition, household income limits were adjusted for  
               inflation.  


               This Committee may wish to consider whether this bill's  
               proposed benefits are merited given those already afforded  
               under current law.  Alternatively, this Committee may wish  
               to consider whether it would be preferable to augment the  
               existing property tax postponement program or re-establish  
               a rebate program to assist qualified homeowners.     


              e)   Income-testing  :  The benefits of this bill would apply  
               to individuals aged 65 and older with less than a specified  
               amount of annual income.  For example, if the qualified  
               taxpayer is single, his or her annual household income, as  
               defined in R&TC Section 20504, would be limited to $25,000.  
                Because county assessors do not possess income information  
               for property owners, this bill would also require the  
               taxpayer to provide the assessor with an affidavit  
               attesting to his or her eligibility.  It is not clear,  
               however, whether these affidavits would have to be  
               submitted annually given that a taxpayer's income may  
               fluctuate over time.  This Committee may wish to consider  
               whether this bill's expansion of property tax benefits  
               should depend on a taxpayer's income and whether such a  
               limitation is warranted given the potential administrative  
               costs involved with implementation.  


              f)   Questions of constitutional authority and  
               interpretation  :  Article XIII A Section 2(b) of the  
               California Constitution appears to grant the Legislature  
               discretion on the question of whether or not to adjust the  
               base year value of real property for inflation.   
               Specifically, Section 2(b) provides: 


                 The full cash value base may reflect from year to year  








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                 the inflationary rate not to exceed 2 percent for any  
                 given year or reduction as shown in the consumer price  
                 index or comparable data for the area under taxing  
                 jurisdiction, or may be reduced to reflect substantial  
                 damage, destruction, or other factors causing a decline  
                 in value.  (Emphasis added.) 


               Thus, while Article XIII A does not appear to prohibit the  
               Legislature from enacting a law making the inflation factor  
               optional, the California Constitution is silent on the  
               question of whether the inflation factor can be applied in  
               a differential manner to discrete classes of taxpayers  
               (e.g., those over a certain age).  Moreover, the BOE staff  
               analysis notes that this bill's provisions could  
               potentially be in conflict with Article XIII, Section 1(a),  
               which provides that "[a]ll property is taxable and shall be  
               assessed at the same percentage of fair market value."  


              g)   Related legislation  :  This bill is substantially  
               identical to SB 1126 (Stone), which was held on the Senate  
               Appropriations Committee's Suspense File.  For additional  
               discussion of this bill's provisions, please refer to the  
               Senate analysis prepared for SB 1126.  


          REGISTERED SUPPORT / OPPOSITION:




          Support


          None on file 











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          Opposition


          None on file




          Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)  
          319-2098