BILL ANALYSIS Ó SB 587 Page 1 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 SB 587 Page 2 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. SB 587 Page 3 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 SB 587 Page 4 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 SB 587 Page 5 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 SB 587 Page 6 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 SB 587 Page 7 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 SB 587 Page 8 $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. SB 587 Page 9 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 SB 587 Page 10 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 SB 587 Page 11 Opposition None on file Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098