BILL ANALYSIS
AB 2461
Page 1
Date of Hearing: April 14, 2008
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles Calderon, Chair
AB 2461 (Davis) - As Introduced: February 21, 2008
Majority vote. Fiscal committee.
SUBJECT : State Board of Equalization: property tax: "split
roll" study
SUMMARY : Requires the State Board of Equalization (BOE) to
conduct a study on the reassessment of nonresidential commercial
property at its fair market value. Specifically, this bill
requires BOE to:
1)Conduct a study on the amount of revenue that would have been
generated during the previous fiscal year (FY) if
nonresidential commercial property had been reassessed at its
fair market value at the prior FY.
2)Report the results of the study to the Department of Finance
and the Legislature on or before January 1, 2010.
EXISTING LAW :
1)Provides that all property is taxable, unless otherwise
provided by the California Constitution or federal laws,
[Section 1(a), Article XIII, California Constitution].
2)Limits ad valorem taxes on real property to 1% of the full
cash value of that property (Proposition 13).
3)Requires reappraisal of real property at its current fair
market value when that real property is purchased, newly
constructed, or a change in ownership has occurred.
4)Specifies in Revenue and Taxation Code (RT&C) Sections 60
through 69.5 what constitutes "a change in ownership" and,
with respect to property owned by legal entities, provides
that, whenever a person or entity purchases or otherwise
acquires more than 50% ownership of a corporation or other
legal entity, any real property owned by the acquired entity
would be reappraised to full market value.
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5)Defines "nonresidential commercial property" as all property,
except the following:
a) A constructed single-family or multifamily unit that is
intended to be used primarily as a permanent residence, is
used primarily as a permanent residence, or that is zoned
as a residence, and the land on which that unit is
constructed; and,
b) Real property that is used and zoned for producing
commercial agricultural commodities.
FISCAL EFFECT : No revenue impact. BOE would need additional
funding for limited term positions to perform this study. A
detailed cost is pending.
Proposition 98 Fiscal Effect : Minimal.
COMMENTS :
1)The author states that, "California's current budget crisis
provides us an opportunity to explore practical solutions to
the problems being faced by our State. Solutions often
require that we confront the past and remove barriers to
building a better future. Since the passage of Proposition 13
- nearly 30 years ago - there have been numerous studies and
articles printed that highlight the many problems identified
with the State's commercial property tax system. Those
problems include the inequities in the business marketplace
and the overtaxing of homeowners. Additionally, these studies
have shed light and inspired legislation to the possibility of
changing how commercial property values are assessed in the
State. The data we seek will provide information to help
better decide on funding education, healthcare and other
valuable state programs."
2)The purpose of this bill is to obtain an estimate of the
property tax revenue that would have been generated in a
particular FY if nonresidential commercial property had been
reassessed at its current market value that year. This
measure does not change existing law, it is simply a "split
roll" study, and a reassessment of nonresidential commercial
property to its current market value that would ultimately
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require additional legislation, and potentially, a
constitutional amendment.
3)As explained by BOE, the phrase "split roll" generally refers
to a system of taxation where various types of real property
are taxed according to different standards or at different tax
rates. The split is typically proposed between residential
property (or the subset of owner-occupied homes) and all other
property types. For instance, rather than taxing all property
at the same rate, nonresidential property could be taxed at a
higher rate or at a higher percentage of market value. This
phrase is also used to describe any legislation attempting to
redefine "change in ownership" as it applies to the purchase
or transfer of ownership interests in legal entities (i.e.,
stock or ownership shares in a corporation or partnership)
that own real property in a way that would trigger more
frequent reassessments to current market value level.
4)BOE notes that, in recent years there have many efforts to
require annual reassessments of nonresidential property, to
increase the tax rate on nonresidential property, and to
modify the change in ownership definitions for legal entities
(which generally own nonresidential property). Proponents of
these proposals state that over time the current system has
become inequitable because property owned by a legal entity
does not get reassessed as frequently as residential property
owned by individuals. Opponents of these proposals state that
the economic impact would be negative to the overall economy,
businesses, employees, and consumers, and that California
would become less competitive in national and global markets.
5)The proponents of this measure state that the classification
and valuation of properties is of critical importance in
determining the manner in which the property taxes are levied
and collected. The proponents also argue that, in light of
the current budget crisis, it is necessary to examine whether
nonresidential commercial property has been adequately taxed
and to identify additional sources of state revenue that will
allow the state to maintain valuable state programs, such as
education and health.
6)The opponents of this measure believe that the approach to
study the potential impacts of a split roll property tax
offered by this bill is incomplete because it does not require
BOE to project the cost of implementing the "split roll"
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study. The opponents also argue that the proposed study would
be inaccurate unless it also addresses the potential impact of
the "split roll" system on California small businesses, public
employee pension funds, consumers and the unemployment rate.
7)Committee staff note that there are fewer opportunities for
local governments to reassess commercial properties at fair
market value because a change in ownership of nonresidential
commercial properties does not occur as often as a change in
ownership of residential properties. Generally, properties
owned by legal entities are taxed under a "separate entity"
theory, which means that, as long as the property is owned by
the same legal entity, that property would not be reassessed,
even if most or all of the ownership interests in the entity
(i.e., stock in the corporation, partners in the partnership)
had changed ownership. As a result, a business may avoid a
major reappraisal of the property of an acquired entity by
simply structuring the acquisition in a way that prevents any
of the separate purchasers from receiving more than 50%
ownership in the acquired entity. As noted by many
commentators, existing law has created some major tax planning
opportunities for businesses.
8)Since 1991, numerous bills have been introduced to require
annual reassessment of nonresidential property to its current
market value via constitutional amendment and to redefine
change in ownership as it applies to property owned by legal
entities to current market value. The following BOE table
lists those measures:
-------------------------------------------------------------------
|Year|Bill |Summary |
| | | |
|----+-------------+------------------------------------------------|
|2005|SB |Change in Ownership Definitions. Provides that |
| |17(Escutia) |a change in ownership occurs when more than 50% |
| | |of the ownership interests in a legal entity |
| | |(excluding publicly traded companies) are |
| | |transferred to one or more persons or entities |
| | |during a calendar year. |
|----+-------------+------------------------------------------------|
|2003|SB |Change in Ownership Definitions. Redefine |
| |17(Escutia) |change in ownership for nonresidential |
| | |commercial and industrial property. |
AB 2461
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| | |(Legislative intent) |
|----+-------------+------------------------------------------------|
|2003|ACA 16 |Annual Reassessment. Annual reassessment of |
| |(Hancock) |nonresidential, nonagricultural property. |
|----+-------------+------------------------------------------------|
|2003|SBx1 3 |Change in Ownership Definitions. Redefine |
| |(Escutia) |change in ownership for nonresidential |
| | |commercial and industrial property. |
| | |(Legislative intent) |
|----+-------------+------------------------------------------------|
|2002|SB 1662 |Change in Ownership Definitions. Reassessment |
| |(Peace) |of nonresidential property when cumulatively |
| | |more than 50% of the ownership has been |
| | |transferred. Broaden the state and local sales |
| | |and use tax base and reduce both the state and |
| | |local sales and use tax rate. (Legislative |
| | |intent) |
|----+-------------+------------------------------------------------|
|2001|AB 1013 |Change in Ownership Definitions. Reassessment |
| |(Leonard) |of property owned by a legal entity when more |
| | |than 50% of the ownership shares transfer. |
|----+-------------+------------------------------------------------|
|2000|AB 2288 |Change in Ownership Definitions. Reassessment |
| |(Dutra) |of property owned by legal entity once every |
| | |three years - Rebuttable presumption of change |
| | |in ownership. Possible income tax credit to |
| | |homeowners based on fair market value of homes |
| | |from additional revenue. Reduce the sales and |
| | |use tax rate by 0.25 percent. |
|----+-------------+------------------------------------------------|
|1991|SB 82 (Kopp) |Change in Ownership Definitions. Reassessment |
| | |of legal entities when cumulatively more than |
| | |50% of the ownership has been transferred. |
-------------------------------------------------------------------
None of the bills listed above ever reached the Governor's desk.
REGISTERED SUPPORT / OPPOSITION :
Support
The American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
California Professional Firefighters
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Opposition
County of Santa Clara, Office of the County Assessor
California Chamber of Commerce
The Western States Petroleum Association
The California Grocers Association
The California Taxpayers' Association
The California Retailers Association
The California Restaurant Association
The California Business Properties Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098