BILL ANALYSIS SENATE REVENUE & TAXATION COMMITTEE Senator Lois Wolk, Chair AB 1178 - Torres Amended: June 16, 2010 Hearing: June 23, 2010 Fiscal: No SUMMARY: States that Possessory Interest Taxes Do Not Apply to Residents of Publicly-Owned Low Income Housing. EXISTING LAW (California Constitution) provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The possessory interest tax is imposed on real property interests located on public land. A taxable possessory interest must be independent, durable, and exclusive, all terms of which are defined by statute and case law. Private interests on federal land (e.g., a vacation cabin on Forest Service land) are subject to the possessory interest tax. EXISTING LAW defines "independence" as "the ability to exercise authority and exert control over the management or operation of the property or improvements, separate and apart from the policies, statutes, ordinances, rules, and regulations of the public owner of the property or improvements. A possession or use is independent if the possession or operation of the property is sufficiently autonomous to constitute more than mere agency." Case law and Property Tax Rule 20 add that the possessor must derive some "private benefit" to be considered independent, meaning the use must provide some private economic benefit to the possessor not shared by the general public. AB 1178 - Torres Page 3 EXISTING LAW grants the power to County Assessors to determine whether a taxable possessory interest exists. THIS BILL states that for purposes of the independence test, a lease of publicly owned low-income housing, the possession of, claim to, or right to the possession of, land or improvements is not independent if the lessee is a low-income tenant. The measure defines a low-income tenant as a low-income household as defined by the Health and Safety Code. The measure states that its provisions are declaratory of existing law, and makes legislative findings and declarations to effectuate its provisions. FISCAL EFFECT: BOE estimates that AB 1178 has minimal revenue impact because only one county levies possessory interests on occupants of low-income housing. AB 1178 - Torres Page 3 COMMENTS: A. Purpose of the Bill The author provides the following statement: AB 1178 makes clear that low-income tenants living in publicly owned affordable housing are not subject to the possessory interest tax. B. Being Possessive Possessory Interest Tax law is a vibrant, yet slightly esoteric corner of the tax world. Possessory interest taxes backstop the property tax when taxpayers enjoy use of public property for his or her economic benefit, ensuring that these taxpayers are not unfairly advantaged relative to taxpayers who own their own property. The tax applies to the interest, not the land. Possessory interest taxpayers may end up paying less that their property tax paying counterparts because the base of the possessory interest tax is the limited rights the private user enjoys on public land, and are often considered less valuable than the exclusive rights property taxpayers enjoy on their own land. Assessors value interest based on income derived, comparable sales, or by subtracting accrued depreciation from replacement cost. Examples of possessory include docks and slips in public waterways, ski resorts on public lands, and the classic example of the cabin in a National Forest. C. The Wrong Way The Assembly Housing and Community Development Committee learned that the Los Angeles County Assessor was asserting a possessory interest tax on tenants of low-income housing, despite direction from the BOE that no AB 1178 - Torres Page 3 possessory interest exists on publicly-owned tax-exempt property because taxpayers do not enjoy an independent use of the land; instead, low-income housing is a public use. The Committee found that the Los Angeles County Assessor did not bill possessory interest taxes in a uniform manner. According to the California Assessors' Association, Los Angeles County was the only county asserting a possessory interest in these housing projects, so AB 1178 would presumably only apply to one county. D. Is AB 1178 necessary? The Los Angeles County Assessor states that because the welfare exemption does not apply to individuals and that absent state law to the contrary, the interests could be considered assessable. The Assessor states that he only assessed five single family homes in Pomona and another five in Pico Rivera, and will no longer do so. Now that the Assessor has seen the error of his ways and agreed not to assess these properties, as well as cancel and refund the taxes, and that no counties are assessing similar properties, then what's the point of a bill? The Committee may wish to consider the efficacy of moving the bill forward when the problem has worked itself out. E. I Hear You Knocking County assessors determine whether possessory interests exist based on the California Constitution, statute, case law, and direction from the BOE. The Legislature has enacted definitions for each of the three tests that assessors use when determining whether an assessable possessory interest exists: independence, durability, and exclusivity. However, assessors have the exclusive power to make determinations, and the only recourse for taxpayers is to the Courts, where assessors have previously argued that only constitutional amendments, not statutes, can limit the assessor's discretion. AB 1178 - Torres Page 3 F. I Do Declare AB 1178's provisions are declaratory of existing law. As such, assessors will have to cancel future taxes, and rebate amounts previously paid. BOE suggests clarifying this application and amending the measure to provide specific authority for tax cancellation and refunds. Support and Opposition Support:None received. Oppose:California Assessors' Association (unless amended) --------------------------------- Consultant: Colin Grinnell