BILL ANALYSIS AB 2492 Page 1 Date of Hearing: May 28, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair AB 2492 (Ammiano) - As Amended: May 18, 2010 Policy Committee: Revenue and Taxation Vote: 6-3 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill provides for a "change-of-ownership" reassessment of property taxes when 100% of the ownership interest in a corporation, limited liability company (LLC), partnership, or other legal entity holding the property is sold or transferred in a single transaction or in multiple transactions occurring over a period of up to three-years. Specifically, the bill: 1)States that a "sale or transfer" of ownership interest in a legal entity includes, among other things, a merger, acquisition, private equity buyout, or transfer of partnership shares in a business. 2)Applies to sales or transfers between legal entities or between legal entities and individuals, but does not apply to transfers of ownership interests in legal entities between parents and their children, or grandparents and their grandchildren. 3)Defines the phrase "ownership interests" as corporate voting stock, partnership capital and profits interests, limited liability company membership interests, and other ownership interests in legal entities. 4)Increases, from 10% to 20% of property taxes owed, the current penalty for failing to file a change in ownership statement with the Board of Equalization. FISCAL EFFECT 1)BOE estimates that the bill would result in AB 2492 Page 2 change-of-ownership related increases in property taxes assessments totaling $21 million per year. Over time the effects would be cumulative, potentially increasing property tax collections by the low hundreds of millions of dollars per year. 2)About 40% of added property tax revenues would be allocated to school districts. Under Proposition 98, increased local revenues to schools translates into a corresponding reduction on GF spending for this purpose. COMMENTS 1)Background . Under Proposition 13, real property (land and buildings) is subject to taxation at a general rate of 1% of its acquisition value, as adjusted for the lesser of inflation or 2% per year. The property is reassessed to market value when a "change in ownership" occurs. Improvements, such as additions or alterations, are assessed at market value in the year in which they are completed, and are subject to the 2% limitation in subsequent years. The definition of "change of ownership was not included in Proposition 13, but rather was left to implementing legislation. Determining a change-of-ownership is a relatively straightforward matter for properties that are owned by individuals - it occurs when legal title to the property passes from one person to another. However, it becomes more complex when the property is owned by a legal entity - such as a corporation, partnership, an LLC, or a trust - which itself is sold to another legal entity. Following passage of Proposition 13, a task force developed to recommend implementing legislation considered the option of providing for reassessment whenever changes in the control of the legal entities took place. However that approach was ultimately rejected due to administrative burden imposed on county assessors, and instead, legislation was passed that limited change of ownership to when one person or entity acquires more than 50% of the ownership interest of the property. A concern that has arisen relating to this change of ownership standard is that a sale or transfer of controlling interests can be legally structured so that no one entity acquires more AB 2492 Page 3 than 50% interest in the legal entity - thereby avoiding the reassessment. Proponents of this bill point to several large transactions that have resulted in a 100% change in ownership interest, but no reassessment of property taxes because no one party controls more than 50% of the transferred property. 2)Purpose . The bill is intended to close the legal loophole created by the current 50% controlling interest standard by requiring a reassessment when 100% of ownership interest changes hands in a single transaction or series of transactions - regardless of whether any one person owns more than 50% legal entity acquiring the property. The author states that, "the current system allows billions of dollars of valuable business property to be vastly under assessed, creates great differences in taxes paid among property owners, resulting in inadequate funding of local governments, schools and infrastructure projects." 3)Opponents (California Chamber of Commerce, CalTax, and various other business groups) assert that the bill removes Proposition 13 protection from business property owners, that the measure, like other "split role" proposals are based on a faulty assumption that there has been a shift in tax businesses to homeowners, and that the increase in the property taxes paid by the affected entities will result in higher prices for goods and services and have other negative impacts on the economy. Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081