BILL ANALYSIS Ó AB 920 Page 1 Date of Hearing: April 29, 2013 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Raul Bocanegra, Chair AB 920 (Ting) - As Amended: April 22, 2013 Majority vote. Fiscal committee. SUBJECT : Property Taxation: tax bill information: interest on refunds SUMMARY : Establishes the Property Tax Transparency and Accountability Program (Program) that would require participating counties to include new information on each county tax bill a comprehensive account of all services funded by local governments and eliminates the requirement for counties to pay interest on property tax refunds at a minimum of 3% per year. Specifically, this bill : 1)Establishes the Program as a pilot program for participating counties. 2)Requires each participating county to include in each county tax bill, in addition to the information specified in Revenue and Taxation Code (R&TC) Section 2611.6, the following information: a) Beginning with the 2014-15 fiscal year (FY), information that indicates the percentage of the general ad valorem property tax that is allocated to each local government jurisdiction, including the county, city, special district, and school district in the tax rate area (TRA) in which the property is located; and, b) Beginning with the 2015-16 FY, a comprehensive account of all the services funded by local governments including, but not limited to, services provided by the county, city, special district, and any school district in the TRA in which the property is located. 3)Provides that the Program will remain operative through the 2017-18 FY. 4)Requires, upon the cessation of the pilot program, each of the AB 920 Page 2 participating counties to provide a report to the Legislature regarding the implementation of the pilot program, including any required technology upgrades, workload adjustments, tax bill designs, costs, and any recommendations regarding how a county can best increase transparency about the use of general ad valorem property tax revenues by local governments. 5)Eliminates the requirement that counties pay interest on property tax refunds at the greater of 3% per year or the "county pool apportioned rate," and instead, requires payment only at the "county pool apportioned rate." EXISTING LAW requires the: 1)Following information to be included on each county tax bill, whether mailed or electronically transmitted or included in a separate statement accompanying the bill (R&TC Section 2611.6): a) Value of the locally assessed property; b) Tax rate of a maximum 1% amount of ad valorem tax imposed on real property; c) Rate or dollar amount of taxes levied in excess of the 1% limitation to pay for voter approved indebtedness incurred before July 1, 1978, or bonded indebtedness for the acquisition of improvement of real property; d) Amount of any special taxes and special assessments levied; e) Amount of any tax rate reduction; f) Amount of any exemptions; g) Total taxes due and payable on the property covered by the bill; h) Instructions on tendering payment, including the name and mailing address of the tax collector; i) Any special parcel tax; j) Information on the taxpayer's right to an informal AB 920 Page 3 assessment review if the taxpayer disagrees with the assessed value on the tax bill and contacts the assessor's office; aa) Information on the taxpayer's right to file an application for reduction in assessment for the following year if the taxpayer and assessor are unable to agree on a proper assessed value pursuant to the informal assessment review; bb) Address of the clerk of the county board of equalization or the assessment appeals board; and, cc) Notification that if property taxes are unpaid, it may be necessary to pay delinquency penalties, costs, redemption penalties, and a redemption fee. (R&TC 2611). 2)Payment of interest on property tax refunds at the greater of 3% per year or the county pool apportioned rate. (R&TC Section 5151). FISCAL EFFECT : Unknown COMMENTS : 1)The author has provided the following statement in support of this bill: California property tax bills are complex and often confusing to the taxpayer. Many taxpayers are unaware that all revenue from property taxes is kept exclusively at the local level for vital services such as education, police and fire protection, parks and recreation, and so much more. The tax bill includes payments for the general 1% ad valorem property tax levied on all properties across the state pursuant to Proposition 13, voter-approved debt rates such as payments for school bonds, Mello-Roos taxes, parcel taxes, and other assessments. Currently, property tax bills identify the purpose of each payment, except for the general 1% ad valorem tax, the largest tax on the property tax bill. It is critical that they are provided a receipt for their payment informing them of the local government services funded by their payment, similar to any other receipt they receive when conducting a financial transaction. AB 920 would give taxpayers a receipt AB 920 Page 4 indicating what services they receive for their property tax payment. This disclosure will increase transparency and provide more information to taxpayers about the important services, such as schools and public safety, funded by property tax revenue. AB 920 would also stabilize property tax refund payments, providing local governments another tool for greater fiscal oversight. Currently, any taxpayer owed a refund for property tax overpayment will receive that payment with a ceiling of three-percent interest or interest at the county pool apportioned rate. The county pool apportioned rate is the annualized rate of interest earned on the total amount of pooled idle funds held and invested by the county treasurer. The economic downturn has contributed to a fall in many counties' pool rates, resulting in property tax refunds paid with more interest than the county is earning. This loss of local government revenue redirects money away from schools and other important services. AB 920 would require property tax refunds to be paid at the county pool rate, providing more oversight and stability to local government revenues during the economic downturn. 2)Proponents of this measure argue: AB 920 increases disclosure and transparency on property tax statements. Currently, it is impossible for taxpayers to discern from their property tax bill what revenue is kept at the local level for important services such as schools, police, and fire. To fix this problem, this bill would require county governments to disclose on each property tax bill the different types of local public services funded by the property tax. This disclosure will help taxpayers understand their often complex and confusing property tax bills. Property taxes are the most important revenue stream for local governments, and this bill will promote transparency and mutual understanding of the money that funds schools and other important local services. 3)Opponents of this measure argue: CalTax opposes AB 920, which, among other things, reduces the interest rate paid by county tax collectors and AB 920 Page 5 treasurers on property tax refunds owed to taxpayers. While we understand counties' desire to reduce their interest costs, this proposal sets up a disparity between the interest rate that counties charge taxpayers for underpayments and the rate at which they pay taxpayers for overpayments. It is our understanding that Sacramento County, for example, charges taxpayers an annualized interest rate of approximately 9 percent on underpayments, but under this bill, would only pay taxpayers a rate of less than 3 percent on overpayments. Such a policy unfairly disadvantages taxpayers. Interest is supposed to be compensation for the use of money, not a revenue-raising function or an additional penalty on taxpayers. 4)Committee staff comments. a) Property Tax Bills . According to the Legislative Analyst's report, Understanding California's Property Taxes, a property tax bill consists of many taxes and charges including the 1% rate, voter-approved debt rates, parcel taxes, Mello-Roos taxes, and assessments. The process of determining the property's taxable value is set out in California's Constitution. Id. All of the revenue from property tax remains within the county in which it is collected and is used exclusively by local governments. Id. However, state law controls the allocation of property tax revenue to more than 4,000 local governments. Because the allocation of local property taxes has evolved over time through legislation and voter approved initiatives, the property tax allocation system is complex, not well understood, unresponsive to modern local needs, and not transparent. Id. b) How is the 1% ad valorem tax distributed ? The 1% rate generates a large portion of the property tax at the local level, about $43 billion in FY 2010-11. Despite being the largest tax on property, the 1% is listed as a "general tax levy" with no indication as to which local governments receive the revenue or the purpose for which the funds are used. Id. The allocation of the 1% tax revenue is distributed pursuant to state law, commonly referred to as "AB 8," which was a long term response to the fiscal austerity introduced by Proposition 13. In general, AB 8 AB 920 Page 6 provides a share of total property taxes collected within a community to each local government that provides services within that community. Id. The distribution is based on the local government's proportionate county-wide share of property taxes during the mid-1970s. Limited information is available on the distribution of revenue from parcel taxes, Mello-Roos taxes, and assessments. Id. c) Implementing the Property Tax Transparency and Accountability Program . In general, this bill provides for two specific pieces of information to be included in a property tax bill: 1) Beginning in the 2014-15 FY, the county must provide information that indicates the percentage of general ad valorem property tax that is allocated to each local government jurisdiction; and, 2) Beginning in the 2015-16 FY, the county must provide a comprehensive account of all the services funded by local governments. As noted above, the property tax allocation system is complex, not well understood, unresponsive to modern local needs, and not transparent . Therefore, requiring the counties to provide the information as specified in this bill appears to be beneficial to the general public. However, several organizations have raised concerns over the implementation of the program. Specifically, organizations have noted that it would require an enormous amount of staff time to create a document describing all required information. Concerns have also been raised as to whether the information can be included as an insert along with the tax bill or if the information has to be included on the tax bill itself. If the information has to be included in the tax bill, software programs may have to be updated. According to one concerned organization, Sacramento County reformatted its tax bill software in 2004 at a cost of $27,000. The language of this measure states that "each participating county shall include in each county tax bill " information as specified. Therefore, it seems that participating counties may have to include the information on the tax bill itself, potentially requiring modification of the property tax bill software. This measure also requires that the information provided be based on the individual TRA. The county auditor allocates the property tax revenue to local governments by TRA, which AB 920 Page 7 is a small geographical area within the county that contains properties that are all served by a unique combination of local governments. Id. A single county may have thousands of TRAs. Id. When distributing revenues, a county auditor will first collect the revenue from the TRA and then distribute to each local government within the TRA, the same amount of revenue it received in the prior year. Id. Because there may be thousands of TRAs in a single county, it may increase the staff time needed to ensure that the appropriate information for each individual taxpayer matches their TRA. Despite the initial costs and difficulties with implementing this program, the information is available by the county auditor and computer systems can be made automated to match specific TRA information to the appropriate taxpayer. Additionally, if a tax bill software requires updating, it may be done in a manner that streamlines much of the required process, eliminating the need for increased staff time. d) Transparency . The author notes that the "disclosure will increase transparency and provide more information to taxpayers about the important services, such as schools and public safety, funded by property tax revenue." Again, as noted above, our current tax allocation system is incredibly difficult to understand and is not transparent. Having additional information for property owners as a ready database for individual TRAs may be beneficial for both local taxpayers and statewide officials. Despite the enhanced transparency provided by this bill, it is important to note that the information included in the tax bill will still not be complete. The state provides a large portion of the revenues received for things such as schools and court houses. Therefore, the required information under this bill may not necessarily provide a complete and accurate picture as to how local government is funded. e) Property Tax Interest . Under current law, counties must pay interest on the property tax refunds at the greater of 3% per year or the "county pool apportioned rate." The statute defines the county pool apportioned rate as "the annualized rate of interest earned on the total amount of pooled idle funds from all accounts held by the county AB 920 Page 8 treasurer, in excess of the county treasurer's administrative costs with respect to that amount." (R&TC Section 5151). In 2012, the pool rate for all 58 counties was below 3%, ranging from .0045% in Plumas County to 2.58% in Tulare County. The rates for the state's five largest counties are: Los Angeles (1.29%), Orange (.56%), San Bernardino (.994%), and Santa Clara (.7903%). Despite having very low rates for refunds, penalties and interest can be very high for individuals that do not pay certain taxes on time. For example, the taxes on the supplemental roll become delinquent on December 10 for the first installment. If the taxes due are not paid before they become delinquent, a penalty of 10% will be imposed plus costs and penalties accruing at a rate of 1.5% per month. (R&TC Section 2616, 2617, 2910.1, and 2922). The author states that the economic downturn has contributed to a fall in many counties' pool rates, resulting in property tax refunds paid with more interest than the county is earning. Because of this, local government revenue has been directed away from schools and other important services. It is true that counties currently earn less interest than what is paid out for property tax refunds, and the imposition of interest is generally provided for the cost of borrowing money. However, as noted above, the imposition of interest has also been used as a penalty, encouraging property owners to pay their property tax bills on time. Local governments greatly depend on property tax. As such, prompt receipt of property tax payments is vital to providing local services. However, lowering the interest rate to the county pool rate for overpayment seems to preclude its use as a penalty. Property taxes may be refunded for a variety of reasons, including taxes that have been erroneously or illegally collected, and illegally assessed or levied. By maintaining an interest rate on refunds that is higher than average county pool rate, existing law encourages local governments to ensure that taxes are levied and assessed in a constitutional and legal manner. f) Double referred . This bill was referred to the Assembly Committee on Local Government on April 17, 2013, and passed AB 920 Page 9 out of that Committee on a vote of 7 to 0. REGISTERED SUPPORT / OPPOSITION : Support CALPIRG California Professional Firefighters AFSCME Opposition California Taxpayers Association Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916) 319-2098