BILL ANALYSIS Ó SB 1021 Page A Date of Hearing: June 25, 2014 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Raul Bocanegra, Chair SB 1021 (Wolk) - As Amended: June 2, 2014 Majority vote. Non-fiscal. SENATE VOTE : 21-15 SUBJECT : School districts: parcel taxes SUMMARY : Allows a school district to impose a parcel tax at different rates by classifying property as commercial, industrial, single-family residential or multifamily residential, provided that the same rate of tax is levied on all properties within the same classification. Specifically, this bill : 1)Specifies that the phrase "special taxes that apply uniformly" to all taxpayers or all real property within the school district means any special tax imposed in accordance with one or more of the following: a) On a per parcel basis; b) According to the square footage of a parcel or the square footage of improvements on a parcel; c) According to the commercial, industrial, single family residential, or multifamily residential classification of a parcel, so long as the same rate of tax is levied on all properties of the same classification; or, d) At a lower rate on unimproved property. 2)Provides that, in no event, the rate that the school district imposes on property within the commercial or industrial classification be more than two times the rate imposed on property within the single family residential classification. 3)Authorizes a school district to treat multiple parcels of real SB 1021 Page B property as one parcel of real property for purposes of a qualified special tax where the parcels are contiguous, under common ownership, and constitute one economic unit, meaning that the multiple parcels of real property have the same primary purpose and are not separate and distinct properties that may be independently developed and sold. 4)States that no inference shall be drawn from the enactment of this bill with respect to the meaning of the term "uniformly" for purposes of special taxes imposed by school districts pursuant to the authorization in Government Code (GC) Section 50079 as it existed prior to the enactment of this act. EXISTING LAW : 1)Authorizes cities, counties, and special districts to impose a general tax for general governmental purposes with the approval of a majority of the voters. 2)Authorizes cities, counties, and special districts to impose a special tax for specified purposes with the approval of two-thirds of the voters. 3)Does not allow cities, counties, or special districts to impose an ad valorem tax on real property or a transactions tax or sales tax on the sale of real property within that city, county, or special district. 4)Prohibits school districts from imposing general taxes, but allows school districts, community college districts, and county offices of education to issue bonded indebtedness for school facilities with 55% approval. (Proposition 39; November 7, 2000 General Election.) 5)Authorizes school districts to impose qualified special taxes, in accordance with specified procedures, including the approval of two-thirds of the voters in the district. 6)Provides that "qualified special taxes" must apply uniformly to all taxpayers or all real property within the school district and do not include special taxes imposed on a particular class of property or taxpayers. 7)Authorizes a school district to exempt from a "qualified special tax" person 65 years of age or older, persons SB 1021 Page C receiving Supplemental Security Income (SSI) for a disability, regardless of age, or low-income persons receiving Social Security Disability Insurance (SSDI) benefits, regardless of age. FISCAL EFFECT : Unknown COMMENTS : 1)The Author's Statement . The author has provided the following statement in support of this bill: "Under the recent court decision, school districts can no longer apply higher or lower rates to parcels based on commercial, industrial, or residential classification of the parcel. Districts cannot even tax an empty property at a lower rate than an oil refinery or a research and development campus. SB 1021 restores this needed local control by allowing school district boards to structure its tax according to local values and priorities. Because these taxes must be approved by 2/3 vote of local voters, school district boards must forge a communitywide consensus to ensure voters approve the tax, evident by the high approval rates in parcel tax elections. The bill simply returns local control to its state before the court case, and conforms the school district law to 15 other laws that allow local agencies to impose parcel taxes. The bill does not grant any additional powers to districts they did not have before the case. The choice SB 1021 presents is clear: the Legislature can decide who should and should not pay local taxes, or local voters can choose at the ballot box whether the tax placed on the ballot by the locally elected school board after a full, public process is worth it." 2)Arguments in Support . The proponents state that this bill addresses an issue that "arose through the decision in Borikas v. Alameda Unified School District" and is needed to clarify "troublesome ambiguities in existing law resulting from the Borikas decision." By explicitly providing that school districts may levy parcel taxes based on square footage, "the bill removes the prospect that future courts could interpret the Borikas decision narrowly and raise questions regarding those types of taxes." Furthermore, the proponents argue that, absent this bill, "Borikas could have the unintended effects of requiring double taxation of owners of contiguous parcels and imposing disproportionate taxes on owners of SB 1021 Page D unimproved parcels." The proponents assert that parcel taxes are "a stable funding source for public schools" and argue that this bill is an important measure necessary to provide the "needed clarity, authority, and flexibility for districts to structure taxes ? that meet community needs and comply with long-standing equal protection principles." The proponents note that this bill "does not change the existing 2/3 vote requirement for local communities to pass parcel taxes." Finally, the proponents argue that this bill "would restore local control and discretion to school districts prior to the court ruling in Borikas... and would bring parity to the law by providing school districts similar legal authority to impose parcel taxes as fifteen other local agencies." All in all, this bill would "give school districts and their respective community much needed flexibility to structure their parcel tax according to local values, needs and priorities." 3)Arguments in Opposition . The opponents argue that this bill would "overturn the Borikas decision for the over one thousand school districts across California, allowing them to impose non-uniform parcel taxes," which could result in "a jumble of different tax rates depending on the type of property in a community, leading to confusion for home and business owners." The opponents assert that pursuant to this bill's "wholly volatile and very random parcel tax regime," school districts would have "nearly unlimited discretion to decide who pays what tax"; would be allowed to impose a different tax rate on unimproved parcels; and would be permitted to "aggregate multiple, smaller parcels owned by one owner to capture all the properties under a square footage parcel." The opponents also state that this bill could be "detrimental to residential homeowners who may be forced to pay higher parcel taxes depending on how a particular tax is imposed." Finally, the opponents claim that one of the "most regrettable unintended consequences of [this bill] is its potentially negative social equity implications, specifically on equal [and fair] access to education." According to the opponents, while "per-pupil funding disparities among school districts currently exist because certain school districts levy illegal non-uniform parcel taxes, SB 1021 would undermine Serrano and exacerbate the problem by allowing school districts to impose even more exaggerated nonuniform parcel taxes, bringing back wealth-related taxes that are extremely unequal and SB 1021 Page E nonuniform." 4)Background . Prior to 1970, the state's K-12 schools largely relied on local property taxes levied at different rates and yielding different amounts per pupil in more than 1,000 California schools districts. State court rulings in the Serrano v. Priest equalization cases forced the state to revise basic school finance and establish the revenue limit system. [Serrano v. Priest (1971) 5 Cal.3d 584; Serrano v. Priest (1976) 18 Cal.3d 728; Serrano v. Priest (1977) 20 Cal. 3d 25).] In order to conform to the court's decision and reduce the differences in per-pupil amounts, the state created the revenue limit system that combines local property tax revenues with state general aid and allows the state to control the two revenue sources on a per pupil basis. The state does not fund basic aid districts, where local property taxes meet or exceed the revenue limit. In 1978, Proposition 13 limited both the tax rates and assessments, thus significantly reducing property tax revenues and forcing the state to replace the lost revenues in district revenue limits. Proposition 13 also eliminated the ability of school districts to levy an incremental ad valorem tax on real property. Local governments and special districts may, however, levy non-ad valorem taxes, subject to voter approval. Since schools and special districts have no plenary taxing powers, the Legislature had provided general authority for all local agencies to levy special taxes, subject to 2/3 voter approval. [SB 785 (Foran) 1979.] However, in 1986, another proposition - Proposition 62 - was placed on the statewide ballot, requiring the Legislature to grant specific power to local agencies to impose taxes. In response, the Legislature authorized school and community college districts to impose qualified special taxes. [AB 1440 (Hanningan) 1988.] Thus, under existing law, a school district may impose a qualified special tax within that district, as long as the special tax applies uniformly to all taxpayers (other than persons over the age of 65 or persons receiving SSI or SSDI] or real property within the district, and is approved by a two-thirds vote of the qualified electors of the district. In 1991, the Legislature additionally authorized 15 other types of local agencies to impose similar taxes, allowing local agencies to tax unimproved property at a lower rate than improved property. [SB 158 (Committee on Local Government) 1991.] SB 1021 Page F 5)What is a "Qualified Special Tax" ? As discussed, school districts have limited authority to generate local revenues from qualified special taxes, even though most school funding is either received from the state or federal government, or controlled by the state through revenue limits required to equalize per-pupil funding. While Proposition 13 did not define the term "special tax", the courts over time have opined that a tax is a "special tax" whenever expenditure of its revenues is limited to specific purposes, i.e. the proceeds of the tax are earmarked or dedicated in some manner to a specific project or projects. In contrast, a tax is a "general tax" only when its revenues are placed into the General Fund and are available for expenditure for any and all governmental purposes. [Bay Area Cellular Telephone Co. v. City of Union City (2008) 162 Cal. App.4th 686; Howard Jarvis Taxpayers Assn. v. City of Roseville (2003) 106 Cal.App.4th 1178.] Since school districts are prohibited from imposing general taxes, any tax levied by a school district, by definition, is considered to be a special tax subject to a two-thirds voter approval. School districts may only to impose "qualified" special taxes, i.e. taxes that are applied uniformly to all taxpayers or real property within the district. Therefore, thus far, school districts have only imposed "qualified special taxes", under Government Code Section 50079, in the form of a parcel tax. 6)A Parcel Tax . The California Constitution specifies that only two types of taxes may be imposed upon a parcel of property: an ad valorem property tax and a special tax receiving two-thirds voter approval pursuant to Section 4 of Article XIIIA (or a parcel tax). A parcel tax is a special tax and may not be based on the property's value (it is non-ad valorem). Instead, it is a flat fee imposed by a city, county, or special district on each parcel, residential as well as commercial, rather than on the assessed value of property, located within the local entity's jurisdiction. Because the same dollar amount of tax is generally assessed on each parcel of property, whether the parcel is one acre or 100 acres, parcel taxes are generally regressive, which means owners of smaller parcels of land pay a larger percentage of tax compared to owners of larger parcels of land. To address the issue of regressivity, some districts decided to levy a rate at a fixed amount per square foot of taxable land, and many SB 1021 Page G include an annual inflation adjustment. Existing law does not prescribe a maximum rate of tax, nor does it limit the period within which the qualified special tax may be imposed. Therefore, the rate of tax varies significantly among different school districts. For example, in 2014, 13 school parcel tax propositions were placed on the ballots in 13 school districts, all of which were approved, ranging from $660 per unit in El Dorado County to $84 per parcel in Santa Clara County, with terms as short as four years and as long as eight years. According to the California School Boards Association, ten school districts have enacted parcel tax measures that utilize various tax rates, based on square footage or certain property classification. There is no current limitation on how the special tax proceeds may be spent and, therefore, a local government or a special district may specify in the ballot measure how the funds will be used. Districts can use revenues in almost any way that serves local needs, such as ongoing expenses, programs, or buildings. Generally, local parcel taxes provide secure funding for teacher salaries, books, materials and supplies, computers, and art, music and sports programs. 7)The "Uniformity" Requirement and the Borikas Decision . Existing law authorizes school districts to impose "qualified" special taxes only if the taxes apply uniformly to all taxpayers or real property within the district. (GC Section 50079.) Some school districts have interpreted the term "uniformly" to require a uniform treatment of taxpayers and property within a tax classification of property or taxpayers. Consequently, those school districts have utilized, with the voters' permission, variable parcel tax rates depending on a property's use and/or size. For example, in 2008 the Alameda Unified School District's voters approved Measure H, which imposed different rates of parcel taxes. A parcel tax of $120 per parcel was levied on residential parcels as well as commercial and industrial parcels under 2,000 square feet. However, larger commercial and industrial properties were subject to a tax of $0.15 per square foot, not to exceed the overall limit of $9,500 per parcel per year. In 2013, Mr. Borikas challenged the validity of the variable tax rates in Measure H, arguing that GC Section 50079 never authorized differential tax rates nor property classification in a school funding measure. [Borikas v. Alameda Unified School District (2013) 214 Cal.App.4th 135.] The Alameda School District SB 1021 Page H argued that the statutory language of GC Section 50079 reflected long-established equal protection principles that allow a governmental entity to create reasonable tax classification so long as all taxpayers within a classification are treated the same. (Id., p. 140.) The Court of Appeal agreed with the plaintiff and concluded that the statutory language in question was intended to be "a constraint on the extent of the taxing authority delegated to the local governmental entities." (Ibid.) In other words, the uniformity provision is "language of limitation and does not, itself, authorize local districts to classify and differentially tax taxpayers or property." (Id., p. 151.) The Court concluded that if the Legislature "had intended to delegate the school districts the broadest taxing authority allowed by law - that is, taxing authority bounded only by equal protection principles - it needed only to have authorized school districts to impose special taxes, or in other words, it needed only to have enacted section 50079, subdivision (a)." (Ibid.) 8)What Does This Bill Do ? This bill would prospectively overturn the Borikas decision, allowing school districts to use property classifications - commercial, industrial, single-family residential and multifamily residential - to levy different parcel tax rates within the classification. The rate of tax imposed on commercial or industrial properties may not be more than two times the rate of the parcel tax imposed on single-family residential properties. School districts would also be allowed to tax unimproved property at a lower rate. In addition, districts would be able to choose the method of calculating a parcel tax based on any the following: a per-parcel, per-square foot of the parcel, or per-square foot of the improvements basis. Finally, this bill would allow districts to combine multiple parcels into one if they are commonly owned and constitute one economic unit. 9)The Balancing Act . While this bill provides school districts with more control and flexibility over their parcel tax measures, it may, at the same time, lead to a patchwork of complex parcel tax regimes in different parts of the state. Under Borikas, school districts can only impose a tax applying the same rate to all parcels, regardless of their sizes or use. In contrast, if this bill were to become law, school districts may choose to tax commercial property based on square footage but multifamily properties on a per-parcel SB 1021 Page I basis; they may decide to treat multiple parcels as one parcel and tax those as one at a higher rate. Different parcel tax regimes in different school districts will certainly complicate the tax compliance for some property owners, especially business owners, and may lead to wide disparities in the amount of revenues raised by various school districts. On the other hand, the Borikas "one-size-fits-all" approach presupposes that all school districts have the same needs and the same ability to raise needed revenues. Parcel taxes are intended as a local source of funding for local programs; they are subject to rigorous public discussions and a voter approval. Local residents must decide whether the proposed tax is a fair price to pay to fund certain programs and services. However, parcel taxes are inherently regressive since they are not based on one's ability to pay or the value of the property. Voters may be questioning this truly "uniform" but regressive tax structure and may be less willing to vote for the new parcel taxes. In essence, this bill highlights the inherent problem with the existing parcel tax structure, as well as the acquisition-based property tax system in California. The Committee may wish to consider whether the benefits of allowing a school district to impose a parcel tax at differential rates would outweigh the burdens of creating a myriad of complicated parcel tax regimes in the state. The Committee may also wish to consider whether a broader discussion of California's property tax system and its current structure is warranted. 10)Who Bears the Burden of a Parcel Tax ? As a special tax, a parcel tax levied by a school district requires approval at an election of at least two-thirds of the qualified electors of such district. Court have interpreted the phrase "qualified electors of such district" to mean the registered voters voting in the election concerning the proposed tax. [Neilson v. City of California City (2005) 133 Cal. App.4th 1296, 1312.] Generally, nonresident landowners are not registered voters and are not included among the voters voting on the proposed parcel tax. On the other hand, some registered voters who do not own real property within the district's boundaries are able to vote on the parcel tax even though they will not be paying that tax (at least not directly). In addition, districts may exempt taxpayers 65 years or older or SB 1021 Page J those who receive SSI or SSDI, creating another class of voters who do not bear the incidence of the tax. This bill would allow school districts to levy a parcel tax on commercial and industrial properties at a higher rate than the tax imposed on residential properties. The Committee may wish to consider whether this bill would encourage residents within the school district to enact a parcel tax where the greater incidence of the tax burden is shifted to commercial and industrial properties, especially in light of the fact that many of those properties are owned by non-residents who do not have the right to vote in the district and do not generally use the services and programs funded by the parcel taxes. 11)Parcel Taxes and Income Tax Deductions . Some critics of this bill have argued that the proposed non-uniform parcel tax structure may cause homeowners to lose their income tax deductions for the parcel tax. However, it is unclear whether a parcel tax imposed as a flat tax on every parcel in the district is currently deductible for income tax purposes. Generally, to be deductible for both state and federal income tax purposes, real property taxes must be levied for the general public welfare at "a like rate against all property" in the taxing authority's jurisdiction. [Treasury Regulations, Section 1.164-4(a).] Non-ad valorem assessments may be deductible only if they are levied "for the general welfare by a property taxing authority at a like rate on owners of all properties in the taxing authority's jurisdiction, and if the assessments are not for local benefits (unless for maintenance or interest charges)."<1> While the phrase "a like rate" is not defined in either the Internal Revenue Code or the Treasury Regulations, a memorandum issued by the Office of Chief Counsel of the IRS states that this term "requires that the rate must uniformly apply based upon an independent variable, such as property value or parcel or structure size, to be considered similar or 'like.' "<2> With respect to the Fire Prevention Fee, the memorandum concluded that a "charge of $150 against each structure no matter how large or small is not levied at a 'like' rate." This interpretation of a "like rate" appears to be based on the assumption that a rate could be "a like rate" --------------------------- <1> Internal Revenue Service Information Letter 2012-0018A (March 30, 2012). <2> Real Property Tax Deduction for Fire Prevention Fees, Office of Chief Counsel of the Internal Revenue Service Memorandum, Number 201310029, January 14, 2013, page 5. SB 1021 Page K only if applied within a certain property classification. The issue of whether a particular parcel tax is deductible for income tax purposes is a question of facts and circumstances. However, it appears that per-parcel flat taxes are not currently deductible for federal or state income tax purposes anyway, and this bill, if nothing else, will bring California parcel taxes one step closer to being deductible by satisfying the federal definition of a "like rate." 12)Related Legislation . AB 59 (Bonta) would have provided that the "uniform application of taxes" provision shall not be construed as limiting a school district from assessing taxes in accordance with rational classifications among taxpayers or types of property within the school district. AB 59 would have applied to transactions predating the Borikas decision. AB 59 was amended out of this Committee's jurisdiction. REGISTERED SUPPORT / OPPOSITION : Support Alameda Unified School District Albany Unified School District Board of Education Association of California School Administrators California Association of School Business Officials California Labor Federation California School Boards Association California School Employees Association California Teachers Association San Diego Unified School District Tom Torlakson, State Superintendent of Public Instruction Wiseburn School District Opposition Air Conditioning Trade Association Air Logistics Corporation American Resort Development Association Apartment Association, California Southern Cities Apartment Association of Greater Los Angeles Associated Builders and Contractors of California Associated Builders and Contractors of California - San Diego Chapter Associated General Contractors of California BayBio SB 1021 Page L Biocom Building Owners and Managers Association of California California Apartment Association California Association of Realtors California Attractions and Parks Association California Bankers Association California Beer and Beverage Distributors California Building Industry Association California Business Properties Association California Cable and Telecommunications Association California Chamber of Commerce California Grocers Association California Healthcare Institute California Hotel and Lodging Association California Independent Oil Marketers Association California Independent Petroleum Association California Manufacturers and Technology Association California Mortgage Bankers Association California New Car Dealers Association California Railroad Industry California Restaurant Association California Retailers Association California Tank Lines, Inc. California Taxpayers Association California Travel Association Caterpiller, Inc. Chamber of Commerce Mountain View Chamber of Commerce Alliance of Ventura and Santa Barbara Counties Chemical Transfer Company, Inc. Contra Costa Taxpayers Association Council on State Taxation East Bay Rental Housing Association Extra Space Storage, Inc. El Dorado Land Holdings, LLC Family Business Association Family Winemakers of California Greater San Fernando Valley Chamber of Commerce Howard Jarvis Taxpayers Association International Council of Shopping Centers SB 1021 Page M Kern County Taxpayers Association Lake Tahoe South Shore Chamber of Commerce Lucy Lofrumento, Esq., LMA Law, LLP NAIOP of California, the Commercial Real Estate Development Association National Association of Real Estate Investment Trusts National Federation of Independent Business NorCal Rental Property Association Orange County Business Council Orange County Taxpayers Association Pacific Life Insurance Co. PhRMA Plumbing-Heating-Cooling Contractors Association of California Redondo Beach Chamber of Commerce Regional Economic Association Leaders of California San Diego County Apartment Association San Jose Silicon Valley Chamber of Commerce San Mateo County Economic Development Association Santa Barbara Rental Property Association Silicon Valley Leadership Group Simi Valley Chamber of Commerce Solar Turbines, Incorporated Superior Tank Wash, Inc. TechAmerica TechNet Tenet Healthcare Corporation United Hospital Association West Coast Leasing, LLC West Coast Lumber and Building Material Association Western Electrical Contractors Association Western Manufactured Housing Communities Association Western States Petroleum Association Wine Institute Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098 SB 1021 Page N