BILL ANALYSIS                                                                                                                                                                                                    Ó






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          Date of Hearing:  April 4, 2016


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                           Sebastian Ridley-Thomas, Chair





          ACA 6  
          (Brown) - As Amended February 8, 2016


          Tax levy.  2/3 vote.  Fiscal committee.  


          SUBJECT:  Property taxation:  exemptions:  fruit and nut trees:   
          base-year value transfers:  persons with a severely disabled  
          child


          SUMMARY:  Proposes to expand several constitutionally prescribed  
          property tax exemptions for personal and real property.   
          Specifically, this bill:  


          1)Modifies Section 3 of Article XIII of the California  
            Constitution to extend the existing property tax exemption for  
            newly planted pistachio trees from four years, starting after  
            the season in which they were planted in orchard form, to six  
            years. 


          2)Modifies Section 2 of Article XIIIA of the California  
            Constitution to do all of the following:












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             a)   Allow spouses to qualify individually for the "base-year  
               value" transfer property tax relief.  Specifically:

               i)     Provides that, for purposes of existing statutory  
                 law, a person shall not be deemed to have previously  
                 claimed and been granted the property tax relief by  
                 reason of being or having been:

                  (1)       The spouse of a person who previously was  
                    granted that property tax relief; and,

                  (2)        A record owner of the replacement dwelling. 





               ii)    Applies only to persons who file a claim for the  
                 property tax relief on or after the effective date of  
                 this measure. 



             b)   Authorize the Legislature to extend the property tax  
               relief for the "base-year value" transfer to homeowners  
               with a severely disabled child, but only with respect to  
               replacement dwellings purchased or newly constructed on or  
               after effective date of this measure. 

             c)   Make technical, conforming changes to the provisions  
               relating to property tax exemptions and base year value  
               transfer eligibility requirements. 


          EXISTING LAW:  













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          1)Provides that all property is taxable, unless otherwise  
            provided by the California Constitution or federal laws  
            [Section 1(a), Article XIII, California Constitution].  Limits  
            ad valorem taxes on real property to 1% of the full cash value  
            of that property [Section 1(a), Article XIII A, California  
            Constitution (Proposition 13)].  


          2)Exempts from property tax fruit and nut trees planted in  
            orchard form until four years after the season first planted  
            [Section 3(i), Article XIII, California Constitution].  The  
            land upon which the trees are planted remains subject to tax.  
            A similar exemption exists for grapevines, except that the  
            exemption period is for three years. 


          3)Requires real property to be reassessed to its current fair  
            market value whenever a "change in ownership" occurs, but  
            creates exceptions to numerous transfers.  (California  
            Constitution, Article XIII A, Section 2; R&TC Sections 60 -  
            69.5.)  The assessed value of the property established  
            initially for property tax purposes is generally referred to  
            as "base-year value", which is subject to annual increases for  
            inflation, not to exceed 2%.


          4)Allows a property owner over 55 years of age and a disabled  
            person a once-in-a-lifetime opportunity to transfer the  
            base-year value of his or her principle residence, within two  
            years from the sale of the original residence, to a  
            replacement home of equal or lesser value within the same  
            county (Proposition 60, 1988) or to a replacement home in  
            counties that have adopted ordinances allowing the transfer  
            (Proposition 90, 1990), provided certain conditions are met  
            and the county assessor is properly notified.  Currently,  
            Alameda, El Dorado, Los Angeles, Orange, Riverside, San  
            Bernardino, San Diego, San Mateo, Santa Clara, and Ventura  
            Counties allow these out-of-county transfers.  In 1990,  
            Proposition 110 also amended the California Constitution to  











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            extend the "base-year" transfer property tax relief to any  
            severely and permanently disabled person regardless of age.   
            "Base-year" transfers allow taxpayers to continue to pay  
            property taxes at the amount and rate of growth of their  
            previous home and prevent reassessments of their newly  
            purchased homes to full market value.


          5)Provides that, if the replacement dwelling is purchased before  
            the original property is sold, the taxpayer may transfer the  
            base-year value only if the replacement property is 100% or  
            less of the original property's value.  If the replacement  
            dwelling is purchased within the first year after the sale,  
            then the taxpayer may transfer the base year if the  
            replacement property is within 105% of the original property's  
            value.  And, if the replacement dwelling is purchased within  
            the second year after the sale, then the taxpayer may transfer  
            the base year if the replacement property is within 110% of  
            the original property's value.


          6)Allows a homeowner, who has been granted a base-year value  
            transfer from his/her original residence to a replacement  
            dwelling, to perform new construction on the replacement        
                   property subsequent to the transfer and exempts the new  
            construction from assessment.  The new construction must be  
            completed within two years of the sale of the original  
            property and its value may not exceed the sales price of the  
            original property.

          7)Defines any person claiming the base-year transfer property  
            tax relief as a "claimant" and specifies that spouses are  
            deemed to be a single claimant.  Provides that a person is  
            eligible to claim a base-year value transfer as a claimant  
            only if neither that person nor his/her spouse, who is a  
            record owner of the new home, has previously received that  
            property tax relief.

          8)Provides that each co-owner of real property, including  











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            domestic partners or unmarried couples, is considered to be a  
            separate claimant for purposes of the base year value property  
                         tax relief.


          FISCAL EFFECT:  The BOE staff estimates that the provision  
          expanding the property tax exemption for pistachio trees will  
          result in an annual revenue loss of $2 million, the provision  
          re-defining the definition of "claimant" in the case of a  
          married couple will result in an annual revenue loss of  
          $333,750, and the provision relating to a parent of a severely  
          disabled child will result in an annual revenue loss of $1,335  
          per transfer. 


          COMMENTS:  


           1)Author's Statement  .  The author has provided the following  
            statement in support of this bill:



          "ACA 6 would allow the transfer of Proposition 13 base year  
            value on residential property to assist those families caring  
            for children who are permanently and severely disabled.   
            Current law, Proposition 60, allows a Proposition 13 base year  
            transfer for persons over the age of 55 and to persons who are  
            severely and permanently disabled.  This ACA arises from a  
            situation in San Diego County where permanently disabled  
            veterans are returning from military action and returning to  
            their parents' home, a house that is not accessible to  
            permanently disabled inhabitants.  Allowing base year  
            transfers under these limited circumstances maintains the  
            spirit of Proposition 60 and can easily be administered by the  
            County Assessor's office." 
           2)Arguments in Support  .  The proponents of this constitutional  
            amendment state that the provisions relating to the property  
            tax exemption for fruit and nut trees would "recognize  











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            pistachios as 'bearing' six years after the season in which  
            they were planted in orchard form" and would "align the County  
            Tax Assessors Handbook with the definition of 'bearing' of  
            pistachios trees as defined by the United States Department of  
            Agriculture and by current industry standards and would  
            provide two additional years of land tax exemption from the  
            County Tax Assessor."  They argue that because pistachio trees  
            are currently treated as "bearing" at the end of the four-year  
            period the valuation of these trees for property tax purposes  
            is increased from $100 per acre to $13,000 per acre.  This  
            bill would provide two additional years of tax exemption, in  
            line with the findings of the U.S. Department of Agriculture.


          The proponents also argue that this constitutional amendment is  
            needed to assist families caring for severely and permanently  
            disabled children.  They assert that "numerous parents have  
            had to contend with the hardship of what occurs when a minor  
            child becomes suddenly and severely disabled."  This  
            constitutional amendment "makes this challenging time easier  
            for both parents and children."  The proponents state that ACA  
            6 "updates the current base-year value transfer eligibility  
            requirements in important ways in order to reflect the  
            changing times in which we live, while at the same time  
            benefitting both seniors and children with disabilities."  

           3)Proposition 13  .  Much of the law pertaining to property  
            taxation is prescribed by Articles XIII and XIII A (commonly  
            known as "Proposition 13") of the California Constitution.   
            Proposition 13 was added to the California Constitution in  
            June 1978 and was most recently amended by Proposition 26 in  
            2010.  Proposition 13 was designed to provide real property  
            tax relief by imposing a set of interlocking limitations upon  
            the assessment and taxing powers of state and local  
















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            governments.<1>  

            Section 1 of Article XIII A states that, as a general rule,  
            the maximum amount of any ad valorem tax on real property may  
            not exceed 1% of the property's full cash value, as adjusted  
            for the lesser of inflation or 2% per year.  The term "full  
            cash value" is defined as the "county assessor's valuation of  
            real property as shown on the 1975-1976 tax bill" or,  
            thereafter, "the appraised value of real property when  
            purchased, newly constructed, or a change in ownership has  
            occurred after the 1975 assessment" [California Constitution,  
            Article XIII A, Sections 1 and 2].  


           4)Property Tax Exemption: Fruit and Nut Trees  .  Existing law  
            exempts fruit and nut bearing trees and grapevines from  
            property tax during the first few years of their life and  
            synchronizes the imposition of the tax with the ability of the  
            trees to produce a sellable crop.  Thus, the California  
            Constitution exempts from property tax fruit and nut trees  
            planted in orchard form until four years after the season  
            first planted and is intended to exempt from taxation plants  
            that are harvested or replanted annually or that are too  
            young.  Section 211 of the Revenue and Taxation Code (R&TC)  
            restates the exemption provisions of the constitution and  
            additionally provides that any tree severely damaged during  
            certain exemption period as a result of freezes restarts the  
            exemption for another four years. In addition to the exemption  
            for newly planted orchards provided by R&TC Section 211,  
            Property Tax Rule 131 provides that the four-year exemption  
            period will also apply to individual trees when:  (a) a tree  
            is newly planted within an existing orchard (i.e., a  
          ---------------------------

          <1> Since any tax savings resulting from the real property tax  
          limitations provided in Sections 1 and 2 of Article XIII A could  
          be effectively eliminated through the imposition of additional  
          state and local taxes, Sections 3 and 4 place additional  
          restrictions upon the imposition of any such taxes.  See Amador  
          Valley Joint Union High Sch. Dist. v. State Bd. of Equalization,  
          (1978) 22 Cal.3d 208.  









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            replacement tree), or (b) a tree that had reached commercial  
            production requires grafting causing another non-producing  
            period before it will bear fruit or nuts.  Once the exemption  
            period expires and the trees are subject to tax, R&TC Section  
            53 provides that the initial "base-year value" of the trees  
            for purposes of Proposition 13 will be the full cash value of  
            the trees as of January 1 on the first year when they are  
            taxable.  



             a)   The Proposed Change for Taxing Pistachio Trees.  A  
               pistachio tree is native to western Asia and Asia Manor and  
               was first introduced to the United States in 1890, when it  
               was planted in California at the Plant Introduction Station  
               in Chico, California in 1904.<2>  The areas of the  
               southwest San Joaquin Valley produce the best yields of  
               pistachios. Pistachios are characterized by a long juvenile  
               period, typically bearing few nuts before five years of  
               age, and achieve full bearing between 10 and 12 years of  
               age.<3>  Peak yields are obtained from trees that are 10 to  
               20 years old.  These trees are alternate bearing, meaning  
               the crop production tends to alternate between high and low  
               yields from year to year.<4>  Since pistachio trees are not  
               considered bearing until six years after the season in  
               which they were planted, this bill proposes to exempt these  
               trees from property tax for two more years.  



             b)   Taxation of Agricultural Land.  Agricultural land is  
               generally subject to property tax under Proposition 13;  
               only the trees and vines are temporarily exempt.  However,  
             --------------------------

          <2> The Pistachio Tree; Botany and Physiology and Factors that  
          Affect Yield, by Louise Ferguson, Vito Polito and Craig Kallsen,  
          p. 1. 
          <3> Ibid. 
          <4> Pistachio Timeline, by Nicole Mosz, HIB/BEAD, January 14,  
          2002. 









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               under the California Land Conservation Act (the "Williamson  
               Act"), landowners may enter into contracts with cities and  
               counties to restrict the land voluntarily to agricultural  
               or open-space uses.  In exchange, the land is valued  
               according to income earning potential, which may be lower  
               than the land's current fair-market value or Proposition  
               13- factored base-year value.  According to the BOE staff  
               analysis of this proposed constitutional amendment, most  
               pistachio tree acres are located on land subject to the  
               Williamson Act, which already results in the lowest value  
               of the land for property tax purposes.  The Committee may  
               wish to consider whether the unique bearing age of  
               pistachio trees warrants a full property tax exemption for  
               extra two years given that most of those trees are grown on  
               land already taxed at the lowest possible rate under the  
               Williamson Act. 



           5)Property Tax Exemption:  Base-Year Value Transfers:   
            Background  .  California has one of the lowest property taxes  
            in the nation and provides the greatest benefit to property  
            owners, especially those who have lived in their homes for  
            many years.  Proposition 13 contains provisions allowing a  
            homeowner over the age of 55<5> or a homeowners who is  
            disabled<6> a once-in-a-lifetime opportunity to transfer the  
            base-year value in his/her principal residence, within two  
            years from the sale of the original residence, to a  
            replacement home of equal or lesser value within the same  
            county or to a replacement home in counties that have adopted  
          ---------------------------

          ---------------------------
          <5> In 1986, the voters passed Proposition 60, which amended the  
          Constitution to allow persons over the age of 55 to sell a  
          principal residence and transfer its base-year value to a  
          replacement principal residence within the same county. 
          <6> In 1990, the voters passed Proposition 110, which amended  
          the Constitution to extend these provisions to any severely and  
          permanently disabled person regardless of age. 










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            ordinances allowing the transfer<7>, provided certain  
            conditions are met and the county assessor is properly  
            notified.  Base-year transfers allow homeowners to continue  
            paying property taxes at the amount and rate of growth of  
            their previous homes and prevent reassessments of their newly  
            purchased or constructed homes to full market value.  This  
            system, established by Proposition 13, may result in  
            substantial property tax savings for long-term property  
            owners. 


           6)Base-Year Value Transfer: Fifty-Five and Over: Spouses  .  A  
            person claiming the base-year value transfer relief is defined  
            as a "claimant." To qualify, the claimant must provide certain  
            information to the assessor, including his/her name and Social  
            Security number as well as the name and Social Security number  
            of his/her spouse who is also a record owner of the  
            replacement dwelling.  Under existing law, a person of any age  
            may make a base-year value transfer claim as long as that  
            person resides with a spouse who is over 55 or permanently  
            disabled even if the spouse is not an owner of record of  
            either the original or replacement property.  However, the  
            implementing statute, but not the Constitution, limits this  
            "base-year value" benefit to a one-time relief.  The statute  
            requires that the "claimant" have not previously received this  
            "property tax relief."



              a)   What is a Problem  ?  A spouse who shares title of the  
               newly purchased home with the "claimant" is also considered  
               to be a "claimant."  Consequently, if "A" and "B" are  
               married and record owners of property which has received  
               the benefits of the base-year transfer value relief, then  
               neither "A" nor "B" is eligible for a similar benefit in  
             --------------------------
          <7> In 1988, the voters passed Proposition 90, which amended the  
          Constitution to extend the base-year value transfer provisions  
          to a replacement residence located in another county on a  
          county-optional basis. 










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               the future.<8>  Furthermore, if "A" and "B" divorce, and  
               "A" marries "C", "C" will not be eligible for the base-year  
               value transfer relief with respect to "C's" replacement  
               dwelling if both "A" and "C" are co-owners of record.  The  
               relief will be unavailable to "C" because "A" is considered  
               a "claimant" for purposes of "C's" claim.  

              b)   Proposed Solution  . This constitutional amendment  
               proposes to stop treating a married couple as one  
               "claimant" for purposes of the "base-year value" transfer  
               relief and, instead, grant this property tax relief to any  
               individual regardless of his/her marital status.   
               Practically speaking, this proposed constitutional  
               amendment would allow a married couple to transfer their  
               base-year value twice, similarly to unmarried co-owners and  
               registered domestic partners.  However, this bill would not  
               allow a claimant under the age of 55 to qualify for the tax  
               relief even if the claimant resides with a spouse who meets  
               the age requirement.  As noted by the BOE staff, residency  
               by an over-55 spouse will no longer suffice to permit  
               transfer of the base-year value.  To qualify, the over-55  
               spouse must file the actual claim and be a recorded owner  
               of both homes.  Under current law, a person who is under  
               the age of 55 may be a claimant if he/she resides with a  
               spouse who is over 55 years of age. 

              c)   Prospective or Retroactive  ?  This proposed  
               constitutional amendment does not specify whether  
               retroactive claims are allowed.  As noted by the BOE staff,  
               it is unclear whether a spouse who was a record owner of a  
               replacement dwelling for which a "base-year value" transfer  
               was granted prior to the effective date of this  
               constitutional amendment, would be eligible to file a claim  
               for the "base-year value" relief on another replacement  
               dwelling.  It appears that the retroactive application of  
               this provision would create certain administrative  
               difficulties for the BOE.  To monitor and enforce the  
               existing one-time relief, the BOE is required to collect  



             --------------------------
          <8> BOE Annotation 200.0020 "Claimant (New Spouse)".










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               data from counties and maintain a database of base-year  
               value transfer claimants and their spouses if names of both  
               spouses appear on the title to the new home.  If claimant's  
               spouse subsequently claims another base-year value  
               transfer, the BOE database would match the name and the  
               claim will be denied.  However, the original paper claims  
               submitted by claimants to the BOE in the past years might  
               have been destroyed.  Thus, it may be impossible to  
               determine whether the person (whose name is in the  
               database) was listed as a spouse of the claimant or was the  
                      claimant himself/herself.  The Committee may wish to  
               consider amending this proposed constitutional amendment to  
               clarify its prospective or retroactive application.

              d)   Married Couple as a "Single Economic Unit  ."  As observed  
               by one of the prominent tax law professors, the choice  
               between marriage neutrality and couples neutrality cannot  
               be made purely on the basis of tax logic, but must consider  
               "society's assumptions about the role of marriage and the  
               family" and "in the end can rest on nothing more precise or  
               permanent than collective social preferences."<9>  Thus,  
               under both federal and state income tax laws, a married  
               couple is treated as a single economic unit.  Generally,  
               spouses file a joint tax return, reporting their combined  
               income and calculate their tax liability based on that  
               combined income.  A married taxpayer filing separately is  
               still subject to tax liability different from that if filed  
               as single.  Many tax preferences are disallowed to married  
               taxpayers filing separately; these differences are called  
               "marriage penalties" and "marriage bonuses".<10>  It  
               appears that existing California property tax law similarly  
               treats married taxpayers as a single economic unit in  
               contrast to couples that cohabitate or are registered as  
               domestic partners.  The Committee may wish to consider  
             --------------------------
          <9> Marriage and the Income Tax, L. Zelenak, 67 S. Cal. Rev.  
          339, p. 342 (1994), citing Boris I. Bittker, Federal Income  
          Taxation and the Family, 27 Stan. L. Rev. 1389, 1395-96 (1975).   

          <10> Id., at p.339. 










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               whether the rationale for this tax treatment of a married  
               couple as a single economic unit is warranted in the  
               context of the property tax law.  The Committee may also  
               wish to consider limiting the application of this proposed  
               constitutional amendment to a married couple where one of  
               the spouses was previously married and received a base-year  
               value transfer on a home he/she, or his/her ex-spouse,  
               owned in the prior marriage.

              e)   Is the Constitutional Amendment Relating to Base-Year  
               Transfer for Spouses Necessary  ?   As noted by the BOE  
               staff, this constitutional amendment addresses a problem  
               that was created by the implementing statute rather than  
               the Constitution.  Put differently, the Constitution does  
               not limit the number of base-year value transfers one  
               person may receive nor does it require both spouses to be  
               claimants.  This requirement was imposed by the  
               Legislature.   The Committee may wish to consider whether  
               this constitutional amendment is necessary to provide the  
               property tax relief to spouses and ex-spouses, where the  
               Legislature itself has full authority to change the  
               implementing statute (as it proposed to do in 2015).  

              f)   Related Legislation.   Last year, Governor Brown vetoed  
               AB 1378 (Holden), sponsored by the Howard Jarvis  
               Association, that would have allowed each spouse the  
               opportunity to make a separate, one-time claim after  
               January 1, 2016.  Because AB 1378 would have applied  
               prospectively only, it would have allowed a married couple  
               to move their base-year value twice but only if each spouse  
               makes a claim for the first time after January 1, 2016.  


               The Governor's veto message states:

               "This bill would allow each spouse in a marriage to submit  
               a separate base-year property tax valuation transfer claim.

               "I think this bill is too broad and allows an already  











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               generous property tax benefit to be allowed a second time  
               on a larger scale.

               "I do not believe that it would be prudent to authorize  
               legislation such as this that would result in significant  
               long-term costs to the General Fund."

           7)Base-Year Value Transfers:  Homeowners with Disabled Children  .  
             As discussed, the Constitution and implementing statute allow  
            a homeowner who is severely and permanently disabled to sell  
            his/her home, buy or build a new one, and transfer the  
            base-year value to a replacement dwelling.  To qualify, the  
            move must be necessary to meet disability requirements and the  
            new home must be of equal or lesser value and located in the  
            same county or another county that offers this property tax  
            benefit.  In addition, the claimant must provide certain  
            information to the assessor, including proof of severe and  
            permanent disability.

              a)   What is the Problem  ?  It is unclear if the definition of  
               a "severely disabled homeowner" includes a child who  
               resides in his/her parents' home but has no legal right as  
               a homeowner.  According to a BOE annotation<11>, a minor  
               may obtain the benefit of a base-year value transfer  
               indirectly if a guardianship or trust is created for the  
               minor and the minor has received the title to both the  
               original and replacement homes.  A minor may not convey or  
               make contracts relating to real property even though he/she  
               may own real property or an interest therein.  Nonetheless,  
               if a guardian or trustee is appointed to sell real property  
               owned by a minor, the benefits of a base-year value  
               transfer may be obtained indirectly through a guardianship  
               or trust.  In other words, a disabled child's name must be  
               added to the title in order to transfer the base-year  
               value.  Once the child is a record owner, he/she becomes a  
               qualified claimant and the parent may file a claim on the  



             --------------------------


             --------------------------
          <11> Property Tax Annotation 200.0076, State Board of  
          Equalization.










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               child's behalf as the trustee or guardian.<12>  However,  
               adding a minor child to a home's legal title may be a  
               lengthy, complicated and costly legal process.  In some  
               cases, parents may not be even aware of this indirect way  
               of obtaining the benefit of a base-year value transfer.   
               Furthermore, in the case of an adult child, the addition of  
               the child's name to the title may result in non-tax related  
               legal complications.  To sum up, existing law does not  
               allow a homeowner with a severely and permanently disabled  
               child to qualify for this "base-year" value transfer  
               directly.  

              b)   The Proposed Solution  .  This constitutional amendment  
               would extend the benefit of a "base-year value" transfer to  
               any person with a severely and permanently disabled child  
               who resides in the home.  The intent of the constitutional  
               amendment is to assist a family caring for a child who is  
               severely and permanently disabled by allowing the family to  
               sell their home and build or buy a new one to accommodate  
               their child's needs.  To that end, this proposed  
               constitutional amendment eliminates the need for parents to  
               engage in complicated legal proceedings and allows a parent  
               to claim directly the benefit of the "base-year value"  
               transfer without adding the child's name to title.

              c)   BOE's Implementation Concerns  .  In its analysis, the BOE  
               staff noted that this constitutional amendment does not  
               appear to require that the child reside in the home with  
               the parent.  To clarify the intent of the author and  
               minimize any future implementation issues, the BOE staff  
               recommends amending R&TC Section 69.5(g)(12).  Furthermore,  
               under this proposed constitutional amendment, any person  
               (such as a caregiver, a relative or friend and not just a  
               parent) with a severely and permanently disabled child  
               would qualify for the base-year value transfer relief.  The  
               Committee may wish to consider amendments that would  
               clarify the intent of this proposed constitutional  



             --------------------------
          <12> BOE's Letter to Assessor's 2006/010, Question 6










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               amendment. 

              d)   Prior Legislation  .  AB 571 (Brown), or the 2014-15  
               Legislative Session, would have, among other things,  
               provided for a transfer of base-year value of original  
               property to a replacement dwelling for persons who have a  
               severely disabled child.  However, because the base-year  
               value transfer relief was created by constitutional  
               amendments, a new constitutional amendment is required to  
               expand the scope of the relief to include disabled  
               children.  AB 571 was later amended to delete these  
               base-year value relief provisions. 


          REGISTERED SUPPORT / OPPOSITION:




          Support


          American Pistachio Growers


          Howard Jarvis Taxpayers Association


          California Assessors' Association




          Opposition


          None on file













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          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098