BILL ANALYSIS Ó ACA 6 Page A 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: ACA 6 Page B 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: ACA 6 Page C 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 ACA 6 Page D 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 ACA 6 Page E 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 ACA 6 Page F 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 ACA 6 Page G 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. ACA 6 Page H 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. ACA 6 Page I 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. ACA 6 Page J ACA 6 Page K 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. ACA 6 Page L 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)". ACA 6 Page M 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. ACA 6 Page N 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 ACA 6 Page O 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. ACA 6 Page P ACA 6 Page Q 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 ACA 6 Page R 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 ACA 6 Page S Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098