BILL ANALYSIS Ó AB 1378 Page A Date of Hearing: May 18, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 1378 (Holden) - As Introduced February 27, 2015 Majority Vote. Tax Levy. Fiscal Committee SUBJECT: Property tax: base year value transfers SUMMARY: Allows each spouse to qualify individually for the base year value transfer property tax relief. Specifically, this bill: 1)Revises the definition of "claimant" to exclude a spouse of the person claiming the base year value transfer property tax relief. Specifically, this bill eliminates the requirement that the claimant's spouse, who is a record owner of the replacement dwelling, be considered a "claimant" for purposes of determining whether in any future claim filed by the spouse AB 1378 Page B the condition of eligibility has been met. 2)Makes technical, conforming changes to the provisions relating to the base year value transfer eligibility requirements. 3)Applies only to persons who file a claim on or after January 1, 2016, and who have not been previously granted the base year value transfer property tax relief. 4)Takes effect immediately as a tax levy. EXISTING LAW: 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)]. 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%. 2)Allows property owners over 55 years of age and disabled persons once-in-a-lifetime opportunity to transfer the base-year value of their 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 AB 1378 Page C 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. 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. 3)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. 4)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. 5)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 AB 1378 Page D property tax relief. 6)Provides that each co-owner of real property, including 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 State Board of Equalization (BOE) staff estimates that this bill would result in an annual loss of $350,000. COMMENTS: 1)The Author's Statement . The author has provided the following statement in support of this bill: "Assembly Bill 1378 recognizes the evolving nature of marriage relations and living patterns of Californians and expands eligibility for a Proposition 60/90 transfer to include one transfer per person in a recognized long-term relationship. Assembly Bill 1378 ensures California law recognizes all types of marriages, cohabitations and housing situations." 2)Arguments in Support . The proponents of this bill state that this bill "clarifies and expands the rules for Proposition 60 'base year value transfers' to allow both spouses to make separate claims for transfer of a principal residence to a replacement residence, assuming all other statutory requirements are met." The proponents claim that this bill is "simply about creating fairness in the years following Proposition 60's passage in 1986." They argue that it "dispenses with [the] unequal treatment and entitles each individual owner, regardless of marital status, to a once per lifetime base year value transfer" and "will streamline administration of the section 69.5 base year value transfers as Assessors will no longer be required to track couples for AB 1378 Page E purposes of ensuring that future transfers are valid." 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 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" means 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" (emphasis added) [California Constitution, Article XIII A, Sections 1 and 2]. In other words, the California Constitution requires that real property be reassessed to its current fair market value whenever a "change in ownership" occurs. The definition of a "change in ownership" was not included in Proposition 13, but was left to implementing legislation. 4)Base-Year Value Transfers . Article XIIIA of the California Constitution contains provisions allowing a homeowner over the --------------------------- --------------------------- <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. AB 1378 Page F AB 1378 Page G age of 55<2> or a homeowner who is a disabled person<3> a once-in-a-lifetime opportunity to transfer the base year values 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 ordinances allowing the transfer<4>, 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. 5)Fifty-Five and Over . California has one of the lowest property taxes in the nation and provides the greatest benefit to property owners, especially those that have lived in their homes for many years. Subject to certain conditions, a homeowner may sell his/her home, buy or build a new one, and transfer the base-year value to a replacement dwelling. Any 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 of Social Security number of his/her spouse who is also a record owner of the --------------------------- <2> In 1986, the voters passed Proposition 60 that amended the Constitution to allow a person 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. <3> In 1990, the voters passed Proposition 110 that amended the Constitution to extend these provisions to any severely and permanently disabled person regardless of age. <4> In 1988, Proposition 90 was passed by the voters. That proposition amended the Constitution to extend the base year value transfer provisions to a replacement residence located in another county on a county-optional basis. AB 1378 Page H 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. 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 the future.<5> 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" would be considered a "claimant" for purposes of "C's" claim. 6)What is a Problem ? The proponents of this bill point out that married people are unfairly penalized when divorced. According to the author, existing law creates a "marriage penalty" by disallowing the benefits afforded by Propositions 60 and 90 to a married person whose spouse has already claimed a base year value transfer property tax relief. The author argues that base year value property transfers "remains one of the few areas of law continuing to make a distinction between domestic partnership and marriage." The purpose of this bill is to "remove tax considerations" when a couple decides on the type of relationship that "is best for them." 7)Proposed Solution . This bill 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 every individual regardless of his/her marital status. Practically speaking, this bill would allow a married --------------------------- <5> BOE Annotation 200.0020 "Claimant (New Spouse)". AB 1378 Page I couple to transfer their base year value twice, similarly to unmarried co-owners and registered domestic partners. However, this bill would disallow a claim made by a claimant who is under the age of 55, 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. 8)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."<6> 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.<7> 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 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 --------------------------- <6> 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). <7> Id., at p.339. AB 1378 Page J consider limiting the application of this bill 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. 9)Statewide Tracking Database . To monitor and enforce the one-time relief, the Board of Equalization is required to collect 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. This bill would allow 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. Because this bill applies prospectively, a spouse of the person who has already been granted a base year value transfer will not be able to claim a second base year value transfer. 10)Prior Legislation : a) AB 321 (Niello), of the 2009-10 Legislative Session, was similar to this bill. AB 321 was held on the Assembly Committee on Appropriations' Suspense File. b) AB 2579 (Niello), of the 2007-08 Legislative Session, was similar to this bill. AB 2579 was held on the Senate Appropriations Committee's Suspense File. REGISTERED SUPPORT / OPPOSITION: Support AB 1378 Page K Howard Jarvis Taxpayers' Association California Association of Assessors California Association of Realtors California Taxpayers Association Opposition None on file Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098