BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON
          ELECTIONS AND CONSTITUTIONAL AMENDMENTS
                              Senator Ben Allen, Chair
                                2015 - 2016  Regular 

          Bill No:             SCA 9          Hearing Date:    1/19/16    
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          |Author:    |Beall                                                |
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          |Version:   |8/18/15                                              |
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          |Urgency:   |No                     |Fiscal:    |No               |
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          |Consultant:|Darren Chesin                                        |
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               Subject:  Property taxation:  base year value transfers

           DIGEST
           
          This measure amends the California Constitution to allow base  
          year value transfers to properties of equal or greater value.

           ANALYSIS
           
           Existing law  :

          1)Provides, pursuant to Article XIII of the California  
            Constitution, that all property is taxable unless explicitly  
            exempted by the Constitution or federal law.  The Constitution  
            limits the maximum amount of any ad valorem tax on real  
            property at 1% of full cash value, and directs assessors to  
            only reappraise property when newly constructed, or ownership  
            changes (Proposition 13 of 1978).  

          Voters subsequently approved change in ownership exclusions to  
            allow homeowners over the age of 55 and disabled persons  
            (regardless of age) to transfer their home's base year values  
            to a replacement home of equal or lesser value within the same  
            county (Proposition 60 of 1988 and Proposition 110 of 1990),  
            or to homes in counties that adopt ordinances allowing the  
            transfer (Proposition 90 of 1990).  Ten counties currently  
            allow these out-of-county transfers (Alameda, El Dorado, Los  
            Angeles, Orange, Riverside, San Bernardino, San Diego, San  
            Mateo, Santa Clara, and Ventura).  Base year value transfers  
            allow taxpayers to continue to pay property taxes at the  







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            factored base year value of their previous home, and not on  
            the cash value of their newly purchased home, often resulting  
            in tax savings, and is only available for a taxpayer's  
            principal place of residence. 

           This bill:
           
          1)Allows disabled persons and persons over the age of 55 to  
            transfer their base year value to a home of greater value.   
            The measure applies to transfers within the same county, or to  
            transfers when the replacement property is located in a county  
            that has enacted an ordinance to allow inbound out-of-county  
            transfers.  In the case of a transfer to a property of greater  
            value, the taxpayer must add to the original base year value  
            the difference in price between the full cash value of the  
            original property and the full cash value of the replacement  
            dwelling.


           BACKGROUND
           
           How It Works and Who Benefits  .  Proposition 13 provided property  
          owners in California with substantial protections from higher  
          property tax rates and annual reassessments.  However, because  
          the initiative generally set a property's taxable value at its  
          purchase price plus growth of up to 2% per year, taxpayers who  
          sold their homes and purchased new ones will likely pay higher  
          property taxes, thereby levying a tax penalty on those seeking  
          to acquire housing that more closely meet their demands.  For  
          example, a four-bedroom single family home may be more house  
          than an empty-nest couple need, but purchasing a two-bedroom  
          condominium may lead to a tax increase, especially if the  
          taxpayer's current home has appreciated in value significantly  
          during the time they owned it.  Proposition 60 and 90 removed  
          that incentive and allowed persons over 55 and the disabled to  
          move without the tax consequence, so long as the value of the  
          replacement home met the definition of "equal or lesser value"  
          in statute.  However, California already has the lowest property  
          tax rates and most taxpayer-friendly reassessment triggers of  
          almost any state in the nation, thereby providing significant  
          benefits to property owners, especially those that have been in  
          their homes for many years.  SCA 9 expands those benefits to  
          allow base year value transfers values when a taxpayer purchases  
          a home at a higher price than for the one they sold.  








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           SCA 9 grants taxpayers the ability to transfer base year values  
          to homes of greater value, but not quite in the same way as  
          transfers to properties with lesser values.  Instead, the  
          taxpayer must add the difference between the full cash value of  
          the original property and the full cash value of the replacement  
          property to the original base year value.  For example, an  
          eligible taxpayer who has a base year value of $200,000 and  
          property taxes of $2,000 per year, sold her home for $300,000,  
          and purchased a replacement home for $400,000.  The new base  
          year would be $300,000 (the $200,000 base year value of the  
          original property plus the $100,000 difference in price between  
          the original and replacement dwellings), resulting in a property  
          tax difference of $1,000 ($3,000 in property tax from a base  
          year of $300,000, instead of $4,000 in property tax resulting  
          from the $400,000 purchase price of the new dwelling).  By  
          requiring the taxpayer to add the price difference between the  
          new dwelling and the original property onto the base year, SCA 9  
          reduces the amount of property tax revenue that local agencies  
          would have received had a taxpayer not eligible for the base  
          year transfer purchased the home, but provides a more limited  
          form of tax benefit than current base year transfers.  

          Currently, taxpayers can only transfer base year values to homes  
          of equal or lesser value than the one they sold, under the  
          assumption that taxpayers "downsizing" will sell their larger  
          home at a price higher than what they pay for the smaller  
          replacement.  SCA 9 would allow transfers to properties with  
          greater values, likely leading to more transfers, especially in  
          areas of California where high local property values make  
          finding homes at lower prices than their current ones difficult.  
           Local agencies may receive less property tax revenue to the  
          extent that a taxpayer taking advantage of SCA 9's benefit buys  
          a property instead of one who isn't, but these losses can be  
          offset if the taxpayer's replacement property is sold at a  
          higher price than its current assessed value.  However, because  
          SCA 9 applies to transfers within a county, as well as transfers  
          to counties that enact an ordinance, the revenue loss and the  
          offset may not occur in the same county.  Additionally, the  
          amount of SCA 9's benefit depends on two variables: the  
          difference between the fair market value and assessed value of  
          the taxpayer's original property, and the price of the  
          replacement property.  Using the example above, SCA 9 saves a  
          taxpayer $1,000 in annual property taxes when transferring her  








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          base year value to a home with a sales price $100,000 higher  
          than the price at which she sold her original property.   
          However, that same taxpayer who sells her house for $1 million  
          can transfer her base year value to a property worth $1.2  
          million, so long as the difference between the two prices is  
          added back for an assessed value of $400,000.  A taxpayer not  
          eligible for a base year value transfer would pay three times as  
          much, as the tax would be based on the $1.2 million value.  

           Current Subsidies  .  In the United States, federal and state  
          governments offer substantial tax subsidies for owning or  
          selling a home, such as:

           Mortgage Loan Interest:  Taxpayers may deduct interest  
            payments on up to $500,000 single/$1 million joint of  
            indebtedness used to purchase a first and second home.   
            Taxpayers may also deduct interest payments on up to $100,000  
            in home improvement loans.  

           Capital Gains Exclusion:  Taxpayers may exclude up to $250,000  
            single/$500,000 joint in income resulting from the sale of  
            their principal residence.

           Deductibility of Property Taxes:  Taxpayers may deduct  
            property taxes and some other real estate taxes from federal  
            income, although California's low property tax rates limit the  
            benefit for Californians compared to residents of other  
            states.

           COMMENTS
           
           1)According to the Author  :  Proposition 60 allows homeowners  
            over the age of 55 and any severely or permanently disabled  
            person to transfer the base year assessed value of their  
            principal residence to a replacement home in the same county.   
            For example, if an individual purchased their principal  
            residence in 1985 for $100,000 and then sold the home for  
            $200,000 in 2015, they would be able to transfer the $100,000  
            base year assessed value and be taxed on that value instead of  
            on the assessed value of the replacement home.  Proposition 90  
            allows such transfers to a home located in a different county  
            so long as that county has agreed to participate in the  
            transfer program.









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          In both cases, however, the value of the replacement home must  
            be equal to or less than the value of the original principal  
            residence.  In the example above, if the value of the  
            replacement home is greater than $200,000, the base year  
            assessed value cannot be transferred.  Due to the increased  
            housing market, many seniors seeking to downsize to a newer,  
            smaller home must buy a home with a value greater than that of  
            their current residence.  Current law would preclude them from  
            benefitting utilizing Proposition 60 and thus, discourage them  
            from moving.

          SCA 9/SB 378 would, instead, allow a transfer to a replacement  
            home with a value greater than that of the original residence.  
             To ensure a homeowner doesn't receive more of a property tax  
            benefit than that to which they are entitled, these bills  
            require that the difference between the value of the  
            replacement home and that of the original residence is added  
            to the base year assessed value.

          Returning to the example above, if a $210,000 replacement home  
            is purchased, the $10,000 difference (between that purchase  
            price and the sale price of the original home; $210,000 -  
            $200,000 = $10,000) would be added to the base year assessed  
            value of $100,000 for a total of $110,000.  This would be the  
            amount the homeowner's property taxes would be based upon. 

          This individual's property taxes would be based on a value  
            $100,000 less ($110,000 as opposed to $210,000) than the sale  
            price of the replacement home.  This is no more a savings than  
            if the individual had purchased a home of equal value  
            ($200,000 as opposed to $210,000).  In both cases the senior's  
            property taxes would be based on a value $100,000 less than  
            the value of the replacement home.  In other words, under SCA  
            9/SB 378, the senior and any severely or permanently disabled  
            person would not receive property taxes savings greater than  
            that to which they would otherwise be entitled.

           2)Argument in Opposition  :  According to the California State  
            Association of Counties, this proposed measure represents a  
            loss of general purpose revenue for local agencies at a time  
            when counties are still working to return to pre-Great  
            Recession levels of fiscal stability.

                               RELATED/PRIOR LEGISLATION








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          SB 378 (Beall), which makes statutory changes necessary to  
          implement SCA 9, was recently approved by the Senate Governance  
          and Finance Committee 7-0 and is now pending in the Senate  
          Appropriations Committee.

          This measure is similar to SCA 11 (Dutton) of 2009 which failed  
          passage in the Senate Revenue and Taxation Committee.

           PRIOR ACTION
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          |Senate Governance and Finance         |7-0                        |
          |Committee:                            |                           |
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          POSITIONS
           
          Sponsor: California Association of Realtors

           Support: California Taxpayers Association

           Oppose:  California State Association of Counties
                    California Tax Reform Association 
                    Rural County Representatives of California