BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 259 (Bates) - Property taxation: change in ownership
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|Version: January 14, 2016 |Policy Vote: GOV. & F. 6 - 0 |
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|Urgency: Yes |Mandate: Yes |
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|Hearing Date: January 19, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 259 would modify current standards for
reassessing property resulting from changes in ownership.
Fiscal Impact:
The Board of Equalization (BOE) would likely incur
administrative costs in the low hundreds of thousands of
dollars annually (General Fund) to implement the provisions
of the bill.
BOE estimates that the measure would increase local
property tax revenues by $26 million annually. Higher
local property tax revenues lead to reduced General Fund
Proposition 98 spending by up to roughly 50 percent (the
exact amount depends on the specific amount of the
Proposition 98 guarantee, which in turns depends of a
variety of economic, demographic and budgetary factors).
Costs to the Franchise Tax Board (FTB) would be minor
and absorbable.
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Under the California Constitution, this bill's imposing
of new duties on local county officials related to the real
property tax assessment process could be subject to
reimbursement by the State. The magnitude is unknown.
Background: Under Proposition 13, county assessors are precluded
from revaluing property for tax purposes unless a change in
ownership has occurred. However, the initiative did not define
the term; consequently, Legislature determined what constitutes
a "change in ownership" with respect to property owned by legal
entities such as corporations. As implemented, assessors
reassess property when one person or legal entity purchases or
otherwise acquires more than 50 percent ownership of a
corporation or other legal entity in a single transaction.
However, if multiple individuals or entities acquire another
entity in a single transaction, but none of the purchasers
acquire more than 50 percent, no reassessment occurs even if it
occurs in a single transaction. As example of this was Kaiser
Steel, ownership of which was acquired by a consortium of seven
separate purchasers, none of whom acquired more than 50 percent.
Even though 100 percent of the corporation had changed hands, no
reassessable change of ownership had occurred, since no single
party had acquired more than 50 percent ownership of the
corporation.
It is difficult for property tax administrators to independently
discover reassessable events involving legal entities, because
ordinarily there is no recorded deed or notice of a transfer of
an ownership interest in a legal entity. To help track potential
reassessments, BOE created the Legal Entity Ownership Program
(LEOP) in 1982 to help find and detect changes in control and
ownership of corporations, partnerships, and other legal
entities, which have no recorded deed or notice of a transfer of
an ownership interest in a legal entity. Under LEOP, BOE (1)
receives from FTB a list of legal entities that have reported a
change in control or change in ownership on income tax returns,
(2) analyzes completed statements to determine changes in
control or ownership, and (3) notifies county assessors of
changes in control and ownership. To assist these efforts, the
Legislature required legal entities to report transfers directly
to BOE within 90 days, and established a penalty for legal
entities failing to self-report a change in ownership and
SB 259 (Bates) Page 2 of
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control to BOE equal to 10 percent of the tax resulting from
enrolling the higher value.
Bill Summary: This bill would create a new "change in ownership"
event for legal entity owned real property that occurs when 90
percent or more of the direct or indirect ownership interests in
that legal entity transfer in a planned single transaction.
Specifically, this bill would do all of the following:
On or after January 1, 2016, require reassessment of a
legal entity's real property holdings whenever 90 percent
or more of its ownership interests transfer in a "single
transaction."
Define "single transaction" to mean a plan consisting of
one or more sales or transfers.
o Create a rebuttable presumption that sales or
transfers occurring within a 36-month period are part
of a single transaction, thus allowing cumulative
counting of ownership interest transfers to reach the
90 percent threshold.
o Create a rebuttable presumption that sales or
transfers are part of a single transaction when the
transferees (buyer) are related persons/entities per
federal law, thus effectively allowing counting of the
cumulative ownership interests of all the related
parties to reach the 90 percent threshold.
Exclude transfers that occur upon death (i.e.,
inheritance).
Exclude sales of publicly traded corporate stock or
partnerships occurring in regular trading activity on an
established securities market.
Require the change in ownership event to be reported to
BOE within 90 days.
Increase from 10 percent to 15 percent the penalty for
failure to report legal entity reassessment events to the
BOE.
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Require BOE to notify assessors when legal entity
reassessment events occur.
Require BOE to report the reassessments occurring under
the new trigger event and their revenue impact by 2021.
Require the Legislative Analyst's Office to report on
the economic impact of the bill by 2021.
Staff Comments: BOE estimates the annual revenue gain from this
measure to be $26 million. However, any estimate in the area of
change of ownership is subject to considerable uncertainty. Key
pieces of information needed to produce a robust estimate are
not known, requiring BOE staff to use related assumptions in
their place. BOE staff examined county assessment roll data and
estimated that in 2014-15, legal entities owned real property
assessed at $646 billion. To get from assessed value to market
value (reassessment), BOE research staff applied a ratio that it
develops annually for a related purpose known as the 4R Act
Ratio. Specifically, current law requires BOE to conduct a study
to determine the effective assessment level (i.e., the
percentage difference between assessed value and market value)
for commercial/industrial property in order to determine a
comparable assessment level for rail transportation property.
The latest study found the effective assessment level was about
71 percent. BOE applied this ratio to its estimated legal entity
owned real property assessed value, consequently estimating
2014-15 market value to be $910 million.
BOE, noting that it could not predict the annual number of legal
entity property reassessments resulting from the bill, assumed
that one percent of legal entity properties are subject to
reassessment each year to current market value under the bill.
At the basic one percent tax rate, the resulting revenue gain
was $26 million.
The uncertainty in the revenue estimate stems from two sources.
First, the 4R act ratio is derived from sales reports provided
to BOE by the counties. These reports are voluntary;
participation by the counties is not universal, and generally is
not submitted if a county has fewer than 10 affect property
sales. Thus, the 4R Act ratio could contain incomplete sales
information. The 4R act ratio itself is not static, and
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generally moves inversely from fiscal year to fiscal year with
the change in market values. In other words, when market value
is rising, the 4R act ratio is generally falling, and
vice-versa. For illustrative purposes, using BOE's estimate of
$646 billion for assessed value of legal entity-owned property,
for every one percentage point change in the 4R Act ratio, the
revenue estimate would change by about $1 million. Second, the
extent to which taxpayers structure their transactions to ensure
that 90 percent does not change within a three year period
cannot be predicted in advance. To the extent that legal
entities restructure their transactions to avoid reassessment,
the revenue gain would be lower than $26 million.
BOE estimates that the revenue increase from the bill's
increasing the penalty from 10 percent to 15 percent would
likely be minimal.
Though the projected revenues resulting from this bill far
outpace BOE's implementation costs, BOE would incur costs in
2016-17, while the Proposition 98 impact from the projected
higher property tax revenues would be scored when those dollars
came in the door, which would begin in 2017-18.
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