BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 678                           |Hearing    |1/13/16  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Hill                             |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |1/4/16                           |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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                       PROPERTY TAXATION:  WELFARE EXEMPTION 



          Increases the amount of the welfare exemption for non-publicly  
          financed affordable housing.


           Background and Existing Law

           The California Constitution provides that all property is  
          taxable unless explicitly exempted by the Constitution or  
          federal law, but also allows the Legislature to exempt property  
          used for charitable purposes, and owned by nonprofit entities  
          organized and operated for charitable purposes, such as  
          universities, hospitals, and libraries.  The Legislature enacted  
          this exemption, commonly known as the "welfare exemption."  The  
          welfare exemption has a similar policy genesis as non-profit  
          status for charitable groups: revenues paid in tax to the  
          government divert needed resources away from the organization's  
          good works.  According to the Legislative Analyst's Office,  
          local agencies statewide forego $3 billion annually in property  
          tax revenues from welfare exempt properties.  

          The welfare exemption includes property used exclusively for  
          rental housing, if:
                 Tax-exempt mortgage revenue bonds; general obligation  
               bonds; federal, state, or local grants; or federal  
               low-income housing tax credits finance the housing,
                 The property is enforceably restricted for low-income  







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               housing, and rents do not exceed those prescribed in deed  
               restrictions, and
                 The property owner certifies that funds that would have  
               been used to pay property taxes are used to maintain the  
               affordability of the units or reduce rents.

          Prior to 1999, rental housing owners could claim a welfare  
          exemption from property tax for low-income housing if 20% of the  
          property's residents were low-income.  After the Los Angeles  
          Housing Project investigated some of the city's worst housing  
          projects, they discovered that some substandard housing projects  
          were exempt from property tax under that section of law.   
          Responding to the investigation, the Legislature enacted AB 1559  
          (Wiggins, 1999), which repealed the occupancy test, instead  
          requiring owners to receive public financing in the forms listed  
          above for the project to claim the welfare exemption, in  
          addition to the above requirements.  However, AB 1559 revoked  
          the exemption for many worthy properties that weren't publicly  
          financed, so the Legislature subsequently enacted AB 659  
          (Wiggins, 2000), which further refined the law to:
                 Reenact the occupancy threshold, but increased to 90%, 

                 Cap the exemption amount to $20,000 in tax for all  
               properties the taxpayer owns in the state, and

                 Require the property be managed solely by a non-profit  
               organization, specifically excluding limited partnerships,  
               to be eligible for the exemption.  

          Since 2000, the value of housing provided by nonprofits has  
          grown, potentially compelling these groups to pay taxes on  
          amounts that exceed the $20,000 cap.  Additionally, other groups  
          want to acquire rental housing in the hopes of preserving  
          existing affordable units in their areas, but lack the available  
          funds to pay the taxes resulting from doing so.  Some nonprofit  
          organizations want the Legislature to increase the cap.


           Proposed Law

           Senate Bill 678 increases the amount of the welfare exemption  
          from property tax for nonprofit agencies owning non-publicly  
          financed rental housing from $20,000 to $100,000, effective on  
          the January 1, 2017, lien date.  The measure also creates a  








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          process for affected taxpayers to file a claim to have taxes in  
          the current year cancelled, and obtain refunds for previous  
          taxes paid, and also contains legislative findings and  
          declarations stating a public purpose necessary to issue refunds  
          of previously paid taxes.  The bill also precludes assessors  
          from issuing an escape assessment for taxpayers with cancelled  
          or refunded taxes.


           State Revenue Impact

           No estimate.


           Comments

           1.   Purpose of the bill  . According to the author, "California  
          has a serious shortage of affordable housing.  SB 678 provides  
          the necessary property tax relief to certain nonprofit  
          organizations so that these tax-exempt organizations can  
          continue to provide more affordable housing for low income  
          people and families."

          2.   As time goes by  .  When the Legislature set the $20,000 cap  
          in 2000, it was part of a series of reforms that responded to an  
          investigation that showed affordable housing developers were not  
          providing basic maintenance to the housing giving rise to the  
          exemption.  Other reforms adopted as part of the package, such  
          as making the exemption contingent upon deed restrictions  
          binding rents, and limiting the exemption solely to non-profit  
          organizations owning the units, should have chased out any  
          potential bad actors over the past fifteen years.  As such, the  
          cap hinders nonprofit organizations seeking that own, or want to  
          purchase, affordable housing in their communities, and can be  
          especially burdensome for organizations operating statewide.   
          Additionally, no other organizations claiming the welfare  
          exemption are subject to a similar cap, such as hospitals,  
          churches, and universities.


           Support and  
          Opposition   (1/7/16)










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           Support  :  Ministry Services of the Daughters of Charity of St.  
          Vincent De Paul, Saint Francis Center 


           Opposition  :  None received.



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