BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 996 |Hearing |3/30/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Hill |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |2/10/16 Click here to enter |Fiscal: |Yes | | |text. | | | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- Property taxation: welfare exemption Increases the amount of the welfare exemption for non-publicly financed affordable housing. Background 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, SB 996 (Hill) 2/10/16 Page 2 of ? The property is enforceably restricted for low-income 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 has increased, compelling some non-profits to pay taxes on amounts that exceed the $20,000 cap, and discouraging other groups from acquiring rental housing in the hopes of preserving existing affordable units in their areas. After the Long Beach Affordable Housing Coalition acquired housing constructed as mitigation when the Century Freeway (I-105) in Los Angeles was built, the Legislature deleted the cap for those specific units (SB 1284, Lowenthal, 2008). Other nonprofit organizations want the Legislature to increase the statewide cap. Proposed Law SB 996 (Hill) 2/10/16 Page 3 of ? Senate Bill 996 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 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 According to the Board of Equalization (BOE), SB 996 results in property tax revenue losses of $240,000 annually, and one-time refunds and cancellations of $400,000. Comments 1. Purpose of the bill . According to the author, "California has a serious shortage of affordable housing. SB 996 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 owners were not providing basic maintenance to the housing that qualifies them for 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. BOE monitors the statewide cap, as it receives annual welfare exemption filings filed with assessors. Based on this data, the legislative reforms were successful: BOE reports that only 26 organizations in the state own housing subject to the limit, of which, only three exceed the cap, with five more close to it. However, the cap hinders nonprofit organizations that own or SB 996 (Hill) 2/10/16 Page 4 of ? want to purchase affordable housing in their communities, and can be especially burdensome for statewide organizations because the cap applies to all of its property in California. Additionally, no other organizations claiming the welfare exemption are subject to a similar cap, such as hospitals, churches, and universities. 3. Do it again . SB 996 is identical to SB 678 (Hill), which the Committee approved in January. However, that measure was held on the Senate Appropriations Committee's suspense file. Support and Opposition (3/23/16) Support : County of San Mateo, Ministry Services of the Daughters of Charity of St. Vincent De Paul, Saint Francis Center Opposition : Unknown. -- END --