BILL ANALYSIS                                                                                                                                                                                                    

                         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.


           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, 


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                 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


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           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.  


           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  


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          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  

           Opposition  :  Unknown.

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