BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 996 (Hill) - Property taxation:  welfare exemption
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          |Version: February 10, 2016      |Policy Vote: GOV. & F. 7 - 0    |
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          |Urgency: No                     |Mandate: Yes                    |
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          |Hearing Date: April 11, 2016    |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.


          Summary: SB 996 would increase the welfare exemption tax cap on  
          certain low-income housing owned by nonprofit entities.

                 The Board of Equalization (BOE) indicates that it would  
               incur minor and absorbable administrative costs to update  
               claim forms, Property Tax Rule 140, and its Assessors'  


          SB 996 (Hill)                                          Page 1 of  

                 BOE estimates that the measure would result in an annual  
               reduction of $240,000 to local property tax revenues.  
               Additionally, the bill would result in a one-time property  
               tax refund or cancellation of roughly $100,000 per year for  
               four years. Lower local property tax revenues lead to  
               increased General Fund Proposition 98 spending by up to  
               roughly 50 percent (the exact amount depends on the  
               specific amount of the annual Proposition 98 guarantee,  
               which in turns depends upon a variety of economic,  
               demographic and budgetary factors).

                 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 of these  
               potential costs is unknown.

          Background: All property in California is taxable unless  
          explicitly exempted. Specifically, the Legislature may exempt  
          property owned by nonprofit entities organized and operated for  
          charitable purposes, such as universities, hospitals, and  
          libraries (known as the "welfare exemption.").  According to the  
          Legislative Analyst's Office, the welfare exemption results in  
          roughly $3 billion in foregone local property tax revenues.  

          The welfare exemption includes property used exclusively for  
          rental housing, if (1) specified financing mechanisms finance  
          the housing, (2) the property is restricted for low-income  
          housing, and rents do not exceed specified levels, and (3) 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.

          Bill Summary: This bill would increase the amount of the  
          property tax welfare exemption for nonprofit agencies owning  
          non-publicly financed rental housing from $20,000 to $100,000.  
          Additionally, it would allow refunds and cancellations of taxes  
          imposed between January 1, 2013, and January 1, 2017 as a result  
          of the exemption cap. Finally, the bill would preclude assessors  
          from issuing an escape assessment for taxpayers with cancelled  
          or refunded taxes.

          Legislative History: This measure is identical to SB 678 (Hill),  


          SB 996 (Hill)                                          Page 2 of  
          which was held on this Committee's suspense file in January  
          Staff Comments: Currently, 26 nonprofit organizations own 76  
          properties of various types, including single-family residences,  
          multifamily residences, and apartments, potentially subject to  
          the $20,000 cap. However, only the three organizations in San  
          Mateo County are known to own property exceeding the cap, which  
          consequently is partially taxable. Nonprofit organizations  
          report their holdings to their local assessor, and this  
          information is annually transmitted to BOE. Most counties report  
          that they have no such properties; the 76 properties are located  
          in only 11 counties.

          The cap has not been increased since its creation over 15 years  
          ago. Twenty thousand dollars in tax is equivalent to $2 million  
          in assessed value at the basic 1 percent tax rate. Increasing  
          the cap to $100,000 in tax ($10 million in assessed value) would  
          allow the low-income housing properties owned by the three San  
          Mateo County organizations to be exempt under the welfare  

          As noted above, the three impacted organizations would see  
          reduced property tax bills by up to $80,000 each ($240,000  
          total). Additionally, there would be a one-time property tax  
          refund of approximately $100,000 per year for four years (or  
          $400,000 total). BOE indicates that no other organizations  
          currently exceed the cap; however, five other organizations are  
          approaching it. The revenue loss resulting from the bill could  
          grow if other organizations acquire more property subject to the  
          cap or if assessed values over time exceed $20,000 in tax due to  
          the application of the annual inflation factor (up to 2  

          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, appear to have succeeded. Consequently, the cap could  
          hinder nonprofit organizations seeking that own, or want to  
          purchase, affordable housing in their communities, and can be  
          especially burdensome for organizations operating statewide.   


          SB 996 (Hill)                                          Page 3 of  
          Additionally, no other organizations claiming the welfare  
          exemption (such as hospitals, churches, and universities) are  
          subject to a similar cap. 

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