BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 996 (Hill) - Property taxation: welfare exemption ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: February 10, 2016 |Policy Vote: GOV. & F. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: April 11, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 996 would increase the welfare exemption tax cap on certain low-income housing owned by nonprofit entities. Fiscal Impact: 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' Handbook. 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 2016. 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 exemption. 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 percent). 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. -- END --