BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 1104 |Hearing |5/4/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Stone |Tax Levy: |Yes | |----------+---------------------------------+-----------+---------| |Version: |2/17/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- Property tax: senior and disabled veterans Eliminates the inflation adjustment for the principal place of residence of veteran taxpayer over the age of 65; Expands to a full exemption the current partial Disabled Veterans' property tax exemption. Background The California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The Constitution limits the maximum amount of any ad valorem tax on real property at 1% of full cash value, plus any locally-authorized bonded indebtedness, and provides that assessors can only reappraise property whenever it is purchased, newly constructed, or when ownership changes (Proposition 13, 1978). Growth limitation. State law implementing Proposition 13 generally sets a property's value as its price when purchased or when ownership changed, plus an annual inflation factor, calculated by the Department of Industrial Relations using the California Consumer Price Index for all items. For example, a home purchased in 2011 for $300,000, has a maximum taxable base year value of $306,000 in 2012, $312,200 in 2013, $318,440 in 2014, $325,808 in 2015, and $332,324 in 2016. This base year value is then multiplied by the appropriate rate (usually 1%, SB 1104 (Stone) 2/17/16 Page 2 of ? but can be slightly more) to determine tax due. Reassessment limits and capped inflation growth ensure a predictable, slowly growing tax obligation for the taxpayer, and predictable revenue for local agencies; however, these limits may also result in a taxable base year value below the property's fair market value, which grows in magnitude the longer the assessor hasn't reassessed the property. In most cases, this system results in shifting the cost of public services from incumbent homeowners onto individuals who recently purchased property. Disabled Veterans' Exemption. The Constitution allows the Legislature to partially or wholly exempt from property tax the value of a disabled veteran's principal place of residence if the veteran has lost one or more limbs, is totally blind, or is totally disabled, as a result of a service-connected injury. This is known as the "disabled veterans' exemption." The Constitution provides that disabled veteran taxpayers, or unmarried surviving spouses of persons who die while on active duty, must apply the exemption instead of, but not in combination with, other real property exemptions. Unlike the homeowners' exemption, the state does not backfill property tax revenue losses resulting from taxpayers applying the exemption. According to the Board of Equalization (BOE), the number of taxpayers claiming the exemption has increased from 8,483 to 37,653 between 1990 and 2015, an increase of 344%. San Diego (5,391), San Bernardino (3,732), and Sacramento (2,422) are the counties with the most taxpayers claiming the exemption. State law implementing the exemption doesn't fully exclude the property value from property tax, instead it allows a partial exemption of $100,000 for disabled veteran taxpayers with household income of more than $40,000, or $150,000 for income lower than that amount, with each threshold adjusted for inflation by the Department of Industrial Relations using the California Consumer Price Index for all items. The current inflation adjusted value is $127,410 for disabled veterans with income of more than $57,258, and $191,266 for those with less than that amount. The author wants to grant additional property tax benefits by disconnecting the inflation factor for taxpayers qualifying for the veterans' exemption in the California Constitution, and SB 1104 (Stone) 2/17/16 Page 3 of ? expand the current partial disabled veterans' exemption conditioned on income into a full exemption. Proposed Law Senate Bill 1104 makes two changes to property tax law: Growth limitation. SB 1104 disconnects the inflation factor for the principal place of residence of taxpayers over the age of 65 who were honorably discharged from military service for any assessment year on or after either January 1, 2017, or the taxpayer's 65th birthday, whichever is later. As such, the measure would freeze the veteran taxpayer's base year value at its current amount until newly construction or a change in ownership occurs. Disabled veterans' exemption. SB 1104 enacts a full exemption from property tax for the principal place of residence of qualifying disabled veterans to replace the current partial exemption, commencing with lien date for the 2017-18 fiscal year. The bill also makes technical and conforming changes. State Revenue Impact According to BOE, the measure's growth limitation provisions result in annual property tax revenue losses of $9.7 million, while its disabled veteran exemption expansion results in potential annual property tax revenue losses of $65.9 million. Comments 1. Purpose of the bill . According to the author, "An issue that is currently plaguing California is the issue of veterans who are homeless. Veterans have sacrificed much for their country, and in return, local, state and federal governments need to do everything in their power to help them succeed. According to the National Coalition for Homeless Veterans, homeless veterans are younger on average than the total veteran population. Approximately 9% are between the ages of 18 and 30, and 41% are between the ages of 31 and 50. On top of that, about 1.4 SB 1104 (Stone) 2/17/16 Page 4 of ? million other veterans are considered at risk of homelessness. There is no single solution that will solve this crisis. Reasons for the large number of homeless veterans are complex and numerous. Two of the biggest factors are the extreme shortage of affordable housing and livable income. SB 1104 attempts to address the affordable housing issue for veterans by capping the property taxes on any primary residence of an honorably discharged veteran over the age of 65, and exempting the property tax of all disabled veterans living in their primary residence. By making these two changes, it will go a long way to helping veterans stay in their homes by making their living situation more affordable." 2. Too many benefits ? Proposition 13 provided property owners in California with substantial protections from higher property tax rates and annual reassessments. However, California already has the lowest property tax rates and most taxpayer-friendly reassessment triggers of almost any state in the nation, thereby providing significant benefits to property owners, especially those that have been in their homes for many years. SB 1104 expands those benefits to freeze their base year values at their current amounts for qualifying veterans currently over the age of 65, and in the future for veterans when they turn 65. The Committee may wish to consider whether this tax benefit is necessary given those already afforded under current law 3. No income test . Generally, property tax exemptions don't depend on the taxpayer's income; however, the different disabled veterans exemption amounts were first enacted by the Legislature when it allowed a greater exemption ($15,000 at the time), for disabled veterans with income that qualified him or her for the Property Tax Postponement program (AB 955, Mangers, 1978). The Legislature maintained the distinction when it fixed the current exemption amounts (SB 320, Royce, 1989), and applied the inflation adjustment (SB 1362, Poochigian, 2000). SB 1104 would end this distinction by granting a full exemption for all taxpayers regardless of income. Increasing the disabled veterans' exemption reduces taxes for those who have sacrificed greatly for their country, and would be easier for assessors to administer, as they would no longer have to verify the taxpayer's income. However, SB 1104 would grant both a full exemption from property tax to all disabled veterans, thereby potentially providing a benefit for individuals who have income sufficient to meet current tax obligations. Additionally, the SB 1104 (Stone) 2/17/16 Page 5 of ? measure also freezes base year values for all veterans when they turn 65, regardless of income. The Committee may wish to consider whether the bill's tax benefits should depend on the taxpayer's income. 4. Different treatment . Proposition 13's cap on assessed value growth currently benefits all taxpayers regardless of age, income, or other variable. SB 1104 sets a precedent by freezing a veteran over the age of 65's property tax base at its amount today, as well as for other qualifying veterans when they turn 65, while all other taxpayers would be subject to annual inflation adjustments. 5. Related legislation, part one . SB 1104's expansion of the disabled veterans' exemption to a full exemption is also found in SB 1138 (Bates), which the Committee approved unanimously on April 27, 2016. Additionally, SB 1104's disconnection of inflation adjustment for veterans over the age of 65 is similar to provisions found in SB 1126 (Stone), which provides the same treatment for income-eligible taxpayers over the age of 65. The Committee also approved that bill unanimously on April 27, 2016. 6. Related legislation, part two . SB 1104 freezes base year values for veteran taxpayers over the age of 65 who were honorably discharged, consistent with the California Constitution's definition for the veterans' exemption, and state law that determines eligibility for the disabled veterans' property tax exemption. However, the Committee unanimously approved SB 1458 (Bates) at its April 27, 2016, hearing, which allows disabled veterans who were discharged under other than dishonorable conditions, so long as they qualify for benefits provided by the United States Department of Veterans Affairs. 7. Mandate . The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because SB 1104 changes the manner in which assessors value real property, Legislative Counsel says that it imposes a new state mandate. The measure provides that the state shall not reimburse local agencies for property tax revenue losses, instead stating that should the Commission on State Mandates determine that the bill imposes a reimbursable mandate, reimbursement must be made pursuant to SB 1104 (Stone) 2/17/16 Page 6 of ? existing statutory provisions. 8. Technicals . BOE and Committee Staff recommend the following amendment: On page 3, line 24, after "law," insert "for any assessment year commencing on or after January 1, 2017;" on line 27, after "older," insert "on the lien date;" on line 28, strike out "for any assessment year," strike out line 29, and on line 30, strike out "65th birthday, whichever occurs later." Specify filing requirements and deadlines for taxpayers to claim the benefit, as assessors do not currently possess age information for potentially eligible taxpayers. Apply the bill's enhanced benefits for owners of mobile homes by amending Revenue and Taxation Code §5813. Clarify whether the measure's benefits apply to as much land surrounding the principal place of residence as is reasonably necessary to use the dwelling as a home, similar to other exemptions. Support and Opposition (4/28/16) Support : California Commission on Aging. Opposition : California Tax Reform Association. -- END --