BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 1126 (Stone) - Property taxation: inflation factor: senior citizens ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 4, 2016 |Policy Vote: GOV. & F. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 16, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 1126 would eliminate the inflation factor-related assessed value increase for the principal place of residence of an income-eligible taxpayer over the age of 65. Fiscal Impact: The Board of Equalization (BOE) indicates that the bill would result in annual property tax revenue losses of $27 million. Reductions in local property tax revenues, in turn, increase 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). SB 1126 (Stone) Page 1 of ? Additionally, the bill could result in unknown, but likely minor, costs to reimburse local governments related to changes in property tax administration. Background: The California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The Constitution (1) limits the maximum amount of any ad valorem tax on real property at 1 percent of full cash value, plus any locally-authorized bonded indebtedness, and (2) provides that assessors can only reappraise property whenever it is purchased, newly constructed, or when ownership changes (Proposition 13, 1978). Proposition 13 also limits on the inflationary growth of real property value to 2 percent per year. Thus, when real property is purchased, the county assessor assigns it an assessed value that is equal to its purchase price, or "acquisition value." Each year thereafter, the property's assessed value increases by 2 percent or the rate of inflation (as measured by the California Consumer Price Index), whichever is lower. This process continues until the property is sold, at which point the county assessor again assigns it an assessed value equal to its most recent purchase price. In other words, a property's assessed value resets to market value (what a willing buyer would pay for it) when it is sold. In most years, under this assessment practice, a property's market value is greater than its assessed value. This occurs because assessed values increase by a maximum of 2 percent per year, whereas market values tend to increase more rapidly. Therefore, as long as a property does not change ownership, its assessed value increases predictably from one year to the next and is unaffected by higher annual increases in market value. 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 percent, 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 SB 1126 (Stone) Page 2 of ? predictable revenue for local agencies; however, these provisions 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. Proposed Law: Beginning January 1, 2017, this bill would eliminate future inflation factor increases for qualified homeowners 65 years of age or older. To qualify, the person must have an annual household income of $25,000 or less if single, or $50,000 or less if married. In the case of a married couple, only one person must be 65 or older. This limitation only applies to a person's principal place of residence, as defined. As a tax levy, this bill is effective immediately upon enactment. However, according to the bill's provisions, it will first apply to property taxes due for the 2017-18 fiscal year, which are based on January 1, 2017 lien date values. Related Legislation: AB 2459 (Davis, 2008) would have authorized any county board of supervisors to allow persons 62 or older with total household income below a specified amount to trade their time and skills performing needed government services to offset their property taxes. This bill was held under submission in the Assembly Appropriations Committee. Staff Comments: Using previous example, had this bill's provisions been in effect, a qualifying taxpayer would have seen a property tax reduction (assuming the basic one percent rate) of $60 in 2012, rising to $65 by 2016. BOE's revenue estimate utilizes U.S. Census data, which indicate that about 750,000 homes in the State are owned by those residents aged 65 years or older. The Census also provides data on the median household incomes of seniors 65 and over, and other details on living arrangements among that group. Based on SB 1126 (Stone) Page 3 of ? that data, BOE estimates that up to 375,000 homes would qualify under the bill. In 2015-16, the average assessed value of homes receiving the homeowners' exemption was $358,217. Using this information, and assuming that annual inflation would exceed the 2 percent cap, BOE estimates the bill would result in an annual revenue loss of $27 million. Reductions in local property tax revenues, in turn, increase 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). -- END --