BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 274 - Dutton
Amended: April 30, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Implements SCA 11 (Dutton); Allows Modified Base
Year Value Transfers to Replacement Properties of
Equal or Greater Value; Widens Eligibility for
Existing Base Year Transfers to Replacement
Properties of Equal or Lesser Value
EXISTING LAW (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. Assessors reappraise property whenever it is
purchased, newly constructed, or when ownership changes.
Voters approved exceptions to Proposition 13 to allow
homeowners over the age of 55 and disabled persons one
opportunity to transfer their base year values to homes of
equal or lesser value within the same county (Proposition
60, 1988), or to homes in counties that adopt ordinances
allowing the transfer (Proposition 90, 1990), under
specified conditions. Currently, Alameda, Los Angeles,
Orange, San Diego, San Mateo, Santa Clara, and Ventura
Counties allow these out-of-county transfers. Base year
transfers allow taxpayers to continue to pay property taxes
at the amount and rate of growth of their previous home and
prevent reassessments to the cash value of their newly
purchased home.
SB 274 - Dutton
Page 6
EXISTING LAW allows taxpayers wanting to transfer
base year values to wait two years to purchase the
replacement dwelling and allows for inflationary
adjustments to account for growth in property values.
Without adjustments, a taxpayer counting on transferring
their base year value may be priced out of the transfer
based on local market conditions. Currently:
If the replacement dwelling is purchased
before the original property is sold the taxpayer
may transfer the base year value only if the
replacement property is 100% or less of the
original property's value.
If the replacement dwelling is purchased
within the first year after the sale then the
taxpayer may transfer the base year if the
replacement property is within 105% of the
original property's value.
If the replacement dwelling is purchased
within the second year after the sale then the
taxpayer may transfer the base year if the
replacement property is within 110% of the
original property's value.
THIS BILL allows disabled persons or those over the
age of 55 or to transfer their base year value to a home of
greater or equal value within the same county within three
years of the sale of the original property. In the case of
a transfer to a property of greater value, the taxpayer
must add to the original base year value the difference in
price between the full cash value of the original property
and the full cash value of the replacement dwelling.
THIS BILL also expands the definition of "equal or
lesser value" include homes of 115% of the full cash value
of the original property purchased or newly constructed
within three years of the sale of the original property.
The Bill becomes effective for the lien date for the
SB 274 - Dutton
Page 6
2009-10 fiscal year.
FISCAL EFFECT:
BOE estimates that SCA 11 and SB 274 will result in
revenue losses of approximately $6.9 million per year when
fully implemented.
COMMENTS:
A. Purpose of the Bill
Current law discourages individuals over the age of 55
from moving to a home that may better suit their needs due
to the property tax considerations. This bill mitigates
that barrier and allows people to move to more appropriate
homes.
B. Too Many Benefits?
Proposition 13 provided property owners in California
with substantial protections from higher property tax
rates, rapid inflation, and frequent reassessments. The
unintended consequence of Proposition 13 was to provide
taxpayers a strong tax incentive not to move to housing
that more closely met their demand. Proposition 60 and 90
removed that perverse incentive and allowed persons over 55
and the disabled to move without the tax consequence, so
long as the value of the replacement home met the
definition of "equal or lesser value" provided in statute.
With Proposition 13, California has the lowest property
taxes of almost any state in the nation and provides the
greatest benefit to property owners, especially those that
have been in their homes for many years. SB 274 grants
SB 274 - Dutton
Page 6
additional leeway for counties to accept base year
transfers that may exceed the targets in law when markets
get hot, but is this one benefit too many? The Committee
may wish to consider whether the Legislature needs to add
to the already substantial benefits afforded property
owners in California.
C. Benefits of Homeownership
Just as investors want the companies they hold equity
in to do well, homeowners have a financial interest in the
success of their communities. If neighborhood schools are
good, if property taxes and crime rates are low, then the
value of the homeowner's principal asset--his home--will
rise. William Fischel calls this the "home voter
advantage;" and states that through buying homes,
homeowners become watchful citizens of local government,
not merely to improve their quality of life, but also to
counteract the risk to their largest asset, a risk that
cannot be diversified. Meanwhile, their vigilance promotes
a municipal governance that provides services more
efficiently than do the state or national government.
Furthermore, the federal government recently
apportioned $6.6 billion for new homebuyers in the economic
stimulus package; the intent is to increase homeownership
thereby stimulating the economy by putting more people to
work through the construction and sale of the home.
According to a study by the Association of Realtors, home
buyers also help carry the economy. California's housing
construction contributes $40 billion per year to the
State's economy. Home building, they state, is responsible
for 359,000 jobs statewide and every dollar spent on new
housing construction generates approximately $1.95 in total
economic activity.
SB 274 - Dutton
Page 6
D. What's Different?
Currently, the Constitution and statute allow disabled
taxpayers and those over the age of 55 to transfer base
year transfers for to properties of equal or lesser value
once. Eligible taxpayers may always transfer base year
values within their current county of residence, and may
transfer to other counties if the destination county
participates in the program by enacting a resolution. SB
274 grants taxpayers the ability to transfer base year
values to homes of greater value, but only for transfers
within the same county. For greater value base year
transfers, SB 274 allows taxpayers one more year between
the sale of the original property and the purchase of the
replacement dwelling to transfer the base year. SB 274
adds one year onto the time allowed for existing transfers
for equal or lesser value and increases the cap on
replacement value to 115% for replacement homes purchased
in the third year. Additionally, base year transfers under
SB 274 are not the same as those currently authorized by
law, instead, the taxpayer must add the difference between
the full cash value of the original property and the full
cash value of the replacement property to the original base
year value. For example, an eligible taxpayer who had an
original base year value of $200,000 and property taxes of
$2,000 per year, sold her home for $300,000 and purchased a
home for $400,000. The new base year would be $300,000
(the $200,000 base year value of the original property plus
the $100,000 difference in price between the original and
replacement dwellings), resulting in a property tax
difference of $1,000 ($3,000 in property tax from a base
year of $300,000 instead of $4,000 in property tax
resulting from the $400,000 purchase price of the new
dwelling). By requiring the taxpayer to add the price
difference between the new dwelling and the original
property onto the base year, SB 274 reduces the amount of
property tax revenue that would have resulted had a
taxpayer not eligible for the base year transfer purchased
the home, but provides a more limited form of tax benefit
than current base year transfers.
SB 274 - Dutton
Page 6
E. Time Value of Policy Advice
Materials submitted to the Committee arguing in favor
of SB 274 argue that granting property tax base year
transfers to properties of equal to greater value will
entice property owners currently not seeking to buy a home
because of the possible property tax increase. If existing
homeowners can avoid property tax increases, they will buy
new houses, and new homeowners will purchase the existing
homeowners' homes at higher prices, leading to increased
property taxes because the new base year values would
exceed the old ones. Builders will build more homes to
accommodate increased demand, boosting economic activity
and boosting local property tax bases.
However, the above arguments place power on the behavior
changing ability of changes in tax rates, and are
predicated upon a time of real estate price inflation, not
deflation. In California, median home sales prices are
down approximately 50% from the peak, and more so in some
areas. In an escalating real estate market, property tax
increases may deter purchases in some cases, but during a
decline, buyers can buy a superior home at a lower price
and lower their property taxes without transferring the
base year. Even then, taxpayers may obtain tax reduction
from assessors must reduce property values to market values
under Proposition 8 (1978).
Economists and real estate experts state that homeowners
are not buying new homes because:
Great uncertainty of future value because of
unprecedented losses in the last year
Escalating unemployment and record personal wealth
destruction significantly diminish purchasing power,
and an escalating savings rate shows that many are
choosing to stay put, reduce debt, and defer
consumption.
Existing homeowners cannot move up because their
existing homes cannot demand prices that meet current
SB 274 - Dutton
Page 6
loan amounts, meaning they may only sell their homes
at a large loss, if at all. Few buyers exist in many
markets for non-bank owned homes.
Mortgage securitization markets crashed, severely
limiting mortgage credit. After issuing almost $1
trillion in private-label mortgage backed securities
(MBS) in both 2006 and 2007, only $100 million of
these securities sold in the last nine months. Fannie
Mae and Freddie Mac MBS issuance is also down
precipitously.
Combined with deteriorating home prices, property tax
revenues in many counties are turning negative. Given
recent volatility in California's real estate market, which
appears unrelated to changes in property taxes, will
allowing base year transfers to properties of equal or
greater value lead to more sales than would otherwise
occur, or does it serve merely as a windfall to those who
would trade up anyway?
F. Most Tax Subsidized Asset Class in History?
In the United State, federal and state government
subsidies for house purchases may be unmatched throughout
the world. Homeownership is clearly a public goal because
similar benefits are not afforded to any other asset class.
Tax subsidies include:
Mortgage Loan Interest: Taxpayers may deduct
interest payments on up to $500,000 single/$1 million
joint of indebtedness used to purchase a first and
second home. Taxpayers may also deduct interest
payments on up to $100,000 in home improvement loans.
The Department of Finance estimates that this tax
benefit results in more than $5.4 billion in foregone
SB 274 - Dutton
Page 6
revenue in 2009-10.
Capital Gains Exclusion: Taxpayers may exclude up
to $250,000 single/$500,000 joint in income resulting
from the sale of their principal residence. The
Department of Finance estimates that this tax benefit
results in more than $3.7 billion in foregone revenue
in 2009-10.
Deductibility of Property Taxes: Taxpayers may
deduct property taxes from federal income, although
California's low property tax rates limit the benefit
for Californians compared to residents of other
states.
Federal and State House Purchase Tax Credits: Both
Congress and the Legislature enacted tax credits for
taxpayers who purchase house in 2009.
G. Most Subsidized Asset Class in History?
Tax subsidies are just the beginning of government
subsidies for housing. In addition to other state and
federal efforts to assist first-time homebuyers and
administer down payment assistance, the Federal National
Mortgage Association (FNMA, or Fanny Mae) and the Federal
Home Loan Mortgage Corporation (also known as Freddy Mac),
are government-sponsored entities (GSEs), but owned until
recently by its shareholders who received all after-tax
income and valuation changes. GSEs purchase loans from
lenders that conform to specified guidelines, then issue
mortgage backed securities (MBS), securitizing the revenue
streams from these conforming loans to investors. Part of
the attraction of GSE MBS is that the GSE guarantee MBS
investors timely payment of principal and interest,
providing mortgage market liquidity and offering investors
a fixed rate of return without credit risk. Before this
year, GSE MBS traded very much like U.S. Treasuries because
of the lack of credit risk and the implicit federal
guarantee. GSEs issued between $1.2 and $1.3 trillion in
MBS from 2004 and 2007.
SB 274 - Dutton
Page 6
Two key events necessitated changes in GSE MBS in
2008. First, increasing loan defaults and deterioration in
collateral values corroded the GSE balance sheets,
necessitating federal conservatorship of the GSEs. The
U.S. Treasury made significant sums available to the GSEs
to maintain the guarantee. Essentially, the functionally
insolvent GSEs now partially rely on the U.S. taxpayer (and
its credit rating) for its MBS guarantee, thereby ensuring
that mortgage lenders have sufficient liquidity to keep the
house purchase market functioning. Second, demand for
private MBS disappeared. Now known as "toxic assets,"
issuance exceeded $900 billion in 2006 and 2007 but less
than $1.5 billion in the last nine months. Soon after,
worldwide investors sold off GSE MBS, pushing spreads
against treasuries to 20-year highs earlier this year,
spurring the Federal Reserve Bank to authorize purchases of
$1.2 trillion of GSE MBS and up to $200 billion in GSE debt
"to provide support to mortgage lending and housing markets
and to improve overall conditions in private credit
markets," according to its March 18th and April 29th
statements. Without MBS purchasers, GSEs cannot buy loans
from lenders, liquidity dries up, and house prices fall as
purchases are limited to bank-held loans and cash
purchasers. Recent accounts from bond traders indicate
that the Federal Reserve Bank is dominating purchasing on
the GSE MBS market.
Given existing tax subsidies, GSE-spurred
liquidity, the federal GSE backstop, and the Federal
Reserve printing money to pour more than one trillion into
the U.S. mortgage financing market, will another tax
reduction actually accomplish anything more than rewarding
purchasers for a decision they would make anyway? The
Committee may wish to consider whether another tax credit
is merited given the unprecedented scale of government
intervention in the housing market.
H. Companionship
SB 274 - Dutton
Page 6
The Committee will also hear SCA 11 (Dutton) at its
May 14, 2008 hearing, which changes the California
Constitution to authorize the statutory changes made by SB
274.
Support and Opposition
Support: Howard
Jarvis Taxpayers Association
City of Rancho Cucamonga
Lake Arrowhead Communities Chamber of Commerce
Board of
Directors
Amador County Assessor
California Association of Realtors
Oppose:California School Employees' Association
California State Association of Counties
California Tax Reform Association
---------------------------------
Consultant: Colin Grinnell