BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 464 HEARING: 4/6/11
AUTHOR: Anderson FISCAL: Yes
VERSION: 3/30/11 TAX LEVY: Yes
CONSULTANT: Grinnell
PROPERTY TAX EXCLUSIONS: FIRE SPRINKLER SYSTEMS
Excludes fire safety systems installed in expanded parts of
reconstructions after a disaster from value for property
tax purposes.
Background and Existing Law
The California Constitution provides that all property is
taxable unless explicitly exempted by the Constitution or
federal law (Section 1, Article XIII). The Constitution
limits the maximum amount of any ad valorem tax on real
property at 1% of full cash value (Section 1, Article
XIIIA). Assessors reappraise property whenever it is
purchased, newly constructed, or when ownership changes.
The Constitution and statute define those terms.
The California Constitution provides that the Legislature
may exclude the construction or installation of any fire
sprinkler system, fire extinguishing system, fire detection
system, or fire-related improvement, as defined by the
Legislature (Proposition 31, 1984). The initiative did not
specify whether the exclusion applied to existing buildings
or all buildings, but the Legislature implemented the
exclusion from "new construction" only to fire safety
systems installed in existing buildings. Assessors do not
include the value of the fire safety system when
determining a property's value, and installing a fire
safety system does not trigger a reassessment, although
both protections terminate if the property is sold to a new
owner.
When a disaster destroys real property, the assessor must
revalue the property to its disaster-affected value. For
example, if a house burns down, the assessor will value the
land and the remaining structure and the taxpayer will only
pay property tax based on that value until reconstructed.
SB 464 -- 3/30/11 -- Page 2
Upon reconstruction, assessors do not revalue any part of
the reconstruction that is substantially equivalent to the
property prior to the disaster, but assessors add any value
attributable to an expansion over the previous real
property. Currently, fire safety systems within the
substantially equivalent part are not included in value;
however, systems in the newly constructed part are
included.
Proposed Law
SB 464 provides that assessors shall exclude from value
constructing or installing any fire sprinkler system, other
fire extinguishing system, and fire detection system in a
building reconstructed after a disaster. First, the owner
of the building must file a claim with the assessor and
provide him or her with the documentation necessary to
identify the value of the fire safety improvement. Next,
the assessor must evaluate the claim and determine the
portion of value attributable to the fire safety
improvements. Lastly, the assessor reduces the new base
year value by that portion of value. However, assessors
must include in value any fire safety system required in
non-residential properties by the California Building Code
or local ordinance.
The bill, as amended, applies apply to any home subject to
a disaster reassessment regardless of when it was.
State Revenue Impact
According to the State Board of Equalization (BOE), SB 464
results in a property tax revenue loss of $16,000.
Comments
1. Purpose of the bill . According to the Author, "Many
residents lost their homes in the 2003 and 2007 fires that
ravaged San Diego County. Due to the hardships that they
have already faced, disaster victims who seek to rebuild
their homes should be supported by government with clear
and straightforward processes and money saving exemptions
from taxes and fees when such exemptions are reasonable.
SB 464 -- 3/30/11 -- Page 3
There are still hundreds of victims of the 2003 and 2007
fires in San Diego County who have not yet rebuilt their
homes. In January 2011 the installation of fire
suppression equipment in new homes became mandatory. Under
existing law, property owners who rebuild following a
disaster are not be burdened with a reassessment due to the
installation of fire suppression equipment. This exception
for the assessment of fire suppression equipment is not
extended to any additional rooms or structures that are
added when the dwelling is rebuilt.
Existing law recognizes the value of fire safety devices
and provides an exemption from property tax reassessment
for installing fire suppression equipment in an existing
building or home. Current law should be amended to extend
this exemption to new construction on buildings and homes
that are rebuilt on properties destroyed in disaster.
Therefore, I have introduced Senate bill 464 in order to
amend the Revenue & Tax Code to exempt the assessment of
fire suppression equipment in new construction by disaster
victims who are rebuilding their previously existing homes
or buildings and adding new rooms or structures."
2. Do the right thing . SB 464 provides an incentive for
taxpayers to add fires safety systems by excluding their
value from that margin of the property's value that is not
the same as the property before the disaster. Taxpayers
choose whether to install fire safety systems based on
initial installation costs, estimated to be 1% of a home's
value. However, the exclusion provides a relatively small
incentive: at a property tax rate of 1% on a $1500 fire
safety system in the newly expanded part of a reconstructed
home, the bill results in a benefit of $15 to the taxpayer.
Additionally, any fire safety system added to the property
within its original footprint is already exempt; SB 464
only applies to the value of fire safety systems installed
in the part of the building expanded during the
reconstruction.
While a $15 property tax reduction may be nice, is
excluding the system from value sufficient to change
behavior and result in any more fires safety systems than
without the bill? Would a taxpayer install the fire safety
system in the exempt part of the reconstruction, but not in
the expansion due to a 1% tax change? If not, the bill
SB 464 -- 3/30/11 -- Page 4
results in a kind reward, but no change in behavior,
rendering it a deadweight loss. The tragedy of losing a
property in a fire leaves survivors forever wary against
future disasters, so any reconstruction will likely lead to
significant fire safety improvements, with or without a tax
benefit.
The Committee may wish to consider the merits of enacting a
measure that changes the tax system that does not cause a
tangible change in behavior.
3. Benefits of fire safety devices . Clearly, installing
fire safety devices prevent loss of life and property.
According to statistics from the National Fire Protection
Association supplied by the author, the chances of dying in
a fire are reduced by 50% to 75% in buildings with fire
safety devices, and property damage is reduced by 50% to
67%. Civilian death rates per 1,000 people are 85% lower
with automatic extinguishing systems. Fire sprinkler
systems also use considerably less water to extinguish a
fire than firefighters use.
4. Lead and follow . After Proposition 13 (1978), voters
approved eight new construction property tax exclusions
between 1978 and 1998. The exclusion for fire safety
devices was one such example, having been put on the ballot
by the Legislature (SCA 58, Boatwright, 1984). The
Legislature followed the initiatives with statutory schemes
to implement them, including SCA 58. In that bill, the
Legislature limited the exclusion to existing buildings to
help property owners with the costs incurred when local
agencies enacted ordinances requiring fire safety systems
in hotels and motels, a concern raised by the California
Hotel and Motel Association regarding the cost of
installing fire safety systems According to BOE, citing an
Assembly Revenue and Taxation Committee analysis. AB 1239
(Garrick, 2007) sought to extend the exclusion for all
bills; however, the Senate Revenue and Taxation Committee
held the measure on its suspense file. SB 464 is much more
limited, applying the value exclusion solely to buildings
destroyed in a disaster.
5. Comeback . On March 23, the Committee amended SB 464 to
provide that its provisions apply to any home subject to a
disaster reassessment regardless of when it was
constructed. The measure, as introduced, restricted the
benefit to only those homes originally constructed before
SB 464 -- 3/30/11 -- Page 5
January 1, 2011. The bill failed on a 4-4 vote, but the
Committee granted reconsideration. The bill was amended on
March 30. The Committee will take up the bill, for vote
only, on April 4.
Support and Opposition (3/31/11)
Support : County of San Diego, San Diego County Assessor
Ernest Dronenburg, Board of Equalization Member Michelle
Steele.
Opposition : Unknown.