BILL ANALYSIS �
SB 1021
Page A
Date of Hearing: June 25, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 1021 (Wolk) - As Amended: June 2, 2014
Majority vote. Non-fiscal.
SENATE VOTE : 21-15
SUBJECT : School districts: parcel taxes
SUMMARY : Allows a school district to impose a parcel tax at
different rates by classifying property as commercial,
industrial, single-family residential or multifamily
residential, provided that the same rate of tax is levied on all
properties within the same classification. Specifically, this
bill :
1)Specifies that the phrase "special taxes that apply uniformly"
to all taxpayers or all real property within the school
district means any special tax imposed in accordance with one
or more of the following:
a) On a per parcel basis;
b) According to the square footage of a parcel or the
square footage of improvements on a parcel;
c) According to the commercial, industrial, single family
residential, or multifamily residential classification of a
parcel, so long as the same rate of tax is levied on all
properties of the same classification; or,
d) At a lower rate on unimproved property.
2)Provides that, in no event, the rate that the school district
imposes on property within the commercial or industrial
classification be more than two times the rate imposed on
property within the single family residential classification.
3)Authorizes a school district to treat multiple parcels of real
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property as one parcel of real property for purposes of a
qualified special tax where the parcels are contiguous, under
common ownership, and constitute one economic unit, meaning
that the multiple parcels of real property have the same
primary purpose and are not separate and distinct properties
that may be independently developed and sold.
4)States that no inference shall be drawn from the enactment of
this bill with respect to the meaning of the term "uniformly"
for purposes of special taxes imposed by school districts
pursuant to the authorization in Government Code (GC) Section
50079 as it existed prior to the enactment of this act.
EXISTING LAW :
1)Authorizes cities, counties, and special districts to impose a
general tax for general governmental purposes with the
approval of a majority of the voters.
2)Authorizes cities, counties, and special districts to impose a
special tax for specified purposes with the approval of
two-thirds of the voters.
3)Does not allow cities, counties, or special districts to
impose an ad valorem tax on real property or a transactions
tax or sales tax on the sale of real property within that
city, county, or special district.
4)Prohibits school districts from imposing general taxes, but
allows school districts, community college districts, and
county offices of education to issue bonded indebtedness for
school facilities with 55% approval. (Proposition 39;
November 7, 2000 General Election.)
5)Authorizes school districts to impose qualified special taxes,
in accordance with specified procedures, including the
approval of two-thirds of the voters in the district.
6)Provides that "qualified special taxes" must apply uniformly
to all taxpayers or all real property within the school
district and do not include special taxes imposed on a
particular class of property or taxpayers.
7)Authorizes a school district to exempt from a "qualified
special tax" person 65 years of age or older, persons
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receiving Supplemental Security Income (SSI) for a disability,
regardless of age, or low-income persons receiving Social
Security Disability Insurance (SSDI) benefits, regardless of
age.
FISCAL EFFECT : Unknown
COMMENTS :
1)The Author's Statement . The author has provided the following
statement in support of this bill:
"Under the recent court decision, school districts can no longer
apply higher or lower rates to parcels based on commercial,
industrial, or residential classification of the parcel.
Districts cannot even tax an empty property at a lower rate
than an oil refinery or a research and development campus. SB
1021 restores this needed local control by allowing school
district boards to structure its tax according to local values
and priorities. Because these taxes must be approved by 2/3
vote of local voters, school district boards must forge a
communitywide consensus to ensure voters approve the tax,
evident by the high approval rates in parcel tax elections.
The bill simply returns local control to its state before the
court case, and conforms the school district law to 15 other
laws that allow local agencies to impose parcel taxes. The
bill does not grant any additional powers to districts they
did not have before the case. The choice SB 1021 presents is
clear: the Legislature can decide who should and should not
pay local taxes, or local voters can choose at the ballot box
whether the tax placed on the ballot by the locally elected
school board after a full, public process is worth it."
2)Arguments in Support . The proponents state that this bill
addresses an issue that "arose through the decision in Borikas
v. Alameda Unified School District" and is needed to clarify
"troublesome ambiguities in existing law resulting from the
Borikas decision." By explicitly providing that school
districts may levy parcel taxes based on square footage, "the
bill removes the prospect that future courts could interpret
the Borikas decision narrowly and raise questions regarding
those types of taxes." Furthermore, the proponents argue
that, absent this bill, "Borikas could have the unintended
effects of requiring double taxation of owners of contiguous
parcels and imposing disproportionate taxes on owners of
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unimproved parcels."
The proponents assert that parcel taxes are "a stable funding
source for public schools" and argue that this bill is an
important measure necessary to provide the "needed clarity,
authority, and flexibility for districts to structure taxes ?
that meet community needs and comply with long-standing equal
protection principles." The proponents note that this bill
"does not change the existing 2/3 vote requirement for local
communities to pass parcel taxes." Finally, the proponents
argue that this bill "would restore local control and
discretion to school districts prior to the court ruling in
Borikas... and would bring parity to the law by providing
school districts similar legal authority to impose parcel
taxes as fifteen other local agencies." All in all, this bill
would "give school districts and their respective community
much needed flexibility to structure their parcel tax
according to local values, needs and priorities."
3)Arguments in Opposition . The opponents argue that this bill
would "overturn the Borikas decision for the over one thousand
school districts across California, allowing them to impose
non-uniform parcel taxes," which could result in "a jumble of
different tax rates depending on the type of property in a
community, leading to confusion for home and business owners."
The opponents assert that pursuant to this bill's "wholly
volatile and very random parcel tax regime," school districts
would have "nearly unlimited discretion to decide who pays
what tax"; would be allowed to impose a different tax rate on
unimproved parcels; and would be permitted to "aggregate
multiple, smaller parcels owned by one owner to capture all
the properties under a square footage parcel." The opponents
also state that this bill could be "detrimental to residential
homeowners who may be forced to pay higher parcel taxes
depending on how a particular tax is imposed." Finally, the
opponents claim that one of the "most regrettable unintended
consequences of [this bill] is its potentially negative social
equity implications, specifically on equal [and fair] access
to education." According to the opponents, while "per-pupil
funding disparities among school districts currently exist
because certain school districts levy illegal non-uniform
parcel taxes, SB 1021 would undermine Serrano and exacerbate
the problem by allowing school districts to impose even more
exaggerated nonuniform parcel taxes, bringing back
wealth-related taxes that are extremely unequal and
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nonuniform."
4)Background . Prior to 1970, the state's K-12 schools largely
relied on local property taxes levied at different rates and
yielding different amounts per pupil in more than 1,000
California schools districts. State court rulings in the
Serrano v. Priest equalization cases forced the state to
revise basic school finance and establish the revenue limit
system. [Serrano v. Priest (1971) 5 Cal.3d 584; Serrano v.
Priest (1976) 18 Cal.3d 728; Serrano v. Priest (1977) 20 Cal.
3d 25).] In order to conform to the court's decision and
reduce the differences in per-pupil amounts, the state created
the revenue limit system that combines local property tax
revenues with state general aid and allows the state to
control the two revenue sources on a per pupil basis. The
state does not fund basic aid districts, where local property
taxes meet or exceed the revenue limit.
In 1978, Proposition 13 limited both the tax rates and
assessments, thus significantly reducing property tax revenues
and forcing the state to replace the lost revenues in district
revenue limits. Proposition 13 also eliminated the ability of
school districts to levy an incremental ad valorem tax on real
property. Local governments and special districts may,
however, levy non-ad valorem taxes, subject to voter approval.
Since schools and special districts have no plenary taxing
powers, the Legislature had provided general authority for all
local agencies to levy special taxes, subject to 2/3 voter
approval. [SB 785 (Foran) 1979.] However, in 1986, another
proposition - Proposition 62 - was placed on the statewide
ballot, requiring the Legislature to grant specific power to
local agencies to impose taxes. In response, the Legislature
authorized school and community college districts to impose
qualified special taxes. [AB 1440 (Hanningan) 1988.] Thus,
under existing law, a school district may impose a qualified
special tax within that district, as long as the special tax
applies uniformly to all taxpayers (other than persons over
the age of 65 or persons receiving SSI or SSDI] or real
property within the district, and is approved by a two-thirds
vote of the qualified electors of the district. In 1991, the
Legislature additionally authorized 15 other types of local
agencies to impose similar taxes, allowing local agencies to
tax unimproved property at a lower rate than improved
property. [SB 158 (Committee on Local Government) 1991.]
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5)What is a "Qualified Special Tax" ? As discussed, school
districts have limited authority to generate local revenues
from qualified special taxes, even though most school funding
is either received from the state or federal government, or
controlled by the state through revenue limits required to
equalize per-pupil funding. While Proposition 13 did not
define the term "special tax", the courts over time have
opined that a tax is a "special tax" whenever expenditure of
its revenues is limited to specific purposes, i.e. the
proceeds of the tax are earmarked or dedicated in some manner
to a specific project or projects. In contrast, a tax is a
"general tax" only when its revenues are placed into the
General Fund and are available for expenditure for any and all
governmental purposes. [Bay Area Cellular Telephone Co. v.
City of Union City (2008) 162 Cal. App.4th 686; Howard Jarvis
Taxpayers Assn. v. City of Roseville (2003) 106 Cal.App.4th
1178.]
Since school districts are prohibited from imposing general
taxes, any tax levied by a school district, by definition, is
considered to be a special tax subject to a two-thirds voter
approval. School districts may only to impose "qualified"
special taxes, i.e. taxes that are applied uniformly to all
taxpayers or real property within the district. Therefore,
thus far, school districts have only imposed "qualified
special taxes", under Government Code Section 50079, in the
form of a parcel tax.
6)A Parcel Tax . The California Constitution specifies that only
two types of taxes may be imposed upon a parcel of property:
an ad valorem property tax and a special tax receiving
two-thirds voter approval pursuant to Section 4 of Article
XIIIA (or a parcel tax). A parcel tax is a special tax and may
not be based on the property's value (it is non-ad valorem).
Instead, it is a flat fee imposed by a city, county, or
special district on each parcel, residential as well as
commercial, rather than on the assessed value of property,
located within the local entity's jurisdiction. Because the
same dollar amount of tax is generally assessed on each parcel
of property, whether the parcel is one acre or 100 acres,
parcel taxes are generally regressive, which means owners of
smaller parcels of land pay a larger percentage of tax
compared to owners of larger parcels of land. To address the
issue of regressivity, some districts decided to levy a rate
at a fixed amount per square foot of taxable land, and many
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include an annual inflation adjustment.
Existing law does not prescribe a maximum rate of tax, nor does
it limit the period within which the qualified special tax may
be imposed. Therefore, the rate of tax varies significantly
among different school districts. For example, in 2014, 13
school parcel tax propositions were placed on the ballots in
13 school districts, all of which were approved, ranging from
$660 per unit in El Dorado County to $84 per parcel in Santa
Clara County, with terms as short as four years and as long as
eight years. According to the California School Boards
Association, ten school districts have enacted parcel tax
measures that utilize various tax rates, based on square
footage or certain property classification. There is no
current limitation on how the special tax proceeds may be
spent and, therefore, a local government or a special district
may specify in the ballot measure how the funds will be used.
Districts can use revenues in almost any way that serves local
needs, such as ongoing expenses, programs, or buildings.
Generally, local parcel taxes provide secure funding for
teacher salaries, books, materials and supplies, computers,
and art, music and sports programs.
7)The "Uniformity" Requirement and the Borikas Decision .
Existing law authorizes school districts to impose "qualified"
special taxes only if the taxes apply uniformly to all
taxpayers or real property within the district. (GC Section
50079.) Some school districts have interpreted the term
"uniformly" to require a uniform treatment of taxpayers and
property within a tax classification of property or taxpayers.
Consequently, those school districts have utilized, with the
voters' permission, variable parcel tax rates depending on a
property's use and/or size. For example, in 2008 the Alameda
Unified School District's voters approved Measure H, which
imposed different rates of parcel taxes. A parcel tax of $120
per parcel was levied on residential parcels as well as
commercial and industrial parcels under 2,000 square feet.
However, larger commercial and industrial properties were
subject to a tax of $0.15 per square foot, not to exceed the
overall limit of $9,500 per parcel per year. In 2013, Mr.
Borikas challenged the validity of the variable tax rates in
Measure H, arguing that GC Section 50079 never authorized
differential tax rates nor property classification in a school
funding measure. [Borikas v. Alameda Unified School District
(2013) 214 Cal.App.4th 135.] The Alameda School District
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argued that the statutory language of GC Section 50079
reflected long-established equal protection principles that
allow a governmental entity to create reasonable tax
classification so long as all taxpayers within a
classification are treated the same. (Id., p. 140.) The
Court of Appeal agreed with the plaintiff and concluded that
the statutory language in question was intended to be "a
constraint on the extent of the taxing authority delegated to
the local governmental entities." (Ibid.) In other words,
the uniformity provision is "language of limitation and does
not, itself, authorize local districts to classify and
differentially tax taxpayers or property." (Id., p. 151.)
The Court concluded that if the Legislature "had intended to
delegate the school districts the broadest taxing authority
allowed by law - that is, taxing authority bounded only by
equal protection principles - it needed only to have
authorized school districts to impose special taxes, or in
other words, it needed only to have enacted section 50079,
subdivision (a)." (Ibid.)
8)What Does This Bill Do ? This bill would prospectively
overturn the Borikas decision, allowing school districts to
use property classifications - commercial, industrial,
single-family residential and multifamily residential - to
levy different parcel tax rates within the classification.
The rate of tax imposed on commercial or industrial properties
may not be more than two times the rate of the parcel tax
imposed on single-family residential properties. School
districts would also be allowed to tax unimproved property at
a lower rate. In addition, districts would be able to choose
the method of calculating a parcel tax based on any the
following: a per-parcel, per-square foot of the parcel, or
per-square foot of the improvements basis. Finally, this bill
would allow districts to combine multiple parcels into one if
they are commonly owned and constitute one economic unit.
9)The Balancing Act . While this bill provides school districts
with more control and flexibility over their parcel tax
measures, it may, at the same time, lead to a patchwork of
complex parcel tax regimes in different parts of the state.
Under Borikas, school districts can only impose a tax applying
the same rate to all parcels, regardless of their sizes or
use. In contrast, if this bill were to become law, school
districts may choose to tax commercial property based on
square footage but multifamily properties on a per-parcel
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basis; they may decide to treat multiple parcels as one parcel
and tax those as one at a higher rate. Different parcel tax
regimes in different school districts will certainly
complicate the tax compliance for some property owners,
especially business owners, and may lead to wide disparities
in the amount of revenues raised by various school districts.
On the other hand, the Borikas "one-size-fits-all" approach
presupposes that all school districts have the same needs and
the same ability to raise needed revenues. Parcel taxes are
intended as a local source of funding for local programs; they
are subject to rigorous public discussions and a voter
approval. Local residents must decide whether the proposed
tax is a fair price to pay to fund certain programs and
services. However, parcel taxes are inherently regressive
since they are not based on one's ability to pay or the value
of the property. Voters may be questioning this truly
"uniform" but regressive tax structure and may be less willing
to vote for the new parcel taxes.
In essence, this bill highlights the inherent problem with the
existing parcel tax structure, as well as the
acquisition-based property tax system in California. The
Committee may wish to consider whether the benefits of
allowing a school district to impose a parcel tax at
differential rates would outweigh the burdens of creating a
myriad of complicated parcel tax regimes in the state. The
Committee may also wish to consider whether a broader
discussion of California's property tax system and its current
structure is warranted.
10)Who Bears the Burden of a Parcel Tax ? As a special tax, a
parcel tax levied by a school district requires approval at an
election of at least two-thirds of the qualified electors of
such district. Court have interpreted the phrase "qualified
electors of such district" to mean the registered voters
voting in the election concerning the proposed tax. [Neilson
v. City of California City (2005) 133 Cal. App.4th 1296,
1312.] Generally, nonresident landowners are not registered
voters and are not included among the voters voting on the
proposed parcel tax. On the other hand, some registered
voters who do not own real property within the district's
boundaries are able to vote on the parcel tax even though they
will not be paying that tax (at least not directly). In
addition, districts may exempt taxpayers 65 years or older or
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those who receive SSI or SSDI, creating another class of
voters who do not bear the incidence of the tax. This bill
would allow school districts to levy a parcel tax on
commercial and industrial properties at a higher rate than the
tax imposed on residential properties. The Committee may wish
to consider whether this bill would encourage residents within
the school district to enact a parcel tax where the greater
incidence of the tax burden is shifted to commercial and
industrial properties, especially in light of the fact that
many of those properties are owned by non-residents who do not
have the right to vote in the district and do not generally
use the services and programs funded by the parcel taxes.
11)Parcel Taxes and Income Tax Deductions . Some critics of this
bill have argued that the proposed non-uniform parcel tax
structure may cause homeowners to lose their income tax
deductions for the parcel tax. However, it is unclear whether
a parcel tax imposed as a flat tax on every parcel in the
district is currently deductible for income tax purposes.
Generally, to be deductible for both state and federal income
tax purposes, real property taxes must be levied for the
general public welfare at "a like rate against all property"
in the taxing authority's jurisdiction. [Treasury
Regulations, Section 1.164-4(a).] Non-ad valorem assessments
may be deductible only if they are levied "for the general
welfare by a property taxing authority at a like rate on
owners of all properties in the taxing authority's
jurisdiction, and if the assessments are not for local
benefits (unless for maintenance or interest charges)."<1>
While the phrase "a like rate" is not defined in either the
Internal Revenue Code or the Treasury Regulations, a
memorandum issued by the Office of Chief Counsel of the IRS
states that this term "requires that the rate must uniformly
apply based upon an independent variable, such as property
value or parcel or structure size, to be considered similar or
'like.' "<2> With respect to the Fire Prevention Fee, the
memorandum concluded that a "charge of $150 against each
structure no matter how large or small is not levied at a
'like' rate." This interpretation of a "like rate" appears to
be based on the assumption that a rate could be "a like rate"
---------------------------
<1> Internal Revenue Service Information Letter 2012-0018A
(March 30, 2012).
<2> Real Property Tax Deduction for Fire Prevention Fees, Office
of Chief Counsel of the Internal Revenue Service Memorandum,
Number 201310029, January 14, 2013, page 5.
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only if applied within a certain property classification. The
issue of whether a particular parcel tax is deductible for
income tax purposes is a question of facts and circumstances.
However, it appears that per-parcel flat taxes are not
currently deductible for federal or state income tax purposes
anyway, and this bill, if nothing else, will bring California
parcel taxes one step closer to being deductible by satisfying
the federal definition of a "like rate."
12)Related Legislation . AB 59 (Bonta) would have provided that
the "uniform application of taxes" provision shall not be
construed as limiting a school district from assessing taxes
in accordance with rational classifications among taxpayers or
types of property within the school district. AB 59 would have
applied to transactions predating the Borikas decision. AB 59
was amended out of this Committee's jurisdiction.
REGISTERED SUPPORT / OPPOSITION :
Support
Alameda Unified School District
Albany Unified School District Board of Education
Association of California School Administrators
California Association of School Business Officials
California Labor Federation
California School Boards Association
California School Employees Association
California Teachers Association
San Diego Unified School District
Tom Torlakson, State Superintendent of Public
Instruction
Wiseburn School District
Opposition
Air Conditioning Trade Association
Air Logistics Corporation
American Resort Development Association
Apartment Association, California Southern Cities
Apartment Association of Greater Los Angeles
Associated Builders and Contractors of California
Associated Builders and Contractors of California -
San Diego Chapter
Associated General Contractors of California
BayBio
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Biocom
Building Owners and Managers Association of
California
California Apartment Association
California Association of Realtors
California Attractions and Parks Association
California Bankers Association
California Beer and Beverage Distributors
California Building Industry Association
California Business Properties Association
California Cable and Telecommunications
Association
California Chamber of Commerce
California Grocers Association
California Healthcare Institute
California Hotel and Lodging Association
California Independent Oil Marketers
Association
California Independent Petroleum Association
California Manufacturers and Technology
Association
California Mortgage Bankers Association
California New Car Dealers Association
California Railroad Industry
California Restaurant Association
California Retailers Association
California Tank Lines, Inc.
California Taxpayers Association
California Travel Association
Caterpiller, Inc.
Chamber of Commerce Mountain View
Chamber of Commerce Alliance of Ventura and
Santa Barbara Counties
Chemical Transfer Company, Inc.
Contra Costa Taxpayers Association
Council on State Taxation
East Bay Rental Housing Association
Extra Space Storage, Inc.
El Dorado Land Holdings, LLC
Family Business Association
Family Winemakers of California
Greater San Fernando Valley Chamber of
Commerce
Howard Jarvis Taxpayers Association
International Council of Shopping Centers
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Kern County Taxpayers Association
Lake Tahoe South Shore Chamber of Commerce
Lucy Lofrumento, Esq., LMA Law, LLP
NAIOP of California, the Commercial Real
Estate Development Association
National Association of Real Estate
Investment Trusts
National Federation of Independent
Business
NorCal Rental Property Association
Orange County Business Council
Orange County Taxpayers Association
Pacific Life Insurance Co.
PhRMA
Plumbing-Heating-Cooling Contractors
Association of California
Redondo Beach Chamber of Commerce
Regional Economic Association Leaders of California
San Diego County Apartment Association
San Jose Silicon Valley Chamber of
Commerce
San Mateo County Economic Development
Association
Santa Barbara Rental Property Association
Silicon Valley Leadership Group
Simi Valley Chamber of Commerce
Solar Turbines, Incorporated
Superior Tank Wash, Inc.
TechAmerica
TechNet
Tenet Healthcare Corporation
United Hospital Association
West Coast Leasing, LLC
West Coast Lumber and Building Material
Association
Western Electrical Contractors Association
Western Manufactured Housing Communities
Association
Western States Petroleum Association
Wine Institute
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
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