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Thursday, August 18, 2011

California Property Taxes in the News

I found two interesting stories in the news this week about California's property tax and the famous "Prop 13." These stories are (1) Los Angeles Mayor Villaraigosa calling for a change to Prop 13 for non-residential property to help generate revenue to help fund education and (2) greater scrutiny being paid to whether non-profit organizations located in California are entitled to a property tax break. Details and tax policy observations ....

1. Mayor Villariagosa spoke to the Sacramento Press Club on 8/16/11. He stated:

"Let’s apply Prop. 13’s protections to homeowners and homeowners alone. And let’s strengthen those protections. We could take half the money we generate to fund schools and use the other half to cut taxes for homeowners – and, you know what, we can spur the housing market in the process. Phase it in over time to soften the impact on business and call it the Homeowner and Public Education Protection Act!"

He observed that this change could generate between $2.1 and $8 billion per year. He also suggests some other changes including taxing some services and reforming the corporate income tax.

He also said there is a need "to modernize and rationalize our tax laws – and yes, even to eliminate taxes that don’t make good economic sense."

The details on his proposed property tax change are not included. I would guess it could be changing the definition of change in ownership, increasing the tax rate, or modifying the valuation formula. One policy aspect of the California property tax system that warrants a look is equity. A business that has owned property for a long time will have a lower property tax bill than a business that recently acquired property even though both pieces have the same market value. That creates competitive disparities. Another policy consideration is neutrality - that tax rules should not affect business decisions. But, certain business restructurings might be done primarily to avoid a property reassessment - in violation of the neutrality or economic efficiency principle.

I'm curious as to what he has in mind to return some of the additional property tax revenue to homeowners. That statement concerns me because homeowners already get so many tax breaks in the federal and state tax rules.

As I've blogged about and written about several times - such as here, the California tax system needs modifications to modernize it and enable it to better meet principles of good tax policy. So, I think it is good that the Mayor is raising these points. He is also taking a bold step in not only calling for reform (which might be done in a revenue neutral manner although that would still need a 2/3 vote) but is calling for generating additional revenue to better fund education.

2. Property tax of non-profits - the New York Times had an article on 8/14/11 - "California Scrutinizes Nonprofits, Sometimes Ending a Tax Exemption." The article notes that "assessors in each of the state’s 58 counties make the final decision on exemptions, after determining whether that property is used in a way that is of “primary benefit” to California." The article notes that it is not always easy to determine whether a charity provides a benefit to California, such as because some of that benefit might be indirect. For example, it notes an organization that fights tuberculosis in Mexico, which provides an indirect benefit to California by limiting spread of this disease. With counties looking for revenue, the exemption is getting extra scrutiny.

This exemption highlights a tax law design challenge. When something is exempt, the law becomes more complicated in trying to define that exemption, which is usually not easy. Are there policy reasons to justify a property tax exemption for non-profits? They do use public services (such as roads, courts, fire and police). As a non-profit, they have income tax breaks in that they are not subject to income tax unless they have unrelated business income. Non-profits do not get employment tax breaks, so why a property tax break?

Tax reform should look at all special rules to determine if they are still appropriate and if yes, are they designed to meet their underlying purpose?

For more on the welfare/non-profit exemption in the California property tax, see Section 267 of the BOE Assessor's Handbook (178 pages!) - here.

What do you think?

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