A recent California Appellate Court decision reminds us how different the state's property tax system is from other jurisdictions. In so doing it points to one of the sources of dissatisfaction with that system that many are expressing these days.
The tax assessor valuation of a real estate property in California is determined by the property's value - its price -- at the time of purchase. Other things being equal (e.g. no substantial improvements being made to the property) any further increase in its assessed value is only determined by the application of a modest inflation factor. Market factors do not play a role. Clearly, this leads to anomalous results.
Suppose I purchased a Plan B in the Happy Homes tract in 2003 for $300,000. If I made no substantial improvements that would catch the tax assessor's eye, my assessed valuation today would be $300,000 plus whatever limited inflation factors might have been applied (e.g. 2% a year for the past 10 years). It might now be assessed at around $365,000.
Also suppose that my neighbor down the street bought the same model on a similar lot around 2007 - during the bubble - for $600,000. His assessed value today, with 5 years of inflation factor, would be about $300,000 greater than mine (roughly $675,000). The same houses essentially - both would fetch about the same price, whatever that might be, in today's market - yet with very different assessed values.
Another way in which California property taxes differ significantly from those of other regions is that there is no "split role". Different types of property are all taxed in the same way. The same tax rates and valuation methods apply to commercial properties as they do to residential properties.
The appellate court case mentioned earlier (Borikas v. Alameda Unified School District, First Appellate District, March 6, 2013) addresses the matter of taxing different types of property at different rates.
In June of 2008, voters in the Alameda Unified School District approved a parcel tax as Measure H on their ballot. It provided that residential and commercial/industrial properties be taxed differently. Residential properties were to be taxed at $120 per year. Commercial and industrial parcels less than 2,000 square feet would also be taxed at $120 per year; but those greater than 2,000 square feet would be taxed at a higher rate up to $9,500 per year.
In August of the same year, George Borikas, trustee of a trust owning commercial properties, filed suit to have the special tax invalidated. He alleged that the tax violated the Government Code (section 50079), because it did not apply uniformly to all parcels in the district. The trial court ruled against Borikas, who then appealed.
It all came down to the meaning of uniform. The district argued that "uniformity" in the realm of tax law "has a well established meaning that allows rational classifications and requires only that all taxpayers or property within a classification be treated the same." It cited a long line of cases involving constitutionally-based equal protection challenges.
But the Appellate Court disagreed. After a long review of the legislative history of that portion of the Government Code, along with other legislative items, it said it was apparent that the Legislature intended that districts "did not have authority to classify taxpayers and property and impose differential tax rates." The trial court ruling was overturned.
Of course the court did not say whether the present tax law is good or bad. It just stated what it means. However, today, more and more of those in and around the Legislature are saying that the tax law is not so good. As we are all told, government and the school districts are "starved for funds." But no one is in the mood to ask the general populace, again, to raise taxes on itself. A likely candidate for increased taxes, though, can be found in commercial property. Proposals are floating for the authorization of a split role tax system in California. It wouldn't be surprising to see such legislation introduced in this session.
Even those who see the split role as reasonable are still wary that such tinkering with the system might be "the camel's nose under the tent." Polls show that most Californians like the property tax system the way it is. It will be interesting to see what the future holds.
Published: June 28, 2013
Use of this article without permission is a violation of federal copyright laws.