SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 1431 (Glazer) - Property taxation: reassessment: disaster relief

Bill Summary:

SB 1431 would permit disaster reassessments for property tax purposes for properties affected by COVID-19.

Fiscal Impact:

The Board of Equalization (BOE) indicates that the revenue loss that would result from this bill cannot be determined. However, the magnitude is likely significant. BOE’s administration costs would be minor and absorbable.

Background:

Under the California Constitution, all property is taxable unless explicitly exempted by the Constitution or federal law. Specifically, Proposition 13 (1978) limits the maximum amount of any ad valorem tax on real property at 1 percent of value, and directs assessors to set assessed values at 1975 market value levels and only reappraise property thereafter if there is a change in ownership or new construction. Voters enacted Proposition 8 (1978) a few months after Proposition 13, which amended the Constitution to allow a temporary reduction in value to reflect substantial damage, destruction, or other factors causing a decline in value.

Local agencies are authorized to provide for the assessment or reassessment of taxable property “physically damaged or destroyed” for property tax purposes. Specifically, current law allows a county board of supervisors to enact an ordinance allowing taxpayers to apply for reassessment when their property is damaged or destroyed in a major misfortune or calamity. The ordinance can apply to large disasters, such as earthquakes or wildfires, or site-specific incidents, like house fires. Additionally, assessors must revalue property when a diminution in value is attributable to restricted access to property as a result of the disaster, if the Governor has issued a disaster proclamation as a result of the disaster. Restricted access traditionally means when an event like a landslide destroys a road or imposes a physical barrier to a taxpayer accessing their property.

If the county enacts an ordinance, its assessor must revalue property affected by the disaster. The loss estimate must be at least $10,000 of current market value to qualify. The assessor will first determine the market value of a property, which often exceeds its assessed value. The assessor then calculates a percentage loss in the market value of the property, and multiplies that percentage by its market value. If the loss exceeds $10,000, the assessor then compares the adjusted market value to its assessed value, and enrolls a new value if the adjusted market value is less than the assessed value.

Taxpayers must file a claim with the county assessor within the time specified in its ordinance, or 12 months from the date of damage or destruction, whichever is later. The assessor next revalues the property to its disaster-affected value, and sends the taxpayer a notice of proposed new assessment. The county will then issue a separate supplemental refund for taxes paid in the current year based on the amount of reduction. The refund is prorated from the month in which the disaster occurred to the end of the fiscal year, or completion of new construction, whichever is first. Taxpayers must still pay their regular tax bill. Taxpayers may appeal the proposed reassessment to the assessment appeals board within six months of the date of mailing the notice. The property retains its disaster-affected value until fully restored, reconstructed, or rebuilt. If the taxpayer rebuilds their property in a like or similar manner, the property retains its prior base year value.

Proposed Law:

This bill would, among other changes, amend disaster reassessment law to require disaster reassessments for a state of emergency. Additionally, it would redefine damage to include the diminution in value resulting from any law, order, rule, or regulation of the state or any city, county, or other political subdivision providing tenant protections in response to the COVID-19 pandemic, including, but not limited to, eviction controls imposed under (1) Executive Order No. N-33-20, which ordered all Californians to stay at their home or place of residence, except as specified, and (2) Executive Order No. N-37-20, issued on March 27, 2020, extended deadlines for 60 days to evict tenants for nonpayment of rent due to COVID-19.

The measure also defines “major misfortune or calamity” to include the COVID-19 pandemic, as defined in the Governor’ state of emergency declaration issued March 4, 2020, thereby allowing disaster reassessment for diminution in the value of property resulting from restricted access due to the COVID -19 pandemic.

The bill would be effective immediately upon enactment, but provides that it would be retroactive to April 5, 2020. Affected taxpayers can submit an application within 12 months of the effective date of the bill or within the time specified in the county’s ordinance, whichever is later.

Staff Comments:

This bill would expand the eligibility for disaster relief of specified properties affected by the COVID-19 pandemic. BOE indicates that it cannot estimate the number or type of properties that would qualify for relief under this bill. Moreover, for disaster relief purposes, it is unclear as to what point in time a market value determination would be made. However, the assessed value of any property is variable and depends on the facts of each property on a case-by case basis. The revenue loss resulting from the bill would depend (1) on the number of properties that would qualify for relief under this bill, (2) the type of properties, (3) the taxable value of the properties, and (4) current market value of the properties. All of these are unknown; consequently, the bill’s ultimate revenue loss is indeterminable.

Lower local property tax revenues lead to increased General Fund Proposition 98 spending by up to roughly 50 percent (the exact amount depends on the specific amount of the annual Proposition 98 guarantee, which in turns depends upon a variety of economic, demographic and budgetary factors). Thus, this bill would lead to increased General Fund expenditures of an unknown amount.

The BOE will incur absorbable costs to update its documents, website materials, and provide guidance to assessors.

Any local government costs resulting from the mandate in this measure are not state-reimbursable because the mandate only involves the definition of a crime or the penalty for conviction of a crime.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Property taxation: reassessment: disaster relief

Allows for disaster reassessment for property tax purposes for properties affected by COVID-19

Background

Article XIII of the California 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, and directs assessors to only reappraise property when newly constructed, or when ownership changes (Proposition 13, 1978). Voters enacted Proposition 8 (1978) a few months after Proposition 13, which amended the Constitution to allow a temporary reduction in value to reflect substantial damage, destruction, or other factors causing a decline in value.

The Constitution allows the Legislature to authorize local agencies to provide for the assessment or reassessment of taxable property “physically damaged or destroyed” for property tax purposes. To implement these Constitutional provisions, current law allows a county board of supervisors to enact an ordinance allowing any taxpayer whose property was damaged or destroyed without his or her fault in a major misfortune or calamity to apply for reassessment. The ordinance can apply to large disasters, such as earthquakes or wildfires, or site-specific incidents, like house fires. The State Board of Equalization (BOE) has previously opined that a major misfortune or calamity generally requires a sudden, distinct occurrence of damage or destruction. Additionally, assessors must revalue property when a diminution in value is attributable to restricted access to property as a result of the disaster, if the Governor has issued a disaster proclamation as a result of the disaster. Restricted access traditionally means when an event like a landslide destroys a road or imposes a physical barrier to a taxpayer accessing their property.

If the county enacts an ordinance, assessors must revalue property affected by the disaster. The loss estimate must be at least $10,000 of current market value to qualify. The assessor will first determine the market value of a property, which often exceeds its assessed value. The assessor then calculates a percentage loss in the market value of the property, and multiplies that percentage by its market value. If the loss exceeds $10,000, the assessor then compares the adjusted market value to its assessed value, and enrolls a new value if the adjusted market value is less than the assessed value.

Taxpayers must file a claim with the county assessor within the time specified in its ordinance, or 12 months from the date of damage or destruction, whichever is later. After the taxpayer files a claim with the assessor, the assessor revalues the property to its disaster-affected value, and sends the taxpayer a notice of proposed new assessment. The county will then issue a separate supplemental refund for taxes paid in the current year based on the amount of reduction. The refund is prorated from the month in which the disaster occurred to the end of the fiscal year, or completion of new construction, whichever is first. Taxpayers must still pay their regular tax bill. Taxpayers may appeal the proposed reassessment to the assessment appeals board within six months of the date of mailing the notice. The property retains its disaster-affected value until fully restored, reconstructed, or rebuilt. If the taxpayer rebuilds their property in a like or similar manner, the property retains its prior base year value.

Seeking relief due to effects of the COVID-19 pandemic, the author wants to apply disaster relief reassessment for properties affected by the COVID-19 pandemic.

Proposed Law

Senate Bill 1431 amends disaster reassessment law to require disaster reassessments for a state of emergency, and redefines damage to include the diminution in value resulting from any law, order, rule, or regulation of the state or any city, county, or other political subdivision providing tenant protections in response to the COVID-19 pandemic, including, but not limited to, eviction controls imposed under:

• Executive Order No. N-33-20, issued on March 19, 2020, which ordered all Californians to stay at their home or place of residence, except as specified, and
• Executive Order No. N-37-20, issued on March 27, 2020, extended deadlines for 60 days to evict tenants for nonpayment of rent due to COVID-19.

The measure also defines “major misfortune or calamity” to include the COVID-19 pandemic, as defined in the Governor’ state of emergency declaration issued March 4, 2020, thereby allowing disaster reassessment for diminution in the value of property resulting from restricted access due to the COVID -19 pandemic.

The bill provides that it applies beginning on and after April 5, 2020, and affected taxpayers can submit an application within 12 months of the effective date of the bill or within the time specified in the county’s ordinance, whichever is later.

SB 1431 also includes legislative findings and declarations stating that:

• It shall neither be construed to affect any previously existing law regarding claims or defenses related to a diminution of property values, nor to establish a presumption that property values have declined or that any property is in any way “damaged or destroyed” or otherwise contaminated for purposes of any civil action.
• Its provisions do not constitute a gift of public funds for purposes of Section 6 of Article XVI of the California Constitution because it provides necessary property tax relief to taxpayers who own multifamily residential buildings that have suffered material rent loss as the result of efforts to preserve housing availability during the COVID-19 pandemic.

The bill also makes technical and conforming changes.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “Senate Bill 1431 would expand the eligibility for disaster reassessment of multifamily properties affected by the COVID-19 pandemic. By expanding the eligibility, this bill would allow temporary mid-year property tax relief until a property recovers to its trended base year value. In response to the ongoing pandemic, state and local governments have enacted “stay-at-home” orders. While these orders have proven effective at flattening the curve here in California, they have unfortunately led to many employees being laid off, raising concerns about the ability for tenants to pay their monthly rents As a result, governments have instituted much-needed protections to renters in the form of anti-eviction ordinances. This relief, however, does not extend to multifamily property owners who are still responsible for mortgage payments, property taxes, insurance, maintenance, and utilities. This bill aims to alleviate multifamily property owners’ financial stress, which, if left unaddressed, threatens to destabilize the housing market and reduce the number of affordable housing options.”

2. Constitutional? The Constitution only allows the Legislature to provide for the reassessment of taxable property “physically damaged or destroyed.” The Legislature implemented this section to provide disaster reassessment if that property was damaged or destroyed by the major misfortune or calamity that caused the Governor to proclaim the area or region to be in a state of disaster, including a diminution in the value of property as a result of restricted access to the property where that restricted access was caused by the major misfortune or calamity. In 2002, BOE added Property Tax Rule 139 to provide a definition for “restricted access” for purposes of disaster reassessment at the request of the airline industry after the September 11, 2001 terrorist attacks. The rule defined “restricted access” to include taxpayers who either suffered restricted physical access to their properties or whose normal business activities were suspended as a result of compliance with a directive, order, law or other exercise of police or regulatory powers by the federal, state or local government. Some county assessors sued BOE, arguing the rule was constitutionally and statutorily invalid. A Court of Appeal found that Rule 139 was inconsistent with the plain language of both the Constitution and the statute in Slocum v. State Board of Equalization, 134 Cal.App.4th 969 (2005). The Court’s decision primarily analyzed the rule’s consistency with the law; however, it explicitly stated that the rule was not consistent with the Constitutional requirement either. SB 1431 changes law to require assessors to provide disaster reassessment for properties where access has been restricted due to the COVID-19 pandemic, which assessors and others argue violates this constitutional requirement. While the economic effects of the COVID-19 pandemic are severe and widespread, it’s unclear whether it has created the physical damage necessary to satisfy the constitution’s requirements for disaster reassessment. SB 1431 would provide needed funds in the form of tax refunds for property owners who have suffered genuine economic harm, but the Committee may wish to consider whether the effects specified in the bill meets the constitutional physical damage requirements.

3. Determining value. SB 1431 expands disaster relief reassessment to include losses in taxable value due to physical damage resulting from the Governor’s tenant protections, as well as from restricted access to property as a result of COVID-19. Assessors generally revalue disaster-

affected property by calculating the percentage loss of value due to the disaster by examining its physical effects before and after a certain event, like a flood, earthquake, or fire. The principle underlying this reduction is that being taxed on property that no longer exists or has no functional use is fundamentally unfair. Both of SB 1431’s expansions to disaster reassessment require assessors to calculate new values for large numbers of properties that suffered economic losses due to COVID-19. However, assessors have never performed disaster reassessments when damage is more economic than physical, and the measure lacks clear direction to assessors for how to do so. For example:

• How can an assessor determine the specific dollar loss of taxable value of a restaurant due to restricted access if it is forced to close or its customers are ordered to stay at home? Does the assessor increase the value if the restaurant subsequently reopens for delivery or takeout?
• If a food processor is contaminated by COVID-19 virus particles, how does the assessor determine the date when the major misfortune or calamity occurred, as the law requires assessors to do when determining taxable value before and after the damage or destruction, and then prorate taxes due accordingly? Must the assessor determine the date when the particles appeared and were subsequently erased? What happens if particles reappear?
• How will an assessor determine loss in value resulting from orders stalling evictions for tenants who do not pay rent for each unit in each multifamily housing complex in the state? Must the assessor assume that each tenant would have paid rent but for the order, and if not, another prospective tenant could have if the owner evicted the current one due to nonpayment? What evidence can the assessor rely on to demonstrate these facts?
• The measure’s provisions regarding tenant protections is not specific to multifamily property. Should assessors revalue all single family homes because the Governor’s order stalls eviction actions against tenants for nonpayment of rent, as those homes may have lost value due to lower potential rental income?
• The measure does not remove the legal requirement for physical damage to occur to qualify for disaster reassessment, so assessors can only look at restricted access or physical changes, not economic effects, from COVID-19. SB 1304 (Huff, 2015), which provided disaster reassessment for taxpayers due to the Porter Ranch Natural Gas Leak, explicitly added “environmental contamination” to the definition of “damage,” providing direction to assessors regarding the specific source of the market value losses that give rise to a loss in taxable value.
• Lastly, assessors generally determine losses in value by looking at sales of comparable properties. Because the pandemic’s economic effects have occurred only very recently, little sales data exist. Additionally, comparable sales prices could continue to increase or decrease if the effects of the pandemic grow or recede. The true loss in property value may not be known for some time, but SB 1431 requires prompt issuance of refunds.

Given the measure’s significant expansion of disaster reassessments to include an event where physical damage is difficult to value, the nature of an ongoing pandemic instead of a distinct disastrous event, lack of specific direction to assessors to determine the date the disaster occurred and a method to value losses, as well as the severe and widespread economic damage from the COVID-19 pandemic, SB 1431 will likely result in disagreements between assessors, taxpayers, and contingency fee property tax agents. These disagreements will increase assessor and assessment appeals board workloads during a period of deteriorating local agency revenues. The Committee may wish to consider whether disaster reassessment as proposed in SB 1431 can be practically implemented.

4. Proposition 8. In 1978, voters approved Proposition 8, which directed assessors to allow temporary reductions in assessed value in cases where real property suffers a decline in market value. The Legislature implemented Proposition 8 in state law, which was widely used by assessors during the economic recession a decade ago. The assessor evaluates the change in a property’s value from one lien date (January 1 of each year) to the next, and enrolls a new value if the property’s current market value falls below its previous assessed value. If the market value subsequently increases, the assessor can revalue the property up to its previous base year value, accounting for Proposition 13’s restrictions. Proposition 8 will apply to properties which lost market value due to COVID-19; however, it does not provide refunds of previous taxes paid similar to SB 1431’s disaster reassessments.

5. Tradeoffs. The economic effects of the COVID-19 pandemic have been quick, unexpected, and severe. According to Federal Reserve Bank Chair Jerome Powell, 40 percent of households earning less than $40,000 annually lost their jobs in March. The national unemployment rate spiked to 14.7 percent in April, the highest level since the Great Depression. While Congress has enacted assistance for both businesses as well as state governments and municipalities with populations above 500,000 people, economic pain is expected to be widespread and is likely to persist for some time. On May 7, the Department of Finance estimated that the state’s three major revenue sources (Personal Income Tax, Corporation Tax, and Sales and Use Tax) would drop between 22% and 27%, and projected a budget deficit of $54 billion over the next two fiscal years. A day later, the Legislative Analyst’s Office stated that “the state’s newly emergent fiscal challenges are unlikely to dissipate quickly and will extend well beyond the end of the public health crisis. Under both of our economic scenarios, budget deficits persist until at least 2023-24.” Local agencies in California are already experiencing significant deterioration in sales and use tax and hotel tax revenues, resulting in significant fiscal stress, which SB 1431 will likely worsen as counties issue property tax refunds to property owners resulting from disaster reassessments. The Committee may wish to consider whether SB 1431’s assistance to businesses affected by the COVID-19 pandemic is worth the cost of its disaster reassessments to local agencies (and the state by virtue of the Proposition 98 guarantee).

6. Right way? Local agencies opposing SB 1431 argue that it is inappropriate for them to compensate businesses for the effects of government regulations necessary to ensure public health out of property tax revenues, especially when the regulations are issued by the state. Additionally, California’s property tax system is designed to accurately calculate values, collect taxes, and allocate revenues to local agencies to fund public services. Providing financial assistance to affected businesses as called for by SB 1431 will be cumbersome: assessors will need to revalue properties, tax collectors must issue refunds and revised bills, auditors must account for the revenues necessary to pay refunds from the taxing entities who receive them, and already strained assessment appeals boards would need to accommodate the increased appeal workload related to SB 1431’s disaster reassessments. Additionally, only some businesses will benefit from SB 1431 businesses with lower assessed values will not benefit as much as those with newer ones because a property’s adjusted market values must be less than its assessed value for the assessor to enroll a new value. The Committee may wish to consider whether SB 1431 is the best way to provide assistance to businesses affected by COVID-19.

7. BOE. At its April 21, 2020, hearing, BOE created a COVID-19 Property Tax Relief Task Force to receive input on the impact of the COVID-19 “Shelter-in-Place” Executive Orders on property tax administration and deliver that information to the full Board at the earliest possible date. BOE considered the working group report at its May 13, 2020, hearing, which included an option for BOE to issue a Letter to Assessors directing them to accept declines in value under disaster reassessment provisions based on the COVID-19 calamity, or set standard capitalization rates for different types of property affected by COVID-19. Assessors and others argued that such a Letter to Assessors would be unconstitutional due to the physical damage requirement, and doing so exceeds BOE’s oversight authority. Tax attorneys and agents argued that the BOE can and should issue such a Letter. While BOE took no direct action at its May 13 hearing, it did indicate that it would consider action on the agenda of a future meeting.

8. Gift of Public Funds. Section Six of Article XVI of the California Constitution prohibits the Legislature from making a gift of public funds. By issuing refunds for previous taxes paid, SB 1431 could be construed to constitute a gift of public funds; however, the bill includes provisions stating legislative intent that the bill does not because it serves a public purpose.

9. Mandate. The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Since SB 1431 requires assessors to revalue disaster-affected properties, among other new duties for local officials, Legislative Counsel says that it imposes a new state mandate. The measure provides that the state shall not reimburse local agencies for property tax revenue losses, instead stating that should the Commission on State Mandates determine that the bill imposes a reimbursable mandate, reimbursement must be made pursuant to existing statutory provisions.

Support and Opposition

(5/18/20)

Support: California Alliance of Taxpayer Advocates, California Apartment Association, Ryan LLC.

Opposition: California Assessors Association, California State Association of Counties, California Special Districts Association, California Tax Reform Association, League of California Cities, Rural County Representatives of California, Urban Counties Caucus,

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