California Elections : Prop. 58 Aims to Fix One Flaw in Taxation Rules Under Prop. 13

Proposition 58 on the November ballot aims to provide a property tax break for California families who found that Proposition 13 was a “good news, bad news” event.

The good news was the big property tax savings generated by the late Howard Jarvis’ constitutional amendment, approved eight years ago.

The bad news was that Proposition 13 produced a basic inequity over which Jarvis said he had no control.

Here is what happens:

When residential or business property changes hands, it is reassessed to reflect current market value. Since most California real estate has appreciated strongly in recent years, reassessment can translate into dramatically higher property taxes.

1975-76 Assessed Values

Property that has not changed hands since Proposition 13 passed, however, is taxed on the basis of its 1975-76 assessed value. Annual property levies rise at only a 2% rate to reflect inflation, no matter how much the market value may rise.

The result is that a new family on the block could be paying three or four times more in property taxes than their neighbors because, under the Proposition 13 formula, the new family’s levies are based on their home’s market value when they bought it.

It would take a constitutional amendment to correct this flaw but, so far, the Legislature hasn’t tackled it.

“So we just take nibbles at it,” said David Doerr, chief consultant to the Assembly Revenue and Taxation Committee.

Proposition 58, a constitutional amendment, is one such nibble.

More Liberal Rule

Essentially, the measure liberalizes the reassessment rule on residential and business property transfers between parents and children. Typical examples would be when parents turn their home over to a child or when children inherit property.

Under Proposition 58, such property transfers of a primary residence between parents and children, regardless of value, would be exempted from Proposition 13’s reassessment formula--a kind of intra-family tax break.

The measure, if it passes, would apply only to property transfers that occur after the amendment becomes law, on Nov. 5.

Proposition 58 goes much further than post-Proposition 13 stopgap laws passed by the Legislature. One such statute, for example, allowed a reassessment exemption only if the child receiving property from his parents was a minor--which, under California law, generally means under 21 years old. Proposition 58 has no age limit governing property transfers between parents and children.

Exemptions Allowed

The measure also would place into the state Constitution previously passed statutes allowing reassessment exemptions for property transferred between spouses, such as among husbands and wives, or transfers triggered by a divorce settlement. As such, only another ballot measure could change them.

Additionally, Proposition 58 would allow other properties that are not primary residences, such as a farm or business, to be transferred by parents to their children without being reassessed up to the first $1 million of the real estate’s assessed value. Property value over the $1-million ceiling would be subject to normal reassessment.

Assemblyman Thomas M. Hannigan (D-Fairfield), chairman of the Assembly Revenue and Taxation Committee, says this latter provision is needed “to fix another mistake in Proposition 13”--to protect businesses and farms from steep property reappraisals that could place them in financial jeopardy.

A far more sweeping Jarvis-sponsored measure, Proposition 36 on the November, 1984, ballot, contained similar sections establishing tax exemptions for intra-family property transfers, but it was defeated.

‘Damage Control’

Hannigan, the primary sponsor of the November amendment, said in a telephone interview that his panel produced Proposition 58 as a means of “damage control.”

By this, he said he was referring to an expectation among lawmakers that tax-slashers would write other measures that could create chaos with the state’s tax laws.

Not everyone agrees with Hannigan’s approach.

The League of California Cities opposes Proposition 58 but did not sign the California ballot pamphlet argument against it. “Tax breaks are appropriate for homes, but not for commercial and industrial property because all other taxpayers would have to pay for it,” said Kenneth Emanuels, legislative director of the Sacramento-based nonprofit group.

According to the legislative analyst, Proposition 58 tax breaks would result in a $23-million loss to the state’s general fund by the 1988-89 fiscal year and more in future years. Assembly tax expert Doerr said the loss amounts to a pittance, however, since property tax revenues in the current financial year are expected to increase by about $1 billion due to increases in land values, higher taxes on new construction and changes of property ownership.

“So the feeling is it wouldn’t have a serious impact,” he said.