Justices to Hear Property Tax Case : W. Virginia Issue May Affect California’s Prop. 13 System

In a move that could pose a threat to California’s property tax structure, the Supreme Court said Monday it will hear a challenge to a West Virginia county taxing system that forces new owners to pay sharply higher taxes than those paid by longtime owners of similar property.

Four coal companies that bought land in Webster County, W. Va., contend that as a result of what they call a “welcome stranger” approach to property taxes, they have been assessed rates up to 60 times higher per acre than those levied on nearby property. They contend that this disparity is unconstitutional and denies them the equal protection of the laws.

In most states and cities, property values are reassessed regularly and taxes are based on current market values. However, in the West Virginia county and also in California under Proposition 13, the value of land is reassessed only when it changes hands.

A high court ruling for the coal companies could provide grounds for a constitutional challenge in California, according to several state lawyers and tax experts.

“That sounds very close to our situation,” said James Delaney, chief counsel for the California State Board of Equalization in Sacramento. “If the court says that is unconstitutional, it would probably affect us.”

In California, new home buyers pay property taxes based on the sale price of the home, while assessments for other homeowners are based on the 1975 value of the home. As a result, new owners can find themselves paying two, three and even 10 times more in property taxes than neighbors who own similar properties. Assessments of both old and newly purchased properties rise at 2% per year.

The method for setting property taxes is generally left to the states and state courts, said Lenny Goldberg, executive director of the California Tax Reform Assn. The high court rarely intervenes in property tax disputes, but in the West Virginia case the justices agreed to hear the appeals and consider overturning the county system.

Immediate Impact

“I would imagine (the final decision) would have a pretty significant and immediate impact on Proposition 13,” Goldberg said.

Proposition 13 was approved in a state referendum in 1978 in response to complaints from homeowners about soaring property tax bills. It froze the rates and pushed assessments back to the 1975 level for all property that had not changed hands since then.

The California Supreme Court upheld the measure against a series of constitutional attacks, including a complaint that it discriminated unfairly against new home buyers. Several tax attorneys in Sacramento said that they were unaware of any current federal court challenges on those grounds.

The Sacramento lawyers pointed out that California’s system has several features that would help it fend off a challenge in federal court. The tax disparities between newly purchased and formerly owned property are not as extreme as in the West Virginia case. Moreover, California’s taxing system is written into law. In Webster County, there is no uniform assessment law and the tax assessor applied the system through his discretion.

In its 1978 opinion, the California Supreme Court ruled that the system was reasonable and within the authority of the state to implement.

The West Virginia case grew out of the experiences of the Allegheny Pittsburgh Coal Co., the East Kentucky Energy Corp. and two other firms. Allegheny and East Kentucky bought land in Webster County between 1974 and 1984 that was assessed at 50% of its sale price. Later, they found that similar properties were rarely reassessed.

In a state court suit, the companies charged that the tax assessor had “employed a systematic plan” of taxing newly purchased property that resulted in “unrealistic, excessive, unlawful, unconstitutional and unreasonable” tax increases.

The state court ruled for the coal companies, saying the tax plan violated both the state constitution and the U.S. Constitution’s requirement of equal protection of the laws.

Last year, the West Virginia Supreme Court overturned that conclusion on a 3-2 vote. It suggested that, rather than fighting their high taxes, the coal companies “should seek to have the assessments of other taxpayers raised to the market level.”

The justices will review that ruling this fall in the two cases (Allegheny Pittsburgh Coal vs. Webster County, 87-1303, and East Kentucky Energy Corp. vs. Webster County, 87-1310) and likely issue a ruling early next year.