High Court Tax Edict May Bring Test of Prop. 13

The Supreme Court appeared to open the door Wednesday to a legal attack on California’s Proposition 13 system of taxing real estate, declaring in a West Virginia case that the Constitution requires “rough equality in tax treatment of similarly situated properties.”

In a unanimous decision, the court declared unconstitutional the so-called “welcome stranger” method of taxing in a West Virginia county. New owners of coal property in that area were taxed 10 to 35 times more per acre than owners of similar nearby property that had not changed hands for decades.

Discrimination Seen

While new owners were taxed based on the purchase price of the land, the county did not reassess other properties to reflect their rising value.

This “intentional systematic undervaluation by state officials of comparable property” discriminated against the new owners and violated their constitutional right to the “equal protection of the laws,” wrote Chief Justice William H. Rehnquist for the court.

Rehnquist made a point of saying that his opinion does not address California’s method of property taxation under Proposition 13. But some tax activists said the ruling will probably bring a suit against the California provision, arguing that it also has produced sharp disparities in property taxes.

“I see this as an open invitation to taxpayers in California who are paying much higher taxes than their neighbors to litigate this issue in federal court,” said David Keating, executive vice president of the 150,000-member National Taxpayers Union. “I think it’s very likely we will see such a suit in federal court.”

Enacted by California voters in 1978, Proposition 13 set the property tax rate at 1% of assessed valuation and froze property tax assessments for existing homeowners at their 1975 levels. Unless a property is sold, these assessments may rise no more than 2% per year for inflation.

When a property changes hands, however, the new buyer pays taxes based on the purchase price. Since home prices have soared in most areas of California, new owners can pay as much as 10 times more in property taxes than neighbors who have owned their homes since the mid-1970s.

In 1978, several challenges to Proposition 13 were filed in state court, but the California Supreme Court upheld the measure. The issue was not appealed to the U.S. Supreme Court, and no federal court suits have been filed since, according to several California lawyers who follow tax issues.

Groups Are Split

The issue has split groups active in the fight for lower taxes. The National Taxpayers Union, in a friend of the court brief, urged the justices to strike down the formula under Proposition 13 because it “systematically discriminates against newcomers.” But the Howard Jarvis Taxpayers Assn. and the California Tax Reduction Movement filed an opposing brief to protect the 1978 measure and avoid “a rigid rule of equal taxation.”

Attorneys on both sides saw something they liked in Wednesday’s ruling.

Gail Norton, a lawyer representing the anti-Proposition 13 group, said Rehnquist’s opinion “is a very strong statement in support of equality in taxation.”

However, Jeffrey Even, a Sacramento lawyer who worked on the brief supporting the current system, read Rehnquist’s opinion as “basically upholding Proposition 13.”

Divided Into Classes

At one point, Rehnquist notes that “a state may divide different kinds of property into classes and assign to each class a different tax burden.” As an example, he cites the different tax treatment often given to corporations and individuals.

Then, quoting a 1910 ruling, he writes: “In each case, if the selection or classification is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy, there is no denial of the equal protection of the laws.”

Even said California had a reasonable basis for treating new home buyers differently than existing homeowners, because it wanted to protect the older homeowners from being taxed on “paper profits.”

David Doerr, chief tax consultant for the California Taxpayers Assn. in Sacramento, said Proposition 13 would stand up well in a court test because the measure was written into law, whereas the West Virginia case concerned the practices of one tax assessor.

“Some one was way off the reservation and doing something that was not lawful in the West Virginia case. It’s a different matter when the state has an assessment provision in its own Constitution,” he said.

Probable Issue

Under the framework set down by Rehnquist, a court challenge to Proposition 13 would probably turn on whether a federal judge--and ultimately the Supreme Court--believed that California had set forth a “reasonable” distinction or an “arbitrary” classification system that discriminated against some to the benefit of others.

It is clear that the chief justice did not intend to settle the issue Wednesday. He attached a footnote to his 10-page opinion which says: “We need not and do not decide today whether Webster County (W. Va.) assessment method would stand on a different footing if it were the law of the state, generally applied,” rather than the practice of a single county assessor, he said.

“The state of California has adopted a similar policy as Article XIIIa of its Constitution, known as ‘Proposition 13’,” he continued. “The system (established in California) is grounded on the belief that taxes should be based on the original cost of property and should not tax unrealized papers gains in the value of the property.”

In Sacramento, Dugald Gillies, a lobbyist who has represented the California Assn. of Realtors for many years, predicted the court ruling will lead California legislators to introduce “clarifying” amendments to the state Constitution concerning Proposition 13. Any constitutional amendments passed by the Legislature would require voter approval.

The West Virginia case was Allegheny Pittsburgh Coal Co. vs. County Commission of Webster County, 87-1303.