Court’s Action Sets Stage for Challenge to Prop. 13

A San Diego Superior Court judge Thursday dismissed a lawsuit challenging Proposition 13, setting the stage for an appeal of the case, which is regarded by tax experts as a formidable challenge to the landmark tax-cutting law.

Judge Herbert B. Hoffman threw the case out of court in a brief hearing Thursday, saying a 1978 California Supreme Court decision obliged him to do so.

Lawyers and tax experts had been expecting a suit challenging Proposition 13 since the U. S. Supreme Court ruled in January that a similar West Virginia tax scheme was unconstitutional.

It came in San Diego, from a Nevada company that had bought property in La Jolla. Relying on the U. S. Supreme Court ruling, the company, Northwest Financial, contended in a suit brought in April that Proposition 13 violates constitutional guarantees of equal treatment by taxing new property owners at a higher rate than longtime owners.

Hoffman’s decision this week came as no surprise to Robert K. Smith, the La Jolla tax lawyer who filed Northwest Financial’s suit.

“We anticipated when we filed that we would encounter this kind of resistance at levels below the California Supreme Court, at least,” Smith said. “So I think we’re on track.”

Appeal Promised

Smith promised an appeal to the 4th District Court of Appeal in San Diego “as soon as possible, though we’re not rushing out to file.” In legal papers he filed with the San Diego Superior Court before the hearing, Smith said the “issue presented in this case may well find its way to the United States Supreme Court.”

Leonard W. Pollard II, deputy counsel for San Diego County, named along with the state Board of Equalization as a defendant in the suit, said Thursday’s result was gratifying. But Pollard also said the case was far from over.

“You hate to call anything a slam-dunk,” Pollard said. “Even in a slam-dunk you’ve got a 15% chance of losing. I think that’s still an applicable provision.”

Both Paul Gann and Joel Fox, president of the Howard Jarvis Taxpayers Assn. in Los Angeles, were in court Thursday to watch, even though the association’s request to join the case had been denied. Tax reformers Gann and the late Howard Jarvis wrote Proposition 13.

“We’ve been waiting breathlessly for the attack, it came in San Diego and this is the result today,” Fox said.

Gann, 77, said he was tired of repeated attacks on the initiative. “When are they going to admit to Paul Gann and Howard Jarvis’ people that this is literally a harassment?” he said.

Proposition 13, which California voters approved in 1978, rolled back property assessments to 1975 levels but permitted properties sold after the initiative passed to be reassessed at market value.

This two-tiered system can create a huge difference in the taxes imposed on owners, depending solely on when they bought property. A homeowner who bought a property this year and had it reassessed at the current market value could, for instance, owe thousands of dollars in annual real estate taxes more than a neighbor who had owned that property since 1978.

Northwest Financial’s suit claims that such unequal treatment violates the equal protection guarantees of the federal Constitution.

According to the suit, Northwest Financial bought the La Jolla property on Nov. 30, 1987. Smith described it Thursday as “residential,” but would not elaborate.

The company paid $730,000 for the property, the suit says. The property, which had been been assessed previously at $175,839, was then reassessed at its purchase price.

Northwest Financial paid an extra $3,355.80 in tax in fiscal year 1987-88 and $5,541.61 in 1988-89, or a total of $8,897.41, because of the new assessment, the suit says. Claiming that the reassessment provision of Proposition 13 is unconstitutional, the suit asks for a refund of that $8,897.41.

The issue turns on the interpretation of January’s U.S. Supreme Court ruling. The California Supreme Court upheld the constitutionality of Proposition 13 in 1978. But in January, the U. S. Supreme Court tossed out a policy by Webster County in West Virginia that assessed newly acquired properties at a higher level than those that had long remained with the same owner--on the grounds that it violated equal protection.

Challenge Invited

In a footnote, Chief Justice William Rehnquist, who wrote the unanimous opinion, specifically noted that “we need not and do not decide” whether the case covered Proposition 13.

That footnote invited a challenge to the measure, lawyers said.

“The West Virginia case was such in general that it was an invitation,” said John J. Curtis, a Los Angeles tax lawyer who formerly was chief counsel to the West Virginia state tax department.

“The fact that the facts (in the San Diego and West Virginia cases) are so similar--it was an invitation,” Curtis said Thursday.

Pollard, the deputy San Diego County counsel, said there are two important differences between Proposition 13 and the West Virginia system.

Proposition 13 is imposed across California, but the West Virginia assessments were made only in Webster County, Pollard said. And, although the Proposition 13 measuring stick is purchase price, the Webster County system uses current market value, he said.

“Then the issue becomes whether taxation based upon acquisition value is a legitimate system,” which the California Supreme Court’s 1978 ruling said it was, Pollard said.

Hoffman said from the bench that he was relying on that ruling in his decision.

Robert Lambert, staff counsel at the state Board of Equalization in Sacramento, said Thursday that he doubts Proposition 13 will ever be overturned. But, if the reassessment provision alone were found invalid, he said, a “reasonable assumption” was that the system would revert to a “current market value” scheme of assessment, as called for by other parts of the state Constitution.

Under such a system, counties would have to reassess properties to fit current values.