Legal Showdown Likely for Prop. 13 : The law: A suit challenging the property-tax cutting measure could reach the U.S. Supreme Court. Attorneys believe the justices might overturn the 1978 initiative.


Little noticed by anyone but lawyers and tax experts, a San Diego lawsuit challenging Proposition 13 has taken its first step up the appeals ladder, setting the stage for what is widely regarded as the most formidable attack since 1978 on California's landmark tax-cutting law.

The suit seeks to have a key provision of Proposition 13 declared unconstitutional and wiped out, contending the law violates guarantees of equal treatment by taxing new property owners at a higher rate than longtime owners.

Attorneys familiar with the suit say that the case very likely is headed for the U.S. Supreme Court, which they believe has signaled that it may be ready to overturn Proposition 13--and is waiting only for the opportunity to do it. Even some of staunchest defenders of Proposition 13 say they are concerned that this challenge may eventually succeed.

The lawyers' arguments in favor of and against this new challenge to Proposition 13 often descend into the complex technicalities of tax and constitutional law. But the central issue the San Diego suit poses is simple:

Is it constitutionally fair for taxpayers who own properties of nearly identical type and value in the same tax district to be taxed in dramatically different amounts, based solely on when they bought the property?

The San Diego challenge to Proposition 13, as well as two other pending challenges, can be traced to a U.S. Supreme Court decision in January. In that case, the court held that a similar West Virginia tax scheme was unconstitutional.

Relying on that ruling, a lawyer for a Nevada firm, Northwest Financial Co., a holding company that invested in residential property in La Jolla in 1987, brought suit in San Diego in April. In the suit, Northwest Financial Co. contended that, because it was a new owner, it unfairly had to pay thousands of dollars more in taxes than longtime owners of similar property.

San Diego Superior Court Judge Herbert B. Hoffman dismissed the suit in July, saying a 1978 California Supreme Court decision upholding Proposition 13 obliged him to do so.

Earlier this month, Northwest Financial's lawyer, Robert K. Smith of La Jolla, filed a notice of appeal to the 4th District Court of Appeal in San Diego, citing the U.S. Supreme Court's decision in January and contending that the California Supreme Court's 1978 ruling was out of date.

Written arguments from Smith and from lawyers for the two defendants in the suit, San Diego County and the State Board of Equalization, will be filed before the state Court of Appeal in January or February. A three-judge panel may schedule oral argument or simply decide the case on the legal papers, Smith said.

Two other suits have been filed since the San Diego case. One was filed in September in Los Angeles on behalf of lawyer Stephanie Nordlinger, who last year bought a house in Baldwin Hills and then discovered that her tax bill was five times higher than that of a neighbor, said attorney Mary Louise Cohen, who filed the suit. That case is pending in Los Angeles Superior Court, Cohen said.

The other suit was brought Nov. 6 in Contra Costa County Superior Court, said Los Angeles tax lawyer Charles Ajalat, who filed that suit on behalf of R. H. Macy & Co., the department store chain, challenging an assessment made when the store took over space at a local mall.

The San Diego suit, however, was the first in the courthouse doors, and is the first to reach the appellate level. Because the state Court of Appeal may be obliged to follow the California Supreme Court decision, Smith said he does not expect to win.

But he plans further appeals, to the California and U.S. Supreme courts, and said: "We're confident."

Defenders of Proposition 13 say they will remind judges that the disparity issue already has been considered--by California voters.

"The ballot arguments in support of and in opposition to Proposition 13 talked about this side-by-side disparity issue," said attorney Jonathan Coupal of the Pacific Legal Foundation in Sacramento, which helps defend the law on behalf of two taxpayer groups.

"The people were aware of (the disparity issue) and said, 'So what?' We want tax relief, and we don't want our tax system to be based on increases in the real estate market. That is, I think, a tremendously valid policy, but even if you don't agree with the policy, I think it's exceptionally difficult to say that there's no rational basis for it."

But Joel Fox of the Howard Jarvis Taxpayers Assn. in Los Angeles conceded that backers of Proposition 13 are "definitely concerned."

"We are considering very strongly going ahead and giving grants to academic types and having them take a look at the problem, (so) if a court should go ahead and overturn Proposition 13, we'll be able to say, 'Here are reasonable solutions that will protect the taxpayers of California and members of our organization and exist peacefully with the (constitution),' " Fox said.

Meanwhile, sparked by the lawsuits, the Assembly's Revenue and Taxation Committee, chaired by Assemblyman Johan Klehs (D-San Leandro), has scheduled a public hearing Dec. 5 to "lay out the issues, the concerns and whether changes to Proposition 13 are appropriate," said Jay Greenwood, Klehs' spokesman.

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

When property changes hands, however, the new buyer pays taxes based on its purchase price.

This two-tiered system can create huge differences in the taxes based solely on when the property was bought, particularly since home prices in most areas of California have soared since the mid-1970s.

The Los Angeles suit includes a survey documenting disparities around the city, ranging from 4 to 1 in Watts, to 15 to 1 in Venice. In 1999, the disparity in one Venice neighborhood will be about 100 to 1, the suit says.

Northwest Financial's suit claims that such unequal treatment violates the equal protection guarantees of the U.S. Constitution.

The disparity in the San Diego suit is about 5 to 1. Northwest Financial bought the La Jolla property on Nov. 30, 1987 for $730,000, the suit says.

The property, a sprawling single-story house in the fashionable La Jolla Farms section of the wealthy San Diego neighborhood, had been assessed at $175,839.

Because of the new assessment at its purchase price, Northwest Financial paid an extra $8,897 in taxes over 1988 and 1989; the lawsuit asks for a refund in that amount.

Smith conceded it might cost that much, or more, to pursue the case to the U.S. Supreme Court. But the decision he and his clients made was that "the law was incorrect, that it didn't seem anyone was moving to rectify the situation and that this was an opportunity to do something for the public good," he said.

The California Supreme Court upheld the constitutionality of Proposition 13 in 1978, saying in a 6-1 decision that taxation based upon purchase price was legitimate.

Because the opinion was issued in September, 1978, only four months after voters approved Proposition 13, the majority said they had no actual value differences in assessments to consider. Chief Justice Rose Bird dissented on that issue, saying Proposition 13 was bound to promote disparities, and that treating people differently was illegal.

The issue was not appealed to the U.S. Supreme Court.

Last January, the U.S. Supreme Court overturned 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.

In a unanimous opinion written by Chief Justice William Rehnquist, the court agreed that a tax system that based an assessment on a property's purchase price was not by itself constitutionally defective.

But the equal protection clause requires adjustments that, over time, obtain "a rough equality in tax treatment of similarly situated owners," Rehnquist said.

The Webster County system failed that test because the coal company property in the case had been assessed at eight to 35 times more than comparable neighboring property, and those discrepancies had continued for more than 10 years with little change, he said.

In a footnote, Rehnquist noted that "we need not and do not decide" whether the case covered Proposition 13.

California lawyers, including John Curtis, a Los Angeles tax lawyer who formerly was chief counsel to the West Virginia state tax department, read that footnote as an invitation to challenge the measure.

"The fact that the facts (in the San Diego and West Virginia cases) are so similar--it was an invitation," said Curtis, a former president of Cal-Tax, a lobbying group that seeks to limit tax increases.

The footnote had special significance in light of two of the court's recent decisions as well as the renewed interest the Rehnquist court has taken in tax matters, attorneys said.

Two other cases that reached the U.S. Supreme Court, like Proposition 13, involved programs that made time-based distinctions and favored longtime residents over newer ones. One was from Alaska and reached the court in 1982, the other, from New Mexico, reached the court in 1985.

The high court struck down both, saying they violated equal protection guarantees.

And while the Supreme Court historically has been reluctant to take up tax cases, a full 10% of the cases the court has agreed to take up so far this term are tax matters, court statistics indicate.

"The court may be looking at taxation in a light they haven't in 60 to 80 years, which is to require greater equality for similarly situated taxpayers," Curtis said.

Supporters of Proposition 13 have read the same U.S. Supreme Court cases and noted the court's interest in tax matters, but contend the California law will not be struck down.

There are two key factual distinctions, lawyers say. Proposition 13 is imposed throughout California, while the West Virginia assessments were made only in Webster County. And Proposition 13's measuring stick is purchase price, while the Webster County system used current market value.

They say the key question is whether Proposition 13 has a "rational basis" for setting property tax rates. They contend that the answer is yes, and point to the California Supreme Court's 1978 decision saying that Proposition 13 provided property taxpayers with predictability and stability.

Smith and other attorneys challenging the measure said that argument glosses over the actual discrepancies that have developed over Proposition 13's 11-year life.

What has happened, they said, is exactly what Bird predicted in her dissent from the 1978 California decision. Inevitably, Bird said, Proposition 13 would create an "irrational tax world" because "people living in homes of identical value pay different property taxes."

If a court does gut Proposition 13, it is unclear whether taxes would be rolled back to 1975 levels or increased to current values, legal experts said.

The San Diego suit specifically asks that Northwest Financial get the benefit of the rollback to 1975 values. A court could extend the ruling to other post-1978 buyers. Yet remaining provisions in the California Constitution declare that property is taxed at its current value, said Richard H. Ochsner, the assistant chief counsel for the State Board of Equalization.

Because there are a "lot of possibilities," some sort of reform legislation is virtually certain, Ochsner said.

Curtis, who said he believes "Proposition 13 has so much good about it," said he is "trying to build a consensus" on an alternative among legislators, tax groups and others, so "we can have it ready to go when something bad does go down."

And "something bad" will happen to Proposition 13, Curtis said. "It's not a conclusion I like, but it's one I have to, as a lawyer, logically make," he said. "It's not the kind of case where it's clear cut, but in a close decision, I think the weight would fall on the side of overturning 13."

Tom Steele, a San Francisco tax attorney, said he already is warning clients to expect changes to Proposition 13.

"I'd be a fool not to," he said. "I've been telling them . . . that there was a time bomb ticking here that you had to watch."

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