If Proposition 13 Falls, What Then? : Taxation: As legal challenges to the measure mount, legislators appear uncertain on how to proceed if it is declared unconstitutional.

With the property tax-cutting measure Proposition 13 facing more legal challenges now than at any time in its 11-year history, legislators appear to be far from certain how to proceed if it is ruled unconstitutional.

During a four-hour hearing Tuesday on the mounting legal challenges to the landmark measure, members of the Assembly Revenue and Taxation Committee agreed that the proposition seems to be flawed. But they also agreed that no one has an answer to the vexing problem of how to tax property equitably in California.

And no one, at least in the Legislature, is ready to talk about repealing it.

“There is simply not a constituency out there to change Proposition 13,” said Johan Klehs (D-Castro Valley), the committee chairman.

Klehs and other lawmakers believe the problem of coming up with a new property tax system will be dumped in the lap of the Legislature if one of the current legal challenges to Proposition 13 is successful.

Basically, the biggest flaw experts see in Proposition 13 is that residential and commercial properties sitting side by side can be taxed at widely varying rates, with newer property owners frequently paying a tax that is five times or more the amount their neighbors are paying.

The problem stems from provisions of Proposition 13 that freeze the 1% property tax assessments to the base year of 1975-76 unless property changes hands. Once property is sold, it is reassessed and taxed on the basis of the new purchase price.

Basis of Suits

One of the lawsuits was filed by a San Diego investment firm, Northwest Financial Co., challenging a tax based on the $730,000 purchase price it paid for a La Jolla home in 1987. The suit claims that Proposition 13 is discriminatory because the tax is based on a value roughly four times higher than the one assessed against the previous owners.

Another suit involves a Los Angeles County woman, Stephanie Nordlinger, who bought a home in Baldwin Hills and says she is paying a tax five times more than neighbors who own comparable property.

Still another suit was filed by R.H. Macy and Co., which claims it was put at a competitive disadvantage when its stores in California were reassessed following a change in corporate ownership. An attorney for the department store chain told the committee that a Macy’s store in Contra Costa County is paying a property tax bill that is 250% higher than those paid by competing department stores in the same Concord shopping mall.

On top of the legal challenges, there is a political challenge developing in the form of a “split roll” property tax initiative that would boost the taxes on business and commercial properties and provide some breaks for homeowners. Petition signatures have been submitted to the secretary of state’s office, but the measure has not yet qualified for a place on next year’s ballot. But the consensus of the tax committee members and those who testified was that the “split roll” initiative will do little to solve the equity problem.

Klehs said the ideal solution would be for owners of equally valued property to pay the same tax so that the burden of financing government is spread evenly to all taxpayers.

Because of political and legal problems, most experts agree that the solution ultimately will have to be one that provides tax breaks to new homeowners without raising the taxes of homeowners who haven’t moved since 1975--roughly 40% of all taxpayers, according to a Board of Equalization estimate.

Lenny Goldberg, a spokesman for the California Tax Reform Assn., suggested a 1% or 2% transfer tax on long-term property owners when they ultimately sell their property. He said the transfer tax would be something akin to “a deferred property tax.”

That proposal was immediately challenged by Ernest Dynda, president of the United Organizations of Taxpayers Inc., the original sponsor of Proposition 13. He said that would hurt elderly homeowners who count on the value of their homes for retirement income.

Ralph Abascal, an attorney for the California Rural Legal Assistance Fund, suggested a property tax based on the income of the taxpayer, rather than the value of the home or business.

Assembly Majority Leader Thomas M. Hannigan (D-Fairfield) criticized the proposal, saying it would centralize taxing authority in Sacramento and “ignores the issue of local control.” Hannigan has drafted a proposed constitutional amendment that would require property to be reassessed periodically, such as once every three years. This would boost the taxes of longtime homeowners who now don’t face a reassessment unless they buy a new home. But Hannigan conceded it had little chance of passage, saying he “introduced it in part to create some discussion” among lawmakers.