2 Railroads in Line for $52-Million Tax Rebate - Utilities: Legal settlement would give them refunds from 51 counties. San Diego’s share is $1.3 million.

San Diego and 50 other California counties are being asked to refund the Santa Fe and Pacific Southern railroads $52.5 million in back taxes, the state Board of Equalization announced Tuesday.

The proposed settlement, which would cost San Diego County nearly $1.3 million, would end a lengthy legal dispute in which California’s two major railroads have maintained that they have been unfairly taxed under Proposition 13, which was passed in 1978 and froze tax values for homes but not utilities, such as railroads.

Under the terms of the settlement, filed in U.S. District Court in San Francisco last week, the 51 counties would give the railroads $52.5 million in cash or future property-tax breaks in exchange for the railroads dropping a number of lawsuits in state and federal court.

The counties’ shares range from $14 million for Los Angeles County, the largest of any jurisdiction, to $6,387 for Trinity County. San Diego’s proposed $1.3 million is the 12th largest.

Bitter Legal Fight

“We’re buying peace of mind here for a very, very, very small sum,” said Robert Tyler, a supervising deputy attorney general. “If the railroads won (the court cases), the counties and ultimately the state stand to lose a lot of money. I’m talking two and three times this amount.”

However, San Diego County officials have a markedly different perspective on the issue--one that stems from the fact that their share would take a sizable chunk out of the county’s $3.2-million unallocated reserve for the fiscal year that ends June 30.

“We wouldn’t be real wild about paying this to the railroads because of something the Board of Equalization decided,” said David Janssen, San Diego County’s assistant chief administrative officer. “This is a great way to begin the new year.”

The county ultimately might be able to recover up to 75% of its proposed share from the other taxing agencies--school districts, cities and a variety of special districts--within the county, Janssen said. However, even if collecting a percentage of the refund from other local agencies is feasible under the terms of the proposed settlement, the county would probably first have to pay the $1.3 million, then seek to recover funds, he said.

The proposed settlement must be ratified by Feb. 9 by a majority of the counties or it will be withdrawn, Tyler said.

Ratification would end a bitter legal fight begun almost immediately after enactment of Proposition 13, the 1978 tax revolt measure aimed at keeping property taxes low in reaction to monumental surges in property values. While the measure froze tax values at 1975 levels for homeowners and many businessmen, the state Supreme Court held in 1978 that the same protection did not extend to utilities.

Armed with that opinion, the state Board of Equalization, which is responsible for setting the valuations on utilities, continued to assess railroad property at its full market value, bumping it up each year for inflation. The result: Railroad property tax bills increased annually at a faster rate than did those for other commercial concerns, such as shopping centers and office buildings.

Faced with the widening disparity, railroads--including the Southern Pacific Transportation Co. and the Atchison, Topeka and Santa Fe Railway Co.--filed a series of suits against the state and county tax collectors. They argued that the state’s tax scheme under Proposition 13 violated a 1976 federal law that makes it illegal to tax railroads at a higher level than other commercial property.

The railroads won an early battle in 1982 when a federal court found that most commercial property was on the tax rolls at about 63% of its market value, while the railroads were being forced to pay 100%. That continuing disparity means counties around California owe the railroads almost $300 million in back taxes, said Phoenix attorney Paul J. Mooney, who represents both Santa Fe and Southern Pacific.

Recently, however, the sheer cost of the legal battle prompted the two sides to sit down and discuss a deal, Mooney said. The two railroads own about 80% of all railroad land in California. Companies owning the other 20% have similar lawsuits pending against the state and counties.

“The litigation had frankly gotten out of hand,” Mooney said. “We’re dealing with a case in which the parties had expended, collectively, $15 million in litigation fees and expert testimony.”

Fred Bennett, an assistant county counsel for Los Angeles County, declined Tuesday to discuss the proposed settlement in detail, but said the announcement by the Board of Equalization was “premature” and could jeopardize the agreement.

He also said that, while the $14-million share from Los Angeles would be a burden, the county could find the money in its $9.6-billion budget. “In a budget of our size, this amount of money can be found,” Bennett said.

Times staff writer Barry Horstman contributed to this article.