Legislature Ponders Problems of Prop. 13 : Revenue: The 1978 initiative has created inequities in property tax assessments. This could lead to its downfall in the courts.

After more than a decade of shying away from Proposition 13--the precedent-setting 1978 initiative that slashed California property taxes in half--the state Legislature is beginning to examine some of the problems it has spawned.

Both a special Senate commission and an Assembly select committee recently began to take a look at some of the consequences of Proposition 13, including these:

* Wide differences in tax assessments on similar properties in the same neighborhood. Some homeowners pay 10 times more, or even higher, than neighbors with similar houses.

* Disparities in property taxes paid by businesses occupying roughly the same amount of space in the same geographical area.

* Problems created for first-time home buyers by the unequal property tax system established by Proposition 13.

* Cuts in local government services that formerly were financed by property taxes.

Legislators have been aware of these problems for years but have done little about them because of the enormous popularity of Proposition 13. The initiative was approved by voters by a 2-1 margin 12 years ago, and is still thought to have powerful popular support.

But lawmakers have been prodded into action by a recent U.S. Supreme Court decision and three cases moving through the California courts, which have raised the possibility that all or parts of Proposition 13 might be declared unconstitutional.

“It seems to me there’s a real possibility that there will be a rejection or a modification of Proposition 13 coming along,” said state Sen. Gary K. Hart (D-Santa Barbara), whose resolution created the special Senate commission. “We ought to try to study the problems that would be created if that happens.”

The 18-member Senate Commission on Property Tax Equity and Revenue held its first meeting last month and is expected to finish its report by January.

Slower to get started is the Assembly Select Committee on Property Tax and Local Government Finance, chaired by Assemblyman Thomas M. Hannigan (D-Fairfield). So far he is the committee’s only member and the staff consists of one part-time consultant.

“I’m taking a pretty cautious approach,” Hannigan said. “Right now the job is to gather as much information as possible about the options that might be out there in case Proposition 13 is thrown out.”

Hannigan said he hopes the two study groups will examine not only tax inequities but also what the assemblyman called the “fiscal dysfunction that has resulted from Proposition 13.”

He said cities, and especially counties, have been hit hard by the loss of property tax revenue and have been forced to resort to “a whole range of schemes” that are fiscally unsound. Hannigan referred to the tendency of cities and counties to rely on such things as benefit assessment districts and special user fees rather than property taxes.

But the Senate commission plans to begin its work by taking a long, hard look at the wide gulf in tax assessments between similar properties that has developed since 1978.

Proposition 13 amended the state Constitution to cap property tax rates at 1%. It also froze property tax values at their 1975-76 levels, plus annual increases of no more than 2%, until the property is sold. At that time it is taxed at fair market value.

As a result, it is not unusual for one homeowner to pay property taxes that are far higher than those of his next-door neighbor.

For example, consider two small houses that stand side by side on Nowita Place in Venice. According to the Los Angeles County assessor’s office, the assessment for 927 Nowita--a 909-square-foot house in which the same owner has lived since 1959--is $26,119. Next door, at 923 Nowita, a 727-square-foot house that sold last year is assessed at $335,000. The second assessment is nearly 13 times higher than the first. The assessor’s records show the house at 927 Nowita is taxed at $291 a year; the house next door gets a tax bill for $3,413.

“This is simply unequal taxation,” said A. Alan Post, the state’s former legislative analyst. “It’s an unfair system that ought to be changed.”

But Proposition 13’s defenders insist that the certainty the measure provides--the 1% cap on property tax rates, the 2% limit on annual increases--more than makes up for the disparities in tax payments.

Joel Fox, president of the Howard Jarvis Taxpayers Assn., said home buyers initially might resent paying a higher property tax than the family across the street “but they feel better in a few years because the next buyer on the block is paying even more than they did”--assuming California property values continue to rise.

Hannigan agreed that the 1% limit on property taxes, plus the 2% cap on annual increases, has created a “comfort zone” for taxpayers that has muted taxpayer complaints about the assessment discrepancies.

“I was surprised there wasn’t more of a hue and cry,” he said. “I thought an anti-Proposition 13 constituency would develop, but it didn’t happen.”

Still, that does not mean Proposition 13 will pass muster with the courts.

Last January, the U.S. Supreme Court ruled that a property tax system similar to Proposition 13 in Webster CountyVa., violates the equal protection clause of the U.S. Constitution.

Even though Chief Justice William H. Rehnquist, writing for a unanimous court, said in a footnote that the West Virginia decision did not necessarily apply to California, three suits that challenge Proposition 13 subsequently were filed in the state.

In Nordlinger vs. Lynch, Los Angeles resident Stephanie Nordlinger is challenging a property tax assessment that is five times higher than those of her neighbors in Baldwin Hills.

In a San Diego County case, Northwest Financial, a Nevada company, is suing because the assessment on a house the firm bought in La Jolla jumped from $175,839 to $730,000.

And, in R. H. Macy & Co. vs. Contra Costa County, the large retailer claims that after a corporate restructuring, its property taxes were raised by more than 250% and that the company now pays 2 1/2 times more tax than J. C. Penney or Sears, both of which have stores of similar size in the same mall.

All three plaintiffs lost in Superior Court and most legal experts think they will lose in all California courts. But these same experts are divided almost equally on the outcome in the U.S. Supreme Court, where one of the cases could appear in 1992.

If major parts of Proposition 13 are found unconstitutional, the financing of local government activities will be thrown into chaos, and that is why the Senate commission and the Assembly select committee are at work.

“I don’t think the Legislature is going to do anything unless the courts force them to,” said Assemblyman Johan Klehs (D-Castro Valley), chairman of the Assembly Revenue and Taxation Committee. “But if they’re forced to, they’re going to want to have some options out there to consider.”

The search for alternatives to Proposition 13 will be difficult because almost all of them involve substantial property tax increases for some voters.

“Once you’re in this system, it’s very hard to reform,” said Lenny Goldberg, executive director of the California Tax Reform Assn. “Anything you do will hit somebody hard at some point.”

Nevertheless, both the Senate commission and the Assembly select committee will look at alternatives to Proposition 13 and presumably recommend some in their final reports.

Jonathan Lewis, chief consultant to the Senate commission, thinks Proposition 13 passions have cooled.

“I don’t sense that people define themselves anymore on the basis of whether they are for or against Proposition 13,” he said.

“I think it was a sacred cow up until the last three or four years, but now the public perception has changed. . . . People are saying, ‘We want to raise taxes fairly and we want to fund the government services that are needed.’ ”