Supreme Court to Rule on Prop. 13 Challenge : Taxes: Millions could face higher bills if U.S. justices find state’s unequal property valuation unconstitutional.

The Supreme Court agreed Monday to hear a major constitutional challenge to Proposition 13’s formula of imposing higher taxes on real estate acquired since 1975, a move that could raise the tax bill for millions of California property owners and lower it for others.

In taking up an appeal filed by a Macy’s department store in Concord, the justices will for the first time review the constitutionality of the tax revolt initiative approved by California voters in 1978. A ruling against Proposition 13 could upset the state’s entire property tax system.

“This is going to decide it--the Supreme Court could end Proposition 13 with one ruling,” said Joel Fox, president of the Howard Jarvis Taxpayers Assn., named for the initiative’s co-sponsor. “So we’re a little nervous.”

The appeal focuses on the Proposition 13 approach that imposes different tax bills on identical properties in the same neighborhood. The unequal tax bite arises from a provision in Proposition 13 that allows homes and businesses to be reassessed for tax purposes only when the property changes ownership.

As a result, someone who bought a house last year pays property taxes based on the 1990 market value, while a resident who lives next door could pay thousands of dollars less based on the home’s 1975 value.

The Macy case accepted for arguments later this year applies only to business property, but a separate appeal filed by a Los Angeles homeowner, Stephanie Nordlinger, has also been filed with the Supreme Court and is expected by attorneys familiar with the cases to be heard at the same time. A ruling is not expected before next year.

Depending on how the court rules, Proposition 13 could be declared void or, more likely, sent back to the California Legislature for fashioning of a new taxation method that equalizes the bite. The state Senate already has created a commission to study a new property tax system and a special Assembly committee has been looking for a politically acceptable way to refine Proposition 13.

One scenario involves raising all property assessments to current market values, then lowering the tax rate imposed on each $1,000 of value. That would have the effect of raising the tax bill for homeowners who have not moved in many years, but lowering it for those who recently bought homes and who pay much higher taxes.

Debating the details, however, could set off a political upheaval across California. Proposition 13 was enormously popular with voters in 1978, and several politicians lost their jobs for opposing the measure.

The court may also avert the battle and declare Proposition 13 constitutional. The California Supreme Court found the initiative constitutional in 1978, though at that time the unequal tax bills had not yet arisen.

Defenders of Proposition 13 say that any ruling striking down the initiative would let the Legislature raise property taxes for millions of Californians and is unjustified.

“We feel Proposition 13 is constitutional and reasonable policy,” said Fox. If the popular initiative is overturned, he said, “it will prime the pumps for another tax revolt.”

Proposition 13 was placed on the ballot by Jarvis, a Los Angeles tax activist, and Sacramento activist Paul Gann, who are both now deceased. On Monday, Gann’s son Robert called for a boycott against Macy’s stores for filing the lawsuit.

The R. H. Macy Co. sued Contra Costa County over the property tax levy on its department store in Concord’s Sun Valley Mall. Macy’s says the store is taxed at a rate 2 1/2 times higher than nearby rivals Sears and J.C. Penney simply because it is classified as property that was sold after 1975.

Proposition 13 capped property taxes at 1% of real estate’s assessed value as of March 1, 1975. So long as the property does not change hands, the 1975 assessment can be raised just 2% a year if market values rise, as they have virtually throughout California. Once sold, the property is reassessed at its new, higher market value.

Although the Macy’s store was not sold, it became subject to the higher rate after a 1986 corporate reorganization that was considered a change of ownership under California law. The assessment shot up to $11.7 million from $4.4 million.

“While the method lacks any rational basis in public policy, it has an almost irresistible political logic,” Macy said in its brief to the Supreme Court. “There will always be a majority of voters who stand to gain . . . by shifting the tax burden to relative newcomers.”

Legal experts have anticipated a high court review of Proposition 13 as a sequel to landmark 1989 ruling that threw out an unequal tax system in a West Virginia county. In that case, the justices ruled that the U.S. Constitution “requires rough equality in tax treatment of similarly situated properties.”

In West Virginia, county assessors taxed new owners of coal property--in what was called by critics a “welcome stranger” policy--at rates 10 to 35 times higher than owners of similar property that had not changed ownership for years, in some cases for decades.

That discriminated against the new owners and violated their right to “equal protection of the laws” under the 14th Amendment, Chief Justice William H. Rehnquist wrote in the 1989 ruling.

Rehnquist noted explicitly that the court was not taking any position on Proposition 13, which is significantly different. The California initiative, unlike the West Virginia case, prescribes unequal property tax valuations as a matter of state policy.

But the West Virginia ruling was seen by some lawyers as an invitation for a challenge to Proposition 13, and several suits have been filed in California in an effort to get the initiative declared at least partially unconstitutional.

Nordlinger, who bought a $170,000 home in the Baldwin Hills section of Los Angeles in 1988, said she resents paying a tax bill five times higher than her neighbors’. “You get exactly the same services,” Nordlinger said Monday.

Nordlinger, an appellate lawyer in Los Angeles, based her suit on a constitutional principle that states cannot discriminate against new residents. The Supreme Court has recently struck down laws that grant favoritism to longtime residents. In Alaska, for instance, the court ordered that payments of oil royalties cannot be restricted to all but new residents.

Nordlinger also said she is a longtime opponent of Proposition 13. “Philosophically, I think it’s just unfair and it deprives us of usneeded tax revenue,” she said.

Her suit against the Los Angeles County tax assessor was unsuccessful in lower courts and an appeal was rejected in March by the California Supreme Court. An appeal to the U.S. Supreme Court was filed last month, but Los Angeles County has until the end of June to file an answer before the court decides whether to hear her appeal along with the Macy case in its new term next fall.

Johnston reported from Washington, Roderick from Los Angeles.