High Court Hearing Poses Prop. 13’s Stiffest Challenge : Government: Justices will hear arguments Tuesday on tax-cutting measure. Experts say it may be in jeopardy.

Proposition 13 protected California homeowners from the hyperinflation of the 1970s that sent their property tax bills, along with their home values, soaring upward.

But it has not done as much to shield new buyers in the 1980s and early ‘90s, who on top of higher home prices have been forced to pay much steeper taxes.

Over time, the contrast between longtime owners and recent buyers has grown extreme: One Beverly Hills mansion valued at nearly $4 million gets a smaller tax bill than a cramped Venice bungalow worth less than $400,000. An ocean-view home on the affluent Palos Verdes Peninsula is assessed about the same as a tiny house in Watts.

On Tuesday, the Supreme Court will hear arguments on whether that kind of tax discrimination violates the U.S. Constitution and its guarantee of “equal protection of the laws.” The case is, quite simply, the stiffest legal test ever of the famous tax-cutting initiative.

“This is life or death for Proposition 13,” said Joel Fox, president of the Howard Jarvis Taxpayers Assn., founded by the late Los Angeles tax crusader who put the 1978 measure on the state ballot.

If the justices strike down California’s method of taxing property, the fallout will be dramatic. Lawmakers could find themselves this summer with the daunting task of redesigning a system that collects $16 billion a year in property taxes.

Homeowners and businesses whose taxes have been held down by Proposition 13 could face thousands of dollars in tax hikes, while property owners who have bought more recently could receive significant tax relief.

While lawyers on both sides say they are uncertain of the outcome, there are reasons to believe that Proposition 13 may be in jeopardy.

Since the 1930s, the Supreme Court has given government broad discretion to regulate the economy and to impose taxes. Under Chief Justice William H. Rehnquist, the conservative court majority has been loath to strike down such state laws as unconstitutional.

Yet, three years ago, the justices in a 9-0 ruling struck down a so-called “welcome, stranger” taxing system used in a mountainous, thinly populated region of West Virginia. There, new buyers of coal mining land were paying taxes roughly eight times higher than owners of similar land that had not changed hands for decades. In defiance of state law, the county assessor refused to update the value of the old property, thereby creating the wide disparity in assessments.

The “intentional systematic undervaluation by state officials of comparable property” discriminated unfairly against newcomers, wrote Rehnquist in the unanimous opinion, Allegheny Pittsburgh Coal Co. vs. Webster County. “The constitutional requirement is . . . rough equality in tax treatment of similarly situated property owners.”

Those few words prompted a flurry of legal challenges to Proposition 13 and its unique method of establishing property values. New buyers in California say they are being subjected to the same sort of discrimination outlawed in Webster County.

In every state that taxes property, except California, the taxes are based on a percentage of the “current value” of the property, although assessors sometimes update this value only every second or third year.

Proposition 13, approved by California voters in 1978, decreed that the assessed value of property would no longer be adjusted every year to reflect market value. For those residents who owned property in 1978, their assessed value was rolled back to the 1975 market value. For those who bought later, the purchase price became the new assessed value. Each time another “change of ownership” occurs, the assessed value is adjusted to the new purchase price.

For all property owners, old and new, the assessed value can be adjusted upward by 2% a year to account for inflation. Because housing prices have soared by 25% or more in some years, the assessed values usually lag far behind actual market prices over time.

Because all owners pay an annual tax of 1% of assessed value, not market value, there are huge disparities between the amount of taxes paid on similar properties, based on when they were purchased.

In 1988, Stephanie Nordlinger, a 50-year-old lawyer and a single woman, bought her first home in the Baldwin Hills area of southwest Los Angeles for $170,000. Under the terms of Proposition 13, her initial property tax bill was 1% of that amount, or $1,700.

Meanwhile, her neighbors, who bought virtually identical homes in the 1970s, also pay the 1% tax, but on the 1975 value of their homes. As a result, their payments now average $376 per year, or less than one-fourth of Nordlinger’s bill.

Last year, a third of all homes in Los Angeles County had been owned continuously since 1978, and therefore received the full benefit of Proposition 13’s rollback of assessments. Those who bought later are subsidizing those who bought before, say Nordlinger’s attorneys.

She filed suit against Los Angeles County Assessor Kenneth P. Hahn, arguing that her tax bill was unfair and unconstitutional. Though California state courts dismissed her complaint, the U.S. Supreme Court announced last October that it would rule on Nordlinger vs. Hahn, 90-1912.

Her attorneys gathered data showing that the most affluent areas in Los Angeles County display the sharpest disparities in taxes between new owners and longtime residents. That is because home prices rose the fastest during the 1980s in communities such as Beverly Hills, Bel-Air, Santa Monica and Pacific Palisades. For example, one 1989 home buyer in Santa Monica paid $4,650 in property taxes, while a nearby longtime resident paid $270--a 17-1 disparity.

“The equal protection clause (of the 14th Amendment) demands that like properties be treated alike,” say Nordlinger’s lawyers. “No state can justify its discrimination by the mere device of embedding the discrimination in law.”

While Proposition 13 protects older residents from housing inflation, it also punishes young families and new residents, they say. It also can have the perverse effect of forcing the poor to pay more than the rich.

“Longtime owners of the most luxurious mansions in the wealthiest neighborhoods . . . now pay lower taxes than recent buyers of humble bungalows in the poorest parts of Los Angeles County,” said Carlyle W. Hall Jr., a Los Angeles lawyer who is representing Nordlinger in the Supreme Court.

Though the inequality fostered by Proposition 13 seems apparent, that does not necessarily mean that the Supreme Court will declare the law unconstitutional. Unless a law discriminates against a particular group--such as blacks or women--the justices have been inclined to uphold it.

The 14th Amendment at issue was added to the Constitution just after the Civil War. It says: “No state shall . . . deny to any person within its jurisdiction the equal protection of the laws.”

The high court has never read that command literally. State laws may limit the legal practice of medicine to those persons who hold degrees from certified medical schools. A person who fancies himself a witch doctor could be denied a state license to practice medicine, even though he might claim such treatment is not “equal.” Similarly, a 15-year-old cannot get a driver’s license, even though a friend who is one year older can.

Because laws by their nature often discriminate in favor of some persons and against others, the Supreme Court has repeatedly said it will uphold state laws that “bear some rational relationship to a legitimate state purpose.” For example, because states want safe highways and older persons are assumed to be more mature than younger ones, laws that deny driver’s licenses to 15-year-olds pass the “rational basis” test.

But in the 1960s, the court said it would view differently laws that discriminate against some often-victimized groups, such as blacks and women, or that infringe upon a “fundamental right” such as the right to vote. In those instances, the justices said they would presume such laws are unconstitutional, unless state officials could prove the measures have a compelling justification. According to the court’s analysis, laws that discriminate against a disfavored group or infringe on a fundamental right are subjected to “heightened scrutiny.”

In their second line of arguments, Nordlinger’s attorneys say Proposition 13 should be struck down because it infringes on the fundamental “right to travel” freely among the states. The court relied on this rationale in 1982 to strike down an Alaska law that distributed excess oil revenues to its residents based on the number of years they lived in Alaska.

The Constitution does not permit the states to apportion “rights, benefits and services according to length of residence,” the court said in 1982 in Zobel vs. Williams. Similarly, the court earlier struck down an Arizona law that permitted county hospitals to deny treatment to indigents until they had resided for one year in Arizona. Such a law “erects a barrier to movement” across states lines and is therefore unconstitutional, the justices said in Memorial Hospital vs. Maricopa County.

Nordlinger’s lawyers say the California taxing system is unconstitutional in that it gives benefits to long-term residents and penalizes newcomers.

Lawyers for Nordlinger and Los Angeles County disagree whether Proposition 13 should be judged by the lenient “rational basis” test or the stricter “heightened scrutiny” standard. That rather technical decision may determine the outcome of the case.

Lawyers for Los Angeles County argue that they need show only that Proposition 13 has a “rational basis” for its method of holding down tax bills. And they say the voter-approved initiative had two apparent rationales.

First, the measure was designed to shield homeowners from soaring inflation that raised “the prospect of (their) being taxed out of their homes.” Second, Proposition 13 was intended to give all property owners a sense of certainty about their future tax bills. Even homeowners who bought in the 1980s benefit from Proposition 13, the attorneys argue, because they will always pay taxes based on the “acquisition value” of their home, not an unpredictable value based on trends in the real estate market.

“The method of taxation chosen by California need not be the best choice--indeed, it need not even be a wise choice--but (the) federal system leaves such choices to the political processes of the states, as long as there is some rational basis for the decision,” the county’s attorneys say.

The high court should not “second-guess the wisdom of California’s” system of setting property values, the Los Angeles County attorneys add.

By their reckoning, the taxing system used in Webster County was properly struck down because it was irrational. West Virginia law called for taxing based on the “current value” of land, but Webster County inexplicably failed to update the value of long-held properties.

While Nordlinger’s lawyers rely on the Webster County case as the key precedent that should invalidate Proposition 13, the Los Angeles County lawyers dismiss the case as a “common sense” decision concerning an oddball county assessor.

Further, the county’s lawyers say that Nordlinger cannot raise a “right to travel” challenge to Proposition 13 because she was not a newcomer to California, but a native who moved across Los Angeles to buy her new home.

How will the court rule? Most legal experts agree that Proposition 13 is in trouble, if for no other reason than because the justices agreed to hear Nordlinger’s appeal. Among the more than 5,000 cases that are filed with the high court each year, the justices agree to rule on only about 3%. Typically, they do so when the courts around the nation are divided on an issue of federal law or the U.S. Constitution.

But Proposition 13 raises a unique issue of state taxing law that has not arisen elsewhere. In such instances, lawyers say, the high court usually agrees to hear a challenge only when a majority of the justices believe that the lower court rulings were incorrect. The California state courts have upheld Proposition 13 and dismissed Nordlinger’s “equal protection” challenge.

Another ominous sign for Proposition 13 is Rehnquist’s broadly worded opinion in the West Virginia case.

In a recent law review article, University of Arizona law professor Robert Jerome Glennon wrote that the ruling in Allegheny Pittsburgh marked the first time since 1931 that the high court struck down a taxing system as irrational and unequal. But rather than writing a narrow opinion that simply stressed Webster County’s failure to reassess old properties, Rehnquist opined that the Constitution demands equal tax treatment of “similarly situated property.”

“This was either a crazy opinion, an aberration, or it may be the beginning of the Rehnquist court flexing its muscles on behalf of property owners,” Glennon said.

On Tuesday, the justices will hear an hourlong argument in Nordlinger vs. Hahn. Nordlinger’s attorney, Hall, will be making his first argument before the high court. Los Angeles County has hired former U.S. Solicitor Gen. Rex E. Lee, a partner in the prominent law firm of Sidley & Austin, to present its case.

Gov. Pete Wilson, members of the state Senate and Assembly from both parties, and state Atty. Gen. Dan Lungren have filed separate friend-of-the-court briefs supporting Los Angeles County. Builders and developers, along with a national organization of tax assessors, have filed briefs on Nordlinger’s side, contending that California’s system inhibits new home construction and unfairly taxes young families.

After hearing arguments on Tuesday, the justices will meet behind closed doors Friday to discuss the case and to vote on the outcome. It will likely be at least two months before a decision is announced, and a ruling may not come until the end of the court term in early July.

Neither side is boldly predicting victory. “We have one attorney who has been confident all along, and another who has been shaking his head,” said Fox, the Jarvis association official whose group has filed a brief urging that Proposition 13 be upheld.

“I can imagine us winning 9-0 or losing 9-0,” said Hall, Nordlinger’s attorney.

What will happen if the court strikes down the unequal assessments created by Proposition 13?

State leaders predict a period of political chaos while lawmakers try to fashion a new, more equal system. Most say the state would have to impose on longtime owners some formula based on current values. If those properties are simply adjusted up to market value and no other changes are made, tax collections would soar as longtime owners are hit with steep increases.

But with higher assessed values for property, state officials could cut the 1% tax rate by more than half and still maintain the same level of revenue, tax experts say. Because other spending limits would remain in effect, state and county governments could not collect and spend all the extra tax revenue.

But most say an equitable solution will not come easy.

“Trying to undo it now is like trying to unscramble an omelet,” says Kirk West, president of the California Chamber of Commerce. “The cure might be worse than the disease.”

West said business leaders fear that the Legislature will create a “split roll” in which the value of commercial and agricultural property is raised, while residential property values are held down. The Supreme Court has already upheld that sort of distinction.

“The key for us would be, how long do we have to do something about it?” said state Sen. Gary K. Hart (D-Santa Barbara), who last year helped to create a special Senate commission to examine alternative methods of taxing property. “If there is a phase-in period of five or 10 years, it can be done. But if they were to say we have to come in compliance today, then I don’t know how we can handle it politically.”

If the Supreme Court rules against Proposition 13, Hart, Wilson and other state leaders are urging the justices to make their opinion applicable only to future tax collections, rather than imposing it retroactively. Even Nordlinger’s lawyers have asked the court to hand down a general ruling in favor of tax equity and then return the case to the California courts to work out the details.

For the record, the two opposing attorneys who handled the Nordlinger case in California note that they do not expect to personally benefit from the outcome.

Los Angeles County Counsel David L. Muir, who successfully defended Proposition 13 in the state courts, bought a new house in 1986. A defeat in the Supreme Court could result in lower taxes for him.

Meanwhile, Nordlinger attorney Hall has owned his home since 1979. As he notes with a smile, a victory in the Supreme Court could boost his tax bill.

Property Tax Comparison

Here are examples of how the era when a home was purchased--before or after 1975--causes property taxes to vary in neighborhoods of Los Angeles. In each area, the houses compared are similar in market value.

Neighborhood Market Value Tax on Tax on of Home New Owner Pre-1975 Owner Beverly Hills $3,800,000 $38,000 $3,230 Manhattan Bch $630,000 $6,300 $680 Baldwin Hills $210,000 $2,100 $360 Compton $90,000 $900 $180 Watts $80,000 $800 $160

Neighborhood Ratio of Tax (New Owner Vs. Old) Beverly Hills 12:1 Manhattan Bch 9:1 Baldwin Hills 6:1 Compton 5:1 Watts 5:1

SOURCE: Supreme Court brief filed on behalf of homeowner Stephanie Nordlinger

Unequal Assessments Under Prop. 13

The Supreme Court will decide if California’s property tax system discriminates unfairly against recent home buyers. Because Proposition 13 requires homes be reassessed only when sold, the tax bills on many newly purchased but modest homes are higher than those on the most expensive estates.

Here are some Los Angeles County examples presented to the Supreme Court by attorneys for homeowner Stephanie Nordlinger.

BEL-AIR ESTATES & WEST LOS ANGELES

The Bel-Air property pictured above is a highly valuable piece of residential real estate. The 10,000-square-foot house sits on 1.6 acres. Its owner’s property taxes are lower than those paid by the owner of the West Los Angeles house, built on a modest lot in an average Westside neighborhood.

LOCATION MARKET VALUE ASSESSMENT Bel-Air Estates $9,000,000 $785,006 West Los Angeles $875,000 $885,500

LOCATION ANNUAL TAX* HOUSE LOT Bel-Air Estates $7,850 10,196 sq. ft. 69,260 sq. ft. West Los Angeles $8,850 2,100 sq. ft. 6,750 sq. ft.

PALOS VERDES ESTATES & VENICE

The small home in the Oakwood section of Venice is assessed higher than the sprawling Palos Verdes Estates property. The Oakwood home is built on a small lot of 1,695 square feet; the ocean-view lot is 10 times larger.

LOCATION MARKET VALUE ASSESSMENT Palos Verdes Estates $1,400,000 $169,897 Venice $214,000 $214,000

LOCATION ANNUAL TAX* HOUSE LOT Palos Verdes Estates $1,700 3,890 sq. ft. 17,040 sq. ft. Venice $2,140 690 sq. ft. 1,695 sq. ft.

* Taxes are approximate.