U.S. Supreme Court Upholds Prop. 13 but Calls It ‘Unwise’ : Taxes: Reversal would have jolted property owners, including those who own 713,000 parcels of taxable real estate in Orange County assessed at a value of $154 billion.

The U.S. Supreme Court, refusing to “upset the will of the people of California,” on Thursday upheld the legality of the state’s controversial Proposition 13, but called the property tax system “distasteful and unwise.”

In its 8-1 ruling, the court said Proposition 13, approved by voters in 1978, does not violate the U.S. Constitution’s guarantee of “equal protection of the laws,” even though it grants tax relief to longtime residents at the expense of new home buyers.

“Certainly, California’s grand experiment appears to vest benefits in broad, powerful and entrenched segments of society,” Justice Harry A. Blackmun wrote for the court. Proposition 13 also may “frustrate the ‘American dream’ of home ownership for many younger and poorer California families,” he said.

Nonetheless, the states “have a large leeway in making classifications” for tax purposes as long as they do not discriminate against a particular group, such as blacks or women, he wrote.

Until now, California’s property tax system has been unique, but the ruling is expected to give impetus to similar measures in Florida and Michigan. The ruling spares California officials from the fiscal nightmare of trying to revise the $16-billion-per-year property tax system in the midst of an election year and budget crisis.

It also will protect homeowners and businesses from what could have been a jolting tax increase. In particular, Proposition 13 has shielded elderly homeowners on fixed incomes from soaring rises in California real estate values that could have driven them from their homes.

Thursday’s ruling leaves intact a system that requires recent buyers to pay more than longtime property owners. Proposition 13--a product of the hyperinflation of the 1970s and the tax revolt that followed--created a revolutionary method for assessing property taxes.

Had Proposition 13 been thrown out, it could have subtantially increased property taxes for many people who live on fixed incomes and have owned their property for years.

In Orange County, there are about 713,000 parcels of taxable real estate with a total value of about $154 billion. Of the total, about 30% have been assessed at pre-1978 market values for a total worth of about $24 billion; 30% are gauged at 1979-86 market values and worth $50 billion; while another 40% are assessed at 1987-1991 market value, representing about $80 billion.

In other states, properties are reassessed every two or three years and owners pay taxes that are a percentage of that value.

By contrast, Proposition 13 froze the assessed value of property held in 1978 at 1975 levels. Continuous owners of these properties pay 1% of this value each year. New buyers also pay 1% per year, but their tax is based on the purchase price of the property. The assessed values of all properties can rise at 2% each year to account for inflation.

Leaders of state government and of groups that led the tax revolt expressed relief over the ruling.

“I am extremely pleased and gratified that Proposition 13 and the will of the people of California has been upheld,” said Gov. Pete Wilson. “(It) is essential to our efforts to protect Californians from unfair and crippling property taxes.”

His sentiments were echoed by former Gov. George Deukmejian--who called it “the best news for California this year.” Deukmejian is a partner in the law firm that defended Proposition 13 before the court.

“It would have been chaos in California had the decision gone the other way,” said Joel Fox, president of the Howard Jarvis Taxpayers Assn., the organization named for the leader of the 1978 tax revolt.

Fox said all property owners benefit from Proposition 13 because they pay a relatively low tax rate of 1% and are protected from sudden tax increases.

But the Los Angeles attorney who challenged Proposition 13 before the Supreme Court, condemned it as “outrageous.”

“They have said it is legitimate to favor the haves over the have-nots,” said attorney Carlyle W. Hall. “The losers are young people who are trying to buy a home or new businesses.”

The justices did not endorse California’s method of assessing property taxes. Indeed, they appeared in some ways to side with its critics.

In comments from the bench, Blackmun called California’s tax system “distasteful, unwise and not likely to be copied by others.”

Justice John Paul Stevens, the lone dissenter, called the state’s longtime homeowners “squires” who voted themselves “a tremendous windfall” at the expense of young people and new residents.

“Simply put,” he said, “those who invested in California real estate in the 1970s are among the most fortunate capitalists in the world.”

The inequity between longtime owners and new property owners was foreseen in 1978 when Proposition 13 was added to the California Constitution, but its effect has become vivid in the 14 years since then.

In 1988, Stephanie Nordlinger, a 50-year-old lawyer, 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.

She soon discovered that she was paying five times more than most of her neighbors. A nearby owner with a slightly larger home was paying $358 per year because he had lived in the same home since 1975.

Even sharper differences were found in other communities in Southern California. A new buyer in Santa Monica found himself paying $4,650, almost 17 times more than his neighbor, whose property tax bill was $270.

Nordlinger paid her tax bill to Los Angeles County but filed suit, contending that the system was “arbitrary and unconstitutional.” The 14th Amendment commands that no state shall “deny to any person within its jurisdiction the equal protection of the laws.”

Nordlinger lost in state courts but appealed to the Supreme Court. In doing so, she relied on a recent precedent written by Chief Justice William H. Rehnquist.

By a 9-0 vote in the 1989 case of Allegheny Pittsburgh Coal vs. Webster County, W. Va., the justices struck down as unconstitutional a “welcome stranger” taxing system used by the West Virginia county.

New buyers of coal property were charged as much as 35 times more than longtime owners of similar land because the existing property had not been reassessed. In a broadly worded opinion, Rehnquist said the Constitution requires a “rough equality in tax treatment of similarly situated properties.”

Seizing on those words, Nordlinger’s lawyers gained the attention of the high court. The 14th Amendment “demands that like properties be treated alike,” Hall said in his brief to the court. However, because of Proposition 13, “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.”

The lawyers also urged the court to examine the state system with a “heightened scrutiny” because it discriminated against newcomers. In earlier rulings, the justices had struck down laws in Alaska and New Mexico that gave benefits to longtime state residents over new residents.

Lawyers for Los Angeles County and the state of California countered that the Constitution gives the states broad powers to devise taxing systems. The 14th Amendment was enacted to halt racial discrimination against blacks, they said, not to give judges the authority to second-guess taxing decisions.

During oral arguments in February, the justices signaled that they were inclined to uphold the state’s system.

It was one thing to strike down a taxing scheme in a thinly populated West Virginia county, but quite another to invalidate the system used in the nation’s largest state. The ruling in the case (Nordlinger vs. Hahn, 90-1912) could have set off a political earthquake in California and the justices seemed determined that that would not happen.

“We don’t throw out taxing schemes because a large group of people are hurt,” Rehnquist snapped at Nordlinger’s lawyer during opening moments of the argument. And as usual, Rehnquist’s comment proved to reflect the prevailing view.

Blackmun’s opinion gives a quick lesson in how the words of the 14th Amendment are not read literally. Although the 14th Amendment speaks of the “equal protection of the laws,” the justices have not required that a law treat each person equally.

“The equal protection clause does not forbid classifications. It simply keeps governmental decision-makers from treating differently persons who are in all relevant respects alike,” wrote Blackmun.

Because Nordlinger did not suffer discrimination because of her race or gender, “the equal protection clause is satisfied so long as there is a plausible policy reason for the classification,” he said.

According to the Los Angeles County lawyers, Proposition 13 could be justified as providing a shield to rapid real estate inflation and the resulting higher taxes. Blackmun hypothesized that the measure was intended to assure “local neighborhood preservation” and to give homeowners an assurance about their future tax bills.

He also concluded that because Nordlinger was not a new resident to California, she could not claim that Proposition 13 unconstitutionally discriminated against newcomers to the state. She moved from an apartment in Los Angeles to buy her home in Baldwin Hills.

Hall, Nordlinger’s attorney, said the ruling probably will end legal challenges to Proposition 13.

However, Blackmun’s opinion leaves open the possibility that a new resident to California could go to court and contend that Proposition 13 unfairly discriminates in favor of state residents at the expense of newcomers to California.