Court Expands Tax Suit

A judge on Thursday granted class-action status to a lawsuit accusing Orange County of overcharging on property taxes, setting the stage for a legal showdown that could cost local governments billions of dollars in tax refunds.

The decision comes a year after Judge John M. Watson ruled in favor of a Seal Beach homeowner, concluding that Orange County violated Proposition 13 in the way it calculated the man’s property tax bill.

The case now goes to the state 4th District Court of Appeal, whose decision will have far-reaching implications, because all 58 counties in California use the same method for determining property-tax assessments.

Orange County officials say that if the ruling is applied to all taxpayers, the county would have to refund up to $1 billion. Los Angeles County officials, who have been closely watching the case, said they could be liable for $4 billion if the outcome applies to them.

Proposition 13, the landmark 1978 ballot measure, limited annual property-tax assessment hikes to no more than 2%. Counties, however, frequently boost tax assessments more than 2% to “recapture” taxes they could not collect when property values dropped or stayed flat.

Seal Beach homeowner Robert Pool sued Orange County, saying his tax bill went up by 4% in one year. He bought the home for $330,000 in 1995, and for years its value stayed flat because of the cool real estate market. Then, in 1998, the county boosted the tax assessment of his home by 4%, to $343,332.

Watson sided with Pool a year ago. And on Thursday, he ruled that all Orange County property owners whose assessments rose more than 2% a year since Proposition 13’s passage were potentially harmed.

In a sign of how far-reaching the issue is, Watson also removed himself as a potential member of the class-action suit after attorneys for the county noted that he owned rental property in La Habra that might qualify for a refund.

County officials said their assessment method was agreed upon by tax officials across the state after Proposition 13 was passed. They maintain it’s legal to reclaim taxes on properties that did not receive tax increases during depressed years.

Proposition 13, they say, set a ceiling on property taxes that grew at 2% a year since 1978, regardless of how much the increases are year to year.

Fighting the suit has proven costly for Orange County. Assessor Webster J. Guillory will ask supervisors Tuesday to increase to $900,000 the amount to be paid to his attorney, Robert Luskin. Treasurer John M.W. Moorlach said his attorney, Harvey Liederman, has charged less than $100,000.

The 4th District Court of Appeal has not been shy about challenging local governments on taxation issues. In his ruling, Judge Watson quoted liberally from a 4th District appellate decision published last month that chastised Orange County for failing to follow the law in a different property tax case.

That ruling, written by Presiding Justice David Sills, reinstated a class-action lawsuit filed by a San Juan Capistrano man on behalf of about 1,500 taxpayers who were denied reductions in 1994 after challenging their tax bills.

Attending Thursday’s court hearing were a handful of taxpayers such as Alan Lavallee of Buena Park. Lavallee said the county hiked the assessed value of his home nearly 52% between 1999 and 2002.