Overturn Assessment Ruling

Proposition 13 sets the property tax rate at 1% of assessed value in the base year (the year in which the property was built or last sold). Assessment increases are limited to 2% per year above that base, even if a property’s market value increases at a faster rate.

Although assessment increases are limited, assessments can be decreased at any rate when properties lose market value because of destruction, depreciation, obsolescence or a depressed real estate market.

When depressed properties regain value, the practice of county assessors statewide is to raise assessments at any rate up to the adjusted base value (original base value, plus 2% per year). In other words, the 2%-per-year limit on assessment increases does not apply to “recapturing” value lost temporarily during a downturn.

In a recent court case, Orange County Superior Court Judge John M. Watson redefined “base value.” He ruled that it goes down when a property is assessed at a lower value, even if ownership hasn’t changed. The effect of the court’s ruling is that the rate of increase is limited to 2% per year from every new, lowered base value.

Right now, the court’s ruling applies only to Robert Pool, a Seal Beach taxpayer whose assessed value remained flat for a year, then was adjusted upward by more than 2% when the property’s value caught up with the market the following year. Pool sued and won a tax rebate of $100.

The wider significance of the ruling lies in two things that may happen next. First, the court may grant the case class-action status, so that it would apply to all Orange County taxpayers who had experienced decline and recovery of property value. Second, the ruling may be made retroactive for four years.

If both of these things happen, schools, cities, special districts and Orange County may be required to refund up to $432 million. If class-action status and retroactivity were to be applied statewide, the refund could be 10 times that. Unlike the federal and state governments, local governments are heavily dependent on property taxes.

They would be hit hard if the court were to grant the Pool case class-action status and make it retroactive. Ironically, it is local agencies that provide services we need and usually don’t mind paying for: police and fire protection, jails, schools, parks, libraries, streets, sidewalks, street lights, landscaping, garbage collection, water and sanitation systems. The services of the federal and state governments generally are less useful and more often distributed according to political opportunism rather than need.

Usually, the Orange County Taxpayers Assn. (OCTax) agrees with the economist Milton Friedman that, “There’s no such thing as a bad tax cut.” It’s tempting to jump on the antitax celebratory bandwagon over the court’s ruling. But a tax cut should be fair and consistent.

Under the ruling, only the lucky few whose property happens to go down in value, then up, will realize the continuing benefit of having all future taxes calculated on a lower adjusted base. The rest of us probably will pay more for governmental services as a result.

Commercial property owners will benefit most, and most unfairly, by this ruling. Commercial properties fluctuate in value more widely and more often than do residential properties. The dot-com collapse last year will allow many commercial landlords to seek lower assessments this year.

The ruling will lock in the lower assessments, preventing the assessor from recapturing value when commercial properties regain their strength. The lost revenue will be made up by taxes borne disproportionally by homeowners. The assessor has the discretion, but not the obligation, to reduce assessments when market values decline.

OCTax is pleased that Orange County Assessor Webster Guillory has voluntarily lowered assessments, even in the absence of appeals by taxpayers.

If the court’s ruling stands, such reductions will be locked in place as long as the owners hold the properties. A future, less ethical assessor may be unwilling to reduce assessments, because he or she will be unable to recoup the losses when the market rebounds.

Guillory has been “recapturing” lost value ethically and correctly in accordance with statewide practice. He may appeal the court’s ruling. OCTax urges him to do so. The ruling is a windfall to a few taxpayers, but it is unfair to the majority. OCTax hopes and believes it will be overturned on appeal.