Proposition 13 Case Could Cost O.C. Millions

Schools, cities and county government would lose an estimated $147 million in taxes in the first year if Orange County complies with a judge’s ruling that a key method for assessing property is unconstitutional.

Schools would take the biggest hit, according to an analysis prepared by Auditor-Controller David Sundstrom. Schools receive 64% of property taxes, meaning they would lose $94 million in the first year, the analysis estimated.

Cities and special districts would lose a combined $32 million, with redevelopment agencies and county government losing a combined $20 million.

The dire predictions were presented Monday to Orange County supervisors, who will meet behind closed doors today to decide how to respond to the judge’s ruling. County Counsel Benjamin P. de Mayo has recommended appealing Judge John M. Watson’s decision in hopes of having it overturned.

At issue is the practice of “recapturing” taxes on properties. California’s landmark 1978 property-tax reform measure barred assessments from rising more than 2% a year, but assessors statewide--including Orange County--routinely tack more than that onto properties where values have slumped and then recovered.

Watson, in a ruling signed last month, declared that the recapturing method violated Proposition 13. Even though property values can drop during bad economic times, the judge said, they cannot be raised more than 2% a year regardless of how much the real estate market springs back.

So far, the ruling affects only the Seal Beach couple who filed the suit; their home’s assessed value rose 4% in 1998. The tax bill followed a year in which their home’s value stayed the same. Assessor Webster Guillory argued that the increase was legal because it “recaptured” the possible increase that otherwise was lost during the stagnant year.

The argument was that assessment rose 2% plus 2% for the previous year when the home didn’t go up in value.

Sundstrom estimated that Orange County would have to refund an additional $285 million in excess property taxes paid between 1998 and 2001 if the 2% limit is upheld and applied retroactively to all property owners.

California taxpayers are closely watching the Orange County case because it’s the first time a court has ruled on the legality of recapturing. Every assessor in California uses the same method, according to county attorneys.

If the case is upheld and given class-action status, it could cost hundreds of millions of dollars in refunds and result in lower property taxes for tens of thousands. Sundstrom estimated that the loss could go as high as $4 billion if the ruling is upheld on a statewide basis.

The biggest impact would come in the first year, with tax reductions diminishing after that as homes are sold or transferred, losing their protections under Proposition 13.

Attorney Bob Pool, who sued the county over his Seal Beach home, said supervisors are “asking for a headache either way they go” on Watson’s ruling. If they appeal, they risk an appellate court affirming the ruling and applying it to every county in California, he said. If they don’t, they risk being flooded with applications for refunds by every property owner whose assessments increased more than 2% in a year.

“It’s going to be an interesting thing to watch,” Pool said. “They kind of brought it on themselves.

Pool has asked Watson to intervene against the county under a separate provision of tax law. He has argued that the county must comply with a requirement that taxpayers be notified of the right to file for a refund if their taxes were overpaid by $10 or more. That way, taxpayers would know about the ruling and how to file a claim, he said.

“The county has been telling people, ‘Don’t bother appealing [their assessments] because what we’re doing is legal,’ ” he said.

Pool and his wife, Renee Bezaire, bought their home for $330,000 in November 1995. For two years, the home’s taxable value stayed the same, thanks to a flat real estate market. But in 1998, the assessor determined that the home had rebounded and raised its taxable value to $343,332--a 4% jump.

Watson has yet to rule on whether he will expand his ruling to class-action status. He indicated in December that he would abide with a request by Pool and county attorneys to wait until after supervisors decide whether they will appeal the ruling.

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Times staff writer David Reyes contributed to this report.