Ruling May Cut Property Taxes

An Orange County Superior Court judge has ruled that the method tax assessors across California use to determine how certain properties are taxed violates state law.

The decision applies to a single Seal Beach homeowner, but if upheld on appeal, it could cost local governments millions of dollars and result in lower property taxes for thousands of homeowners.

At the heart of the case is how to apply Proposition 13, the landmark 1978 ballot measure that severely limits the amount of property taxes that local governments can collect.

Proposition 13 prohibits counties from raising the taxable value of properties by more than 2% a year. But counties have maintained that the provision doesn’t apply when property values have remained flat or dropped during a down housing market, then climbed back as real estate values rebounded.

In these cases, counties regularly raise the taxable value of the property beyond 2%. For example, a home whose value remained flat for two years before rising could be retroactively assessed by 2% for each of the years the property value did not rise.

That’s what happened to attorney Robert Pool, who bought a $330,000 Seal Beach home with his wife, Renee Bezaire, in November 1995. For two years, the home’s taxable value stayed the same because of a flat real estate market. But in 1998, the assessor raised the taxable value to $343,332, arguing that the jump of about 4% was justified.

“When it happened to me, I knew I wanted to fight it,” Pool said.

Judge John M. Watson ruled this month that the Orange County assessor violated Proposition 13 by increasing the taxable value of Pool’s home by about 4% in a single year.

County attorneys argued that the assessment was legal because it made up for years in which the property value did not increase and there was no corresponding tax increase. The county maintains it was merely “recapturing” the full tax value of the property, charging 2% for each of the years the property values did not rise.

This “recapturing method” is unconstitutional, Watson wrote in his Nov. 2 ruling. Proposition 13 was clear that taxable values can’t rise more than 2% per year, regardless of how much the property value rebounds, he said.

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., said Watson’s ruling is the first time the issue has been tested in court. “This has profound implications for property tax policy and Proposition 13, specifically,” said Coupal, a Sacramento attorney.

Watson still must rule on a motion to broaden the complaint to class-action status, meaning its ruling could apply to other cases statewide. Watson would also have to decide whether class-action status would apply to all property owners currently appealing their retroactive tax increases or a much larger group of people who have seen their assessments rise by more than 2% annually over the last decade.

If Watson’s decision is upheld on appeal, it could have financial ramifications throughout California. According to Judge Watson’s ruling and the Orange County assessor’s office, counties throughout California have similar “recapturing”policies.

In Los Angeles County, about 147,000 homes retroactively reassessed last year could be affected by the ruling--representing about $92 million in property tax revenues.

Orange County officials could not provide the exact number of properties retroactively reassessed last year. But officials estimate that over the last few years, the value of about 330,000 parcels dropped or remained flat. Officials aren’t sure how much tax revenue is in jeopardy if the judge’s ruling stands.

The average property tax bill is about 1.2% of the assessed value. Counties receive about 5 cents of every tax dollar, with state and other taxing agencies, such as schools, receiving the rest.

Orange County Assessor Webster J. Guillory said his staff is reviewing the judge’s decision and probably will ask the Board of Supervisors to appeal it.

The county finds itself in a difficult position. Although the judgment applies only to Pool, it could prompt other homeowners to file similar claims if a higher court does not reverse the ruling. If the county does appeal, it faces the risk of losing again and having the decision apply to all of Orange County and California.

Supervisor Todd Spitzer said he supports Watson’s interpretation of Proposition 13. “In my mind, the government can’t exploit the taxpayer to make up for a [previous] loss in value,” he said.

Spitzer said he didn’t know what the financial impact would be, but “I’ve been advised it could be substantial.”