Nevada County Real Estate Market Snapshot-CA Property Taxes Double Dip

January 10, 2010 – For the first time since the enactment of Proposition 13 in 1978, assessed values of (and taxes levied on) real property may see a year over year decline for the January 1, 2010 assessment date. 

 

Proposition 13 defines taxable value as the lower of the property's Factored Base Year Value or market value on lien date, January 1. Factored Base Year Value is the market value of the property when it was acquired by the current owner, plus the value of any new construction, plus an inflation factor of no more than 2% per year. Pursuant to Article XIII A, section 2(b), and Revenue and Taxation Code section 51, the percentage increase cannot exceed 2% of the prior year's value.

 

In a letter to all 58 CA County Assessors on September 2, 2009, the CA State Board of Equalization (BOE) reported the likelihood of a negative inflation factor for the coming year. From 1978-2009, the inflation factor has always been positive and has usually (except for 5 of the 31 years) been greater than 2%. The inflation factor is based on the California Consumer Price Index (CCPI).

 

The opinion of the BOE as communicated to Assessors in the letter states “Accordingly, because section 51 does not distinguish between positive and negative changes in the CCPI, and because Article XIII A, section 2(b) of the California Constitution specifically provides adjustments based upon reductions in the CCPI, it is our opinion that section 51 requires factor adjustments whether positive or negative. If positive, the increase is limited to 2%. However, there is no such limitation to downward adjustments, including instances in which the net change to the CCPI is zero or less than zero.”

 

What this means for CA is that for the first time in over 30 years, a reduction in the annual property tax bill may be seen for a substantial majority of taxpayers.

 

In addition to this effect of Proposition 13, another statewide consequence of the current economic crisis is that real estate values have also declined significantly since the peak of the boom in 2005. Values statewide have declined to approximately the levels last seen in 2002, and in some cases the decline is greater yet. 

 

Proposition 8, also enacted in 1978, requires the Assessor to enroll the lower of either: (1) the Factored Base Year Value, or (2) the market value as of the annual lien date January 1. During the real estate boom, a substantial fraction of parcels in CA changed hands and received a new (usually higher) Base Year Value. Since market values have declined for many of these properties, they must be enrolled in Proposition 8, at a value lower than the Proposition 13 value they received when they changed hands. 

 

In Nevada County, the number of parcels that changed hands between 2002 and the end of 2008 (the apparent end of the decline in values) was at least 5% of the total, and represents as much as 20% of the total assessed value in the County. The decline in value for these properties has been as much as 50% in some cases. This effect of Proposition 8 will have a significant impact on property tax revenue, perhaps greater than any foreseeable effect of a negative inflation factor for Proposition 13 enrolled property.

 

What this means is that CA Counties are facing a great challenge in declining property tax revenues in the near future due to a significant decline real estate market values and possibly also in the CCPI. Truly a Double Dip.

 

CA Assessors are charged with implementing these laws in a way that reflects a duty to both taxpayers and the taxing authority, in this case County Governments. It is a very challenging time for Assessors and their workload will be significantly greater than usual with a complicated mix of automated processes and the need to address a flood of individual property re-assessments under Proposition 8.