California's
Tax Expenditure Programs

Property Tax Programs--Part 1

Contents

• Homeowners' Exemption
• Household Furnishings
• Transfers Between Spouses
• Transfers Between Family Members
• Replacement Housing
• Purchased by Senior Citizens
• Transfers Within a Joint-Tenancy Agreement
• Mobilehome Park Property
• Transfers to Tenant Cooperatives
• Business Inventories
• Financial Assets
• Business Records
• Transfers of Interests in
• Corporate or Partnership Property
• Transfers to Employee Benefit Plans
• Computer Programs
• Motion Pictures
• Hand Tools
• Returnable Containers for
• Soft Drink Beverages
• State and Local Governments
• Leases by a Nonprofit Corporation
• To a Government
• Volunteer Fire Departments
• Restricted Historical Property
• Aircraft Owned by a Government Agency
• Federal Property Used for Migratory Fowl
• Hospital, Educational, Museum, Scientific, or
• Charitable Purposes ("Welfare Exemption")

Exemption (Assessment):

Homeowners' Exemption

Description

This program provides homeowners a partial exemption from the property tax. The exemption, equivalent to $7,000 of the property's assessed value, is applicable only to a taxpayer's principal place of residence.

Rationale

This program provides property tax relief to owner-occupants of residential dwellings by reducing the assessed value of their property, and thereby lowering their property tax bills. The rationale for the program is that it encourages homeownership, and that increased homeownership results in higher levels of economic activity and promotes stability in individual neighborhoods and society generally.

The passage of Proposition 13 in 1978 provided major tax relief to all property owners--including homeowners. By fixing the basic property tax rate at 1 percent, Proposition 13 also had the effect of setting the level of tax relief provided by the homeowners' exemption at about $70 annually.

Exemption (Assessment):

Household Furnishings

Description

This program exempts from the property tax all personal property owned by individuals, including household furnishings and pets. This exemption does not apply to aircraft, vehicles, or boats, or to personal property held and used in connection with a trade, profession, or business.

Rationale

This program provides tax relief to individuals by eliminating the tax on their qualifying personal property. The underlying rationale for the program is to simplify administration of the property tax. The identification and valuation of household items are difficult and often subjective tasks. Moreover, the value of many household property items is so low that the annual tax revenues attributable to them would not offset the costs of collecting these taxes.

Exemption (Reassessment):

Transfers Between Spouses

Description

This program exempts from reappraisal any property transferred between spouses. This exemption includes property transferred between spouses after: (1) a property settlement, (2) a decree of dissolution of a marriage or legal separation, or (3) upon death of a spouse. It also exempts from reappraisal the creation, transfer, or termination between spouses of a co-owned interest in property.

This exemption from reappraisal ensures that the property retains the taxable value ascribed to it prior to the transfer. Because the assessed value of the transferred property would otherwise be increased to reflect its current market value, this exemption reduces the tax assessed on qualifying property.

Rationale

This program was added by Proposition 58 in the November 1986 statewide general election. The rationale for the program is that a reappraisal should not be triggered when property is transferred to a spouse upon death of the other spouse, or upon dissolution of a marriage.

Exemption (Reassessment):

Transfers Between Family Members

Description

This program exempts from reappraisal a property holder's principal residence, and up to $1 million in other real property, when the property is transferred between (1) parents and children, or (2) grandparents and grandchildren, provided that both parents of the grandchildren are deceased. This exemption from reappraisal provides that the transferred property retains the taxable value that it held prior to the transfer. Since the property would otherwise be reappraised at its current market value (which is generally higher than its taxable value) following the transfer, this program reduces the tax assessment on the specified property.

Rationale

This program provides tax relief to property owners by allowing parents and grandparents to transfer the family house and other property to their children or grandchildren without property tax consequences. Proponents of the program argue that transfers within the family deserve special treatment in order to preserve family homes, businesses, and farms.

Comments

This program was added by Proposition 58 in the November 1986 statewide general election, and expanded (to include transfers by grandparents) by Proposition 193 in the March 1996 statewide primary election. This program provides a substantial reduction in property taxes for children or grandchildren who inherit (or otherwise receive) homes, farms, and other real property from their parents or grandparents if the property has been held for several years or more. In these cases, the property's assessed value may be significantly less than its current market value. There is no income limitation or other "needs test" for participants in this program.

Exemption (Reassessment):

Replacement Housing

Purchased by Senior Citizens

Description

This program allows persons 55 years of age or older who sell their principal residence and buy or build another residence of equal or lesser value within two years, to transfer the old residence's assessed value to the new residence, provided that the replacement residence is within the same county as the original residence. In addition, this program allows the transfer of assessed valuation to a replacement dwelling located in a different county, provided that the county in which the replacement dwelling is located has adopted an ordinance allowing intercounty transfers of assessed value for elderly homeowners. A homeowner may benefit from this program only once.

Rationale

This program provides tax relief to taxpayers 55 years of age or older who sell their principal dwelling and then buy or build a replacement home. It does so by preventing the reassessment of the replacement home at its current market value. This results in a property tax savings to the extent that the market value of the replacement home is greater than the assessed value of the original home. The rationale for this program is that it removes a disincentive for senior citizens who no longer need family-sized dwellings or dwellings located near schools or places of employment to move to more suitable homes, thereby increasing the availability of suitable housing for younger families.

Comments

This program is available to all persons age 55 and older, regardless of income or wealth status. For many seniors, a much more significant impediment to moving in past years was state and federal income tax treatment of capital gains on such home sales. This impediment has largely been eliminated by recent law changes.

This program was originally established when voters approved Proposition 60 at the November 1986 statewide general election. It applied, however, only to moves within a county. The approval of Proposition 90 at the November 1988 statewide general election authorized the Legislature to expand the program to allow counties to make this program available to seniors moving in from another county.

Exemption (Reassessment):

Transfers Within a Joint-Tenancy Agreement

Description

This program exempts from reassessment any transfer of property among members of a specified joint-tenancy agreement. In order for the program to apply, the original transferor(s) of the property, or their spouses, must remain members of the joint tenancy after the transfer. When an original transferor leaves the joint tenancy, the property must be reassessed unless it vests to a remaining original transferor. If a joint tenant other than the original transferor leaves the joint tenancy, there is no reassessment if that tenant's share of the property is either transferred to an original transferor, or is distributed among all remaining joint tenants.

Rationale

This program provides tax relief to individuals by reducing the tax liability on property which has been transferred within a joint-tenancy agreement. The underlying rationale for the program is that joint-tenancy agreements essentially represent a single-ownership covenant, and that redistributions of property within the agreement, therefore, should not result in an increased tax liability.

Exemption (Reassessment):

Mobilehome Park Property

Transfers to Tenant Cooperatives

Description

This program exempts from reappraisal any mobilehome park property which is transferred to a qualified corporation formed by the tenants of the mobilehome park for the purpose of purchasing the park. To qualify for the exemption, within 270 days of the initial transfer, at least 51 percent of the corporation's stock must be owned by tenants previously renting at least 51 percent of the spaces prior to the transfer. The exemption from reappraisal under this program permits the transferred property to retain the assessed value ascribed to it prior to the transfer.

Rationale

This program provides tax relief to mobile-home residents who organize to purchase the mobilehome parks in which they reside. Such purchases may be motivated by the potential loss of long-term, mobilehome-space leases, higher rents for spaces, and other factors. The program's underlying rationale is to promote home ownership among mobilehome residents, many of whom are lower-income or elderly individuals.

Comments

Chapter 139, Statutes of 1998 (AB 2384, Aguiar) extends this exemption indefinitely. It was previously scheduled to sunset January 1, 2000.

Exemption (Assessment):

Business Inventories

Description

This program exempts personal property held as inventory by businesses from the property tax.

Rationale

This program provides tax relief to businesses that maintain inventories of products for sale in the course of doing business. The rationale for the program is that the application of the property tax to inventories causes extensive administrative problems for retailers and distributors, and may result in the loss of economic activity as businesses take actions to avoid the tax. To the extent that imposing the property tax on inventories would lead businesses to decrease their inventories or locate warehouses outside the state, another rationale for the program is to remove a "disincentive" to efficient inventory management, as well as encouraging inventory-related economic activity in California.

Comments

Inventories were fully taxable prior to 1968, 15 percent exempt from 1968 to 1973, 50 percent exempt from 1974 to 1978, and fully exempt beginning in 1979.

This exemption encompasses a prior exemption for blood and human body parts held for medical purposes (California Revenue and Taxation Code Section 33).

Exemption (Assessment):

Financial Assets

Description

This program exempts from the property tax intangible personal property used by businesses--such as notes, debentures, capital stock, solvent credits, and mortgages. In addition, the program exempts money kept at hand which is used in the regular course of business. In the absence of this exemption, such assets would be considered as business personal property and be taxed as such. Bonds issued by the state or a local government are exempt from the property tax under this exemption as well as a more specific exemption (California State Constitution, Article XIII, Section 3[c], and California Revenue and Taxation Code Section 208).

Rationale

This program provides tax relief to businesses that own various intangible financial assets and money kept on hand. According to the Board of Equalization, the rationale for the program is that difficulties in administering the tax on such assets lead to unequal treatment of taxpayers. This is because financial assets can be very difficult to identify, and they easily can be moved outside of the state to avoid taxation. The assets covered under this program have been exempted in order to avoid such administrative difficulties and inequities.

Exemption (Assessment):

Business Records

Description

This program exempts from the property tax business and professional records. The exemption applies to written documents and photographic reproductions, recorded data, research notes, calculations, and indices. However, the value of the media on which the records are stored (such as computer tape) is not exempt. In addition, the program does not apply to books, old newspapers on microfilm, computer programs, and records which are sold in the ordinary course of business.

Rationale

This program provides tax relief to persons engaged in a business or profession. The underlying rationale for the program is to simplify tax administration. The assessment of business records is a difficult and often subjective task. In most cases, moreover, these records have no value apart from that to the business itself. There are exceptions, however, such as the records of property transfers found in a title insurance business, or credit records of a credit bureau. Copies of these records might be sold to other parties who want to go into these businesses. In general, however, the value of business records is so low that the annual property tax revenues attributable to them would not offset the costs of assessing and collecting these taxes.

Exemption (Reassessment):

Transfers of Interests in

Corporate or Partnership Property

Description

This program exempts from reappraisal property owned by a legal entity (such as a corporation or partnership) and transferred pursuant to a corporate reorganization, or when 50 percent or less of the ownership interest in the entity is transferred (providing that control over the entity is not transferred). This exemption from reappraisal generally allows the transferred property to retain the assessed value ascribed to it prior to the transfer. In the absence of this exemption, the property's assessed value would be increased to reflect its current market value pursuant to the change-of-ownership provisions of Proposition 13.

Rationale

This program provides tax relief to the owners of corporations, partnerships, and other legal entities owning real property in California. The rationale for exempting from reappraisal the transfer of property pursuant to a corporate reorganization is that no real transfer of property has taken place. In the case of exempting transfers of 50 percent or less of an entity, program proponents argue that majority interest determines control, and that a transfer of a noncontrolling interest is not a substantive change of ownership.

Comments

This program results from the necessity of defining the term "change in ownership" for properties owned by corporations, partnerships and other legal entities with multiple ownership. It seems reasonable that Proposition 13 did not intend to trigger change-in- ownership reassessments whenever a few shares of a large corporation are traded. The same corporation continues to own the property and there is no change in the control or use of the property due to a minor stock transfer. On the other hand, the outright sale of an entire legal entity to a new owner clearly is a real change in ownership even though the name of the corporation holding title to the property may remain the same. The Legislature determined that the appropriate definition of a change in ownership for these properties is a change in the controlling ownership of the legal entity holding title.

Property transfers among farm credit institutions due to reorganizations under federal law were included in this program by Chapter 560, Statutes of 1988 (SB 569, Garamendi).

Exemption (Reassessment):

Transfers to Employee Benefit Plans

Description

This program exempts from reappraisal property transferred to an employee benefit plan. Transfers of property that are exempt under this program include: (1) the vesting of a participant's or beneficiary's interest in an employee benefit plan, (2) any contribution of real property to an employee benefit plan, and (3) any acquisition by an employee benefit plan of the stock of the employer's corporation for the purpose of control. An employee benefit plan is defined for the purposes of this program as either an employee pension plan, or as a plan or fund which provides employee welfare benefits (such as medical or hospital care, disability or unemployment benefits, daycare, job-related training, or legal services).

This exemption from reappraisal permits the property to retain the assessed value ascribed to it prior to the transfer. Because the assessed value would otherwise be increased following the transfer to reflect the market value of the property, this exemption reduces the property's tax assessment and, therefore, its property tax liability.

Rationale

This program provides a tax incentive for firms to improve the funding of, and the benefits provided by, their employee benefit plans. To the extent that the lower property tax liability promotes use of a greater variety of financing mechanisms for plans, the program may lead employers to contribute more to the plans and, hence, provide improved benefits to their employees.

In addition, the program provides tax relief to employees having a vested interest in employee benefit plans. It also provides relief to participants when an employee benefit plan acquires controlling interest in a company in order to prevent a corporate takeover.

One rationale underlying this program is to encourage employee participation in, and ownership of, businesses in the State of California.

Exemption (Assessment):

Computer Programs

Description

This program exempts from the property tax all computer programs, except basic operational (including control) programs. The storage media for the programs are, however, taxable. Such storage media are defined under this program to include punch cards, tapes, discs, or drums.

Rationale

This program provides tax relief to the owners of computer programs. The underlying rationale for the program is to stimulate technological innovation in California by promoting the development and use of computers. The program's proponents also argue that the taxation of computer programs would be detrimental to the computer science industry because it would discourage the use of computer programs by other California industries. In addition, proponents argue that the valuation of custom software is a highly subjective and potentially arbitrary process.

Comments

Custom computer programs also are exempt from the sales and use tax under California Revenue and Taxation Code Section 6010.9.

While valuing custom software may be difficult, standard software has well-established prices. Software purchases often comprise a significant portion of the total cost of a mainframe or personal computer installation, so that this exemption probably results in a revenue loss of more than $100 million annually.

Exemption (Assessment):

Motion Pictures

Description

This program provides that the value of motion pictures for property tax purposes is the full value of the tangible materials upon which the motion picture is recorded. As such, this program exempts intangible rights, such as the copyright, or right to reproduce, copy, and exhibit the motion picture, as well as the value added to the motion picture in the production process.

Rationale

This program provides an incentive for the motion picture industry to locate in California by reducing the operating costs associated with doing business in the state. According to program proponents, many motion picture companies have migrated to other states. This program is rationalized on the grounds that a healthy motion picture industry is important to the economic health of California.

Comments

Intangible property, such as a copyright, never is taxable in and of itself because the property tax is levied only on real property or tangible personal property. However, the courts have ruled that, in valuing tangible property, assessors may take into consideration earnings from intangible rights that are associated with that property (Michael Todd Co. v. Los Angeles County, 57 Cal. 2nd 684, and ITT World Communications v. Santa Clara County, 101 Cal. App. 3d 246).

Exemption (Assessment):

Hand Tools

Description

This program exempts from taxation the first $20,000 in personal property that consists of hand tools owned and supplied by an employee that are required as a condition of employment, such as for some mechanics or construction workers. Hand tools consist of hand-held implements and equipment (including hand-held power tools) which may be transported to and from the workplace, and which are necessary for the ordinary and regular performance of the employee's work.

Rationale

These hand tools would be exempt if owned for personal use. In addition, as small objects, they would be difficult to assess accurately. As a result, this exemption helps to provide administrative simplicity to the property tax system.

Exemption (Assessment):

Returnable Containers for

Soft Drink Beverages

Description

This program exempts from the property tax returnable beverage containers held on the property tax lien date by persons who are under a legally enforceable duty to return the containers for reuse. The program also exempts from taxation the containers that are not in the physical possession of the bottler on the lien date.

Rationale

This program provides tax relief to retailers who collect containers for return to a bottling company. In addition, it provides tax relief to bottling companies by exempting them from taxes on beverage containers held by retailers and consumers on the lien date. The program does not apply to bottles physically in possession of bottling companies on the lien date.

Proponents of this program defend its provisions on equity grounds. They argue that retailers should not be responsible for taxes on containers to which they do not hold title. They likewise argue that the bottling company should not bear the tax liability for bottles not in their possession, because many of these bottles will be broken or otherwise not returned to their bottling facilities.

Prior to 1973, county assessors generally assessed bottling companies for all of the containers they owned, including those held by retailers and consumers. Industry members complained, however, that certain assessors assessed both the bottling company and the retailers for the same containers. In 1973, the courts decided that bottlers were not liable for bottles outside their control on the lien date. This program codifies the relief granted to bottlers by the courts, and extends the relief to the retailers handling the bottles.

Comments

Nonbusiness consumers of soft drinks generally are exempt from taxation of beverage containers under the constitutional exemption for household furnishings and personal effects.

Nonreturnable containers are business inventory and are exempt from property taxation under California Revenue and Taxation Code Section 219.

Exemption (Assessment):

State and Local Governments

Description

This program exempts from the property tax real property owned by the state or a local government (including special districts). Property owned by a city or county, but located outside of its boundaries, may be taxable, however, under Article XIII, Section 11 of the California Constitution. Property owned by the State Compensation Insurance Fund (SCIF) does not qualify for this exemption.

Rationale

In the absence of this exemption, local governments would be required, in essence, to pay property taxes to themselves. In addition, the exemption avoids situations when one level of government assesses the property of another level of government.

Comments

Special provisions apply to the tax treatment of possessory interests, extraterritorial property, and property owned by the SCIF.

Possessory Interests. Use of tax-exempt government property for a private purpose generally results in a taxable possessory interest. For example, a lessee would have a taxable possessory interest for leased space that is used for a shop or public restaurant in a government building, and would be required to pay property taxes based upon the value of the possessory interest.

Extraterritorial Property. Any property (including water rights) located in Inyo or Mono counties and owned by a local government outside those counties is taxable if it was assessed in 1966 (for Inyo County) or 1967 (for Mono County). This provision primarily applies to property owned by the Los Angeles City Department of Water and Power in the Owens Valley. In other counties, real property located outside the boundaries of the owning local government is taxable if it was taxable when acquired by the local government or, for new construction, if it replaces a previously taxable improvement. Special formulas apply to the assessment of these properties.

State Compensation Insurance Fund. The SCIF is a semi-independent nonprofit agency, which was created by the state in 1919. The SCIF provides workers' compensation insurance to local public agencies, to state agencies requiring excess coverage, and to private companies. The SCIF also is required by law to be the insurer of last resort for high-risk companies. The SCIF is fully supported out of its premium structure. The SCIF maintains a headquarters office building in San Francisco and has district offices statewide. The exclusion of the SCIF from the general exemption appears to reflect the Legislature's desire to ensure that all of the SCIF's costs are reflected in its premium structure, in order to ensure parity between the SCIF and private insurance providers.

Exemption (Assessment):

Leases by a Nonprofit Corporation

To a Government

Description

This program exempts from the property tax real property which is owned by a nonprofit corporation and leased to a government entity. The property must be used exclusively by the government for specified governmental purposes, and must be located within the boundary of the leasing government. The lease arrangement also must ultimately transfer ownership of the property to the government. Property leased by the State Compensation Insurance Fund does not qualify for this program.

Rationale

This program essentially extends the property tax exemption generally available to government-owned property, to property owned by nonprofit corporations that governments have created as capital-outlay financing vehicles. For example, a government may create a "dummy" nonprofit corporation to issue tax- exempt securities to finance acquisition of a capital facility which the government entity then lease-purchases. The underlying rationale for the program is that such nonprofit corporations are, for all practical purposes, an "arm" of the government. Therefore, these corporations should share the tax-exempt status granted to regular government entities.

Comments

Technically, this program is based on the exemption granted for charitable property in the California Constitution. Nonprofit corporations are deemed to be charities operating for the benefit of general governmental purposes.

Chapter 489, Statutes of 1990 (SB 2309, Greene), expanded this program to include golf courses leased to governmental entities.

Exemption (Assessment):

Volunteer Fire Departments

Description

This program exempts from the property tax real property which is both owned by a volunteer fire department and used exclusively for the department's purposes. For property to qualify, the fire department must have official recognition and at least partial financial support from a local government agency in whose jurisdiction the department is located. Qualifying property is deemed by this program to be used for charitable purposes and, therefore, is granted tax-exempt status under the welfare exemption in the California Constitution.

Rationale

This program provides tax relief to volunteer fire departments. The underlying rationale for the program is that volunteer fire departments render government-like services to the public.

Special Assessment:

Restricted Historical Property

Description

This program provides a partial exemption for restricted historical property. Eligible properties must be included on an official list of historical properties, and the property owner must enter into a contract with the city or county in which it is located that prohibits any alteration or use of the property that is not consistent with its historic designation. These contracts run for 10 years and are automatically extended each year so that 10 years always remain on the contract, unless the property owner or the local government objects.

In return for this restriction, the property is assessed in a special manner that generally reduces the amount of tax levied on it. Specifically, the assessment is based only on the income that the property can generate in its restricted use, and the assessed value is derived from this anticipated income stream using a special "historical risk component" that further reduces the computed amount of assessed value.

Rationale

This program provides an incentive to preserve and restore historical property in California by reducing the tax liability on such property. It is similar to the partial exemption for open-space lands.

Comments

Prior to the adoption of Article XIII A of the California Constitution (Proposition 13), properties could be reassessed annually based on their "highest and best" use. For example, the assessed value of an historic house in an intensively developed downtown area could be based on the development potential of the property for an office building. The resulting property tax burden could have increased the cost of maintaining the historic property to the point that development of the property--in a way incompatible with its historical nature--became an economic necessity. An original argument for this program was that it removed this disincentive for historic preservation.

Under Proposition 13, however, reassessments occur only when a change in ownership or new construction takes place. Consequently, for existing property owners, an increase in the development potential of their property no longer increases their taxes.

Exemption (Assessment):

Aircraft Owned by a Government Agency

Description

This program exempts from the property tax any aircraft owned by the United States, a foreign government, or any local government agency.

Rationale

This program has two rationales. First, it simply recognizes that aircraft owned by the United States or a foreign government generally are immune from taxation under federal law and treaties. Second, the program extends the general exemption for property owned by a local government within its own boundaries to include aircraft based at airports outside the owning jurisdiction. This eliminates tax inequities that otherwise would occur because some local agencies do not have suitable airport facilities available within their own jurisdiction.

Exemption (Assessment):

Federal Property Used for Migratory Fowl

Description

This program exempts from the property tax federal property used exclusively for any of the following: (1) refuges for migratory water fowl, (2) promotion or protection of migratory water fowl, or (3) migratory water fowl public shooting grounds.

Federal property is generally exempt from the property tax, but property leased to a private party may involve a possessory interest. A possessory interest is the right to use the property and, under California law, is subject to the property tax. For example, if a private contractor operated a water fowl shooting ground on property leased from the federal government, the contractor ordinarily would be required to pay property tax on his or her possessory interest in the property. This program exempts the contractor from paying property taxes on such property.

Rationale

This program provides tax relief to the operators and users of public water fowl shooting grounds that are located on federal property.

Exemption (Assessment):

Hospital, Educational, Museum, Scientific, or

Charitable Purposes ("Welfare Exemption")

Description

This program exempts from the property tax specified real and personal property used exclusively for religious, hospital, educational, museum, scientific, or charitable purposes. (Charitable purposes, as defined by statute, now include a wide range of activities performed by nonprofit organizations for public benefit.) This program is commonly referred to as the "welfare exemption." The property must be owned (or leased for a term of 35 years or more) and operated by nonprofit corporations that meet specified requirements. The program also applies to real property that is under development and that ultimately will be used for the exempt purposes. Any possessory interest in government property held by a qualifying organization for qualifying purposes also is tax exempt.

Hospital property represents the single largest category of property qualifying for this program. Other examples of qualifying property include the following:

• Property used exclusively for purposes associated with a nursery school, or K-12 school.

• Property of a nonprofit educational radio or television station that does not sell advertising time.



• Real property used exclusively for the preservation of native plants or animals, biotic communities, or geological formations of scientific or educational interest.



• Museum property, including museum restaurants, gift shops, and items to be sold at a rummage sale.



• Property of nonprofit educational organizations generally.



• Specified property used exclusively for housing and related facilities for low-income, elderly, or disabled families.

Rationale

This program provides tax relief to the qualifying organizations. The rationale for the program is that these organizations fulfill a socially valuable function in providing property and services to the public and, therefore, are deserving of governmental financial assistance.

Comments

The estimated revenue loss cited above excludes losses due to the "religious exemption," which we have included under the program that exempts church and religious property.

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