California's
Tax Expenditure Programs

Property Tax Programs--Part 3

Contents

• Disabled Veterans' Principal Residence
• Real Property of Specified
• Veterans' Organizations
• Personal Property of Specified
• Veterans' Organizations
• Open-Space Contracts (The "Williamson Act")
• Growing Crops
• Fruit Trees, Nut Trees, and Grapevines
• Diseased Grapevines
• Restricted Timberlands
• Low Harvest Value Timber
• Seed Potatoes
• Vessels
• Documented Vessels
• Vessels Under Construction
• Vessels With a Market Value of $400 or Less
• Air Carrier Ground Time
• Aircraft Being Repaired
• Private Railroad Car Repair Days
• Cargo Containers Used in Ocean Commerce
• Exhibition Exemption
• Works of Art Available for Display
• Works of Art Owned by the Artist
• Aerospace Museum Displays
• Aircraft of Historical Significance
• Assessments of $5,000 or Less
• Supplemental Roll Tax Assessments
• Of $20 or Less
• Fixtures Excluded From the Supplemental Roll
• Interests That Represent Less Than
• Five Percent of the Property's Total Value

Exemption (Assessment):

Disabled Veterans' Principal Residence

Description

This program exempts from the property tax a portion of the assessed value of the principal residence owned by a disabled veteran, or by the disabled veterans' unmarried surviving spouse. The value of the exemption varies with the disability and the claimant's income. The program generally exempts up to $40,000 of assessed value for veterans who have lost two or more limbs or are blind in both eyes. Totally disabled veterans (as determined by the U.S. Department of Veterans' Affairs) receive exemptions of up to $100,000 of assessed value. The maximum exemption amounts above increase to $60,000 (in the case of blindness or loss of two limbs) and $150,000 (for total disability), for low-income disabled veterans or surviving spouses.

Program participants cannot also claim the general veterans' property tax exemption or the homeowners' exemption. The larger exemption for totally disabled veterans and surviving spouses terminates on January 1, 2001, a change which will affect property taxes due in 2001-02 and thereafter.

Rationale

This program initially was designed to provide tax relief to disabled veterans who must install special ramps and fixtures. The program was intended to eliminate the tax on such specially installed improvements. In 1974, however, the program was extended to apply to a portion of the assessed value of a disabled veterans' principal residence, regardless of whether the home has special features.

The rationale for the program is two-fold. First, it is thought to be inequitable for veterans to pay property tax on residential improvements required by a service-related injury. Second, disabled veterans, by virtue of their service to their country, are thought to be entitled to certain publicly provided benefits.

Comments

The higher exemption amounts for totally disabled veterans would have sunsetted on January 1, 1991, but were extended until 1996 by Chapter 1077, Statutes of 1989 (SB 320, Royce) and extended again until 2001 by Chapter 536, Statutes of 1995 (AB 3, Baca). This measure also increased the totally disabled exemption from $100,000 to $150,000 for low-income veterans or surviving spouses. According to the Board of Equalization, most veterans who claim this exemption do so on the basis of total disability.

Proposition 110, adopted at the June 1990 statewide primary election and implemented by Chapter 1494, Statutes of 1990 (AB 3843, Cannella), provides an exemption from assessment as new construction for disability-related modifications made to the home of any severely and permanently disabled person. A veteran may benefit from this assessment exemption in addition to this program.

Exemption (Assessment):

Real Property of Specified

Veterans' Organizations

Description

This program exempts from the property tax real property owned by a qualified nonprofit veterans' organization. To qualify, the organization must have been chartered by the United States Congress, and organized and operated for charitable purposes. The exempt property must be used exclusively for charitable purposes. For example, property used primarily for veterans' social activities would not qualify.

Rationale

This program provides tax relief to qualified veterans' groups by relieving them of taxes on their real property. The rationale behind this program is to promote charitable activities by qualifying veterans' organizations.

Exemption (Assessment):

Personal Property of Specified

Veterans' Organizations

Description

This program exempts from the property tax qualified personal property owned and used by a nonprofit veterans' organization, provided that the organization has been chartered by the U.S. Congress. To qualify, the property must be used exclusively to further the goals of the veterans' organization.

Personal property used by veterans' organizations exclusively for charitable purposes would be exempt under Revenue and Taxation Code Section 214. This program extends the exemption to property used to further the goals of a veterans' organization, which may not be exclusively charitable in nature.

Rationale

The rationale for the program is that veterans, by virtue of their military service, deserve to have their veterans' organizations receive certain publicly provided benefits.

Special Assessment:

Open-Space Contracts (The "Williamson Act")

Description

This program provides a partial exemption for restricted open-space lands. Owners of eligible properties must enter into a contract with the city or county in which the land is located that prohibits any development or use of the property that is not consistent with its use as farmland, open space, or wildlife habitat. These contracts run for 10 years and are automatically extended each year so that 10 years always remains 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 statutory formula. The program applies to land and living improvements (such as vines and orchards), but not to other improvements (such as farmhouses and barns).

Chapter 353, Statutes of 1998 (SB 1182, Costa) provides another similar program for open space. Land owners can enter their land into 20-year contracts as farm land security zones. Under this program, property tax savings potentially could be greater than under the Williamson Act.

The annual budget act provides an appropriation to reimburse cities and counties for their approximate revenue losses associated with these contracts. The 1989-99 Budget Act provides $36 million for these subventions in 1998-99.

Rationale

This program is intended to provide a tax incentive for the conservation of farmlands, open space, and wildlife habitat lands by reducing the property tax on land that is restricted for these purposes.

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 a farm in an urbanizing area could be based on the land's development potential for a shopping center or housing tract. The resulting property tax burden could have increased the cost of maintaining the farming operation to the point that alternative types of development became an economic necessity.

An original argument for this program was that it removed this incentive to develop farmland and other types of open space. Under Proposition 13, however, reassessments occur only when a change in ownership or new construction takes place. In the absence of either of these events, a property's assessed value remains constant, except for an annual inflation adjustment of up to 2 percent. Consequently, for existing property owners, an increase in the development potential of their property no longer increases their taxes. Furthermore, Proposition 13 generally limits the property tax rate to 1 percent of assessed value so that, in most cases, property taxes have a small financial impact and only marginally affect decisions to buy or develop real estate. For these reasons, a property tax reduction, such as this program provides, is unlikely to change current or future decisions regarding the development or preservation of open-space lands, and the program now functions essentially as a subsidy to owners of restricted open-space lands.

The new farmland security zone program aims to increase the property tax savings available and therefore increase the incentive to preserve open space.

Exemption (Assessment):

Growing Crops

Description

This program exempts from the property tax any agricultural crops growing on property on the lien date (January 1 of each year). The program does not apply to mature vineyards or orchards.

Rationale

This program provides tax relief to farmers by eliminating any tax liability for growing crops. In the absence of the program, such crops would be included in the value of land under Property Tax Rule 121 of the Board of Equalization. The program is rationalized on equity grounds. In the absence of the exemption, farmers with crops that mature early in the calendar year, such as asparagus, would have a higher tax liability than farmers with later-maturing crops, such as wheat or corn. This is because the crops which are more mature on the lien date (January 1 of each year) would be of higher value than crops which were less mature on that date.

Comments

Harvested crops are not subject to the property tax because they are exempt as business inventory under California Revenue and Taxation Code Section 219.

Exemption (Assessment):

Fruit Trees, Nut Trees, and Grapevines

Description

This program exempts from the property tax fruit trees and nut trees for the first four years after they have been planted, and grapevines for the first three years after they have been planted. It also exempts nursery stock held by the grower from taxation as personal property, provided that the nursery stock is planted within the following year.

Rationale

This program provides a tax incentive for growers to plant orchards or vineyards by not levying the property tax on trees and vines until the approximate time when the trees and vines begin to bear produce.

One rationale for the program is that no income is available from orchards and vineyards to pay taxes and other carrying costs in the initial years after their planting. Under these circumstances, the planting of fruit trees, nut trees, and grapevines cannot provide the same level of cash flow and return on investment in the near term as can various alternative land uses.

Exemption (Reassessment):

Diseased Grapevines

Description

This program authorizes county boards of supervisors to allow special assessments for grapevines planted to replace certain diseased grapevines. The assessed value of the diseased grapevines can be transferred to their replacements. The grapevines must have been younger than 15 years old and have been destroyed by either phylloxera or Pierce's Disease. These two diseases have been particularly damaging to California vineyards in recent years.

As noted previously, grapevines also receive an exemption from property tax assessment for the first three years after planting. As a result, this provision only affects the assessment of replacement grapevines once the three year exemption has expired.

Rationale

The program extends tax relief to vineyard owners already facing high costs to replace their grapevines. The rationale is that vineyard owners should not experience higher property tax payments as a result of a disease outside of their control.

Special Assessment:

Restricted Timberlands

Description

This program provides a partial property tax exemption for restricted timberlands. Restricted timberlands are assessed in a special way to reflect only the value of the land for timber production, exclusive of its development potential or aesthetic value. The Legislature has established per-acre values for various classes of timberlands. Each year, the Board of Equalization adjusts these values in proportion to the annual change in the unit prices of the different types of timber. In order to qualify for this program, land must be designated by the county as a timber production zone, which prohibits any use of the land that is not compatible with timber production. This restriction runs for 10 years, and is automatically renewed each year (resulting in a continuously rolling 10-year commitment). If either the property owner or the county wants to terminate this commitment, then the contract is not renewed in the following year, and the 10-year time period is allowed to "run down."

Rationale

This program provides tax relief to owners of timberlands. The program's rationale is that the reduced tax burden on lands maintained as forests reduces economic pressure for incompatible development and facilitates long- term forest management by limiting the annual ownership costs of timberlands. As a result, it is argued that these lands continue to serve public purposes by providing recreation, open space, and wildlife habitat, which merits public financial support.

Comments

This program for timberlands is similar in principle to the program that limits the assessed value of lands which are under open- space contracts. As with the open-space program, the benefit of this program has diminished since the adoption of Proposition 13 in 1978, which eliminated reassessments due to property appreciation in the absence of new construction or of a sale or other transfer of the property.

Standing commercial timber (as opposed to the underlying land) is not taxed under the property tax. Instead, standing timber is subject to a separate state tax--the timber yield tax--when it is cut (California Revenue and Taxation Code Section 38115). The state allocates the revenue from the timber yield tax back to the counties in which the timber was produced.

Exemption (Administrative):

Low Harvest Value Timber

Description

This program authorizes the Board of Equalization (BOE) to exempt timber harvest yields of up to $3,000 in value from the timber yield tax. The BOE must determine that, if not exempted, these harvests would cost more in tax administration costs than they would provide in revenues.

Rationale

This exemption is intended to provide administrative savings in those cases where collecting taxes on a small timber harvest would be more costly than the amount of collected revenues.

Exemption (Assssment):

Seed Potatoes

Description

This program exempts from taxation as personal property seed potatoes which are held on the lien date (January 1 of each year) and are to be planted during the assessment year. The program does not apply to those potatoes owned by plant nurseries.

Rationale

This program provides tax relief to potato farmers. The rationale for the program is that seed potatoes essentially reflect business inventory that is incorporated into the potato crop and, therefore, should be exempt from taxation. This is similar to the treatment for property tax purposes of seeds, which are exempt as business inventory under Property Tax Rule 133 of the Board of Equalization (BOE). According to the BOE, this program applies to a small number of farmers in northeastern California.

Exemption (Assessment):

Vessels

Description

This program exempts from the property tax vessels which (1) have a carrying capacity in excess of 50 tons and (2) transport freight or passengers.

Rationale

According to the Board of Equalization, the rationale for this program is based on tax equity grounds. In the absence of the exemption, a vessel would be taxed only if it were in port on the property tax lien date (January 1 of each year). As a result, shipping schedules would determine which vessels were taxable each year, and some vessels might pay no property tax, even though they might spend as many days per year in California ports as other vessels on which taxes would be levied.

Proponents of the program also argue that it removes a tax disincentive for maritime shippers to use California ports. This is because both Washington and Oregon have similar exemptions, and these states have ports which compete, to some extent, for business with California's ports. Thus, the program's proponents argue that, in its absence, some maritime shipping through California ports would be diverted to other northwestern ports, such as Seattle.

Comments

This program was first implemented in California in 1914 and the exemption is provided for directly by the State Constitution. An alternative way to approach the tax-equity issue regarding mobile vessels would be to tax them based on the average number of days per year that they are docked in California ports. Such treatment would be analogous to the way that railroad cars and airplanes are taxed, which is based on the percentage of time that they are in the state.

Special Assessment:

Documented Vessels

Description

This program allows a "documented vessel" to be assessed for property taxation at 4 percent of its full cash value, provided that it is employed exclusively for any of the following purposes: (1) taking fish or other living resources from the sea for commercial purposes, (2) providing instruction or conducting research, or (3) transporting at least seven people as a commercial passenger fishing ship. A "documented vessel" is defined under the program as a vessel which has a valid marine document issued by the U.S. Bureau of Customs, or that is registered by the California Department of Motor Vehicles.

Rationale

This program provides tax relief to the owners of qualifying documented vessels. It does this by authorizing their assessment at 4 percent of value, instead of the normal 100 percent, which results in a much lower effective rate of tax on them. The rational for this program is that the economic viability of the commercial fishing industry is susceptible to significant fluctuations on a year-to-year basis, and the tax relief provided by this program helps to maintain the health of the industry. It does this by reducing annual costs to vessel owners. Implicit in this argument is the notion that maintaining the health of the commercial fishing industry is important to the state, and that the cost of this program is offset by the benefits of the increased stability of the industry.

Comments

The economic viability of the California fishing industry depends on a great many different factors, including weather, the availability of fish, and various other determinants of fishing-related costs and revenues. In a prior review of this program, we concluded that the property tax exemption had only a minor impact on the viability of the fishing industry, relative to these other factors (see The Economic and Fiscal Impacts of California's Property Tax Assessment of Sportfishing Vessels, Legislative Analyst's Office, April 1979, Report No. 79-9).

Exemption (Assessment):

Vessels Under Construction

Description

This program exempts from the property tax any vessels of at least 50 tons carrying capacity or 100 tons displacement during the time they are being constructed. The program also exempts from taxation property which will be incorporated into such vessels. The program applies only to vessels which are built by their ultimate users. Vessels which are built for resale are exempt under another provision of the law, because they are classified as "business inventory."

Rationale

This program provides tax relief to the shipping and shipbuilding industry. In addition, proponents argue that this program provides a tax incentive for shipping companies to undertake vessel construction projects in California ports, especially since both Washington and Oregon provide a similar tax exemption for vessels under construction. These proponents argue that, in the absence of the program, the California shipping industry, and related port activities, might be at a competitive disadvantage relative to their counterparts located elsewhere on the West Coast.

Exemption (Administrative):

Vessels With a Market Value of $400 or Less

Description

This program exempts from the property tax vessels with a market value of $400 or less. The program applies only to vessels used or held for noncommercial purposes, and does not apply to lifeboats. In addition, each property owner may have only one such vessel exempted in any given year.

Rationale

This program provides tax relief to owners of low-value vessels. Its underlying rationale is to simplify tax administration. The value of the qualified boats is so low that the annual tax revenues attributable to them would not offset the cost of collecting the taxes.

Comments

California Revenue and Taxation Code Section 155.20 allows counties to also provide, by ordinance, a general exemption for low-valued property (defined as property not assessed at more than $5,000). In those counties having passed such an ordinance, the general exemption for low-valued property supersedes this program.

Exemption (Assessment):

Air Carrier Ground Time

Description

This program exempts from the property tax a portion of the time during which aircraft are located in California, but are out of service. Ordinarily, the taxation of aircraft is based on the percentage of time an aircraft is physically located in the state, either on the ground or flying above it, and the proportion of its total arrivals and departures that take place in the state. However, this program permits out-of-service days to be excluded from this calculation. Specifically, for out-of-service periods exceeding 30 consecutive days, the amount of time after the first seven days is excluded.

Rationale

This program provides a tax incentive for airlines to have their airplanes serviced within the state. Because routine servicing can be done on airplanes at or near many different airports, including those located outside of California, it is argued that the absence of this program could cause some airlines to have these services performed elsewhere, particularly in states that do not include servicing time in determining property taxes. On the West Coast, for example, both Washington and Oregon exclude time spent within the state for servicing when computing property taxes on airplanes.

Exemption (Assessment):

Aircraft Being Repaired

Description

This program exempts from the property tax any aircraft which is in California on the property tax lien date (each January 1) solely for the purpose of being overhauled, modified, serviced, or repaired. Aircraft normally based in California, or which service California airports, do not qualify for the program.

Rationale

This program provides tax relief to aircraft owners who bring their craft into California to be overhauled, modified, serviced, or repaired. According to the Board of Equalization, this program effectively applies primarily to aircraft which must be serviced or repaired by a California manufacturer. The program is justified on the grounds that it would be inequitable to tax aircraft which ordinarily are not operated in California, and which happen to be in California on the lien date solely for servicing or modification.

Proponents of the program also argue that it provides an incentive for airlines to repair their craft in California and, as such, promotes the California aircraft repair industry. To the extent that aircraft repairs need to be made by an aircraft's manufacturer, this program also could promote California's aircraft manufacturing industry.

Exemption (Assessment):

Private Railroad Car Repair Days

Description

This program provides a partial property tax exemption for private railroad cars, based on the number of days such cars are in the state but are undergoing repairs. For the purposes of this program, a private railroad car is any passenger or freight car which is not owned by a railroad company. Such cars ordinarily are owned by leasing companies, or by railroad car manufacturers who lease the cars to railroad companies. The state assesses and collects the property tax on private railroad cars from the lessor in lieu of the local property tax. The revenue from this tax is deposited in the state General Fund.

The state computes the tax liability of the railroad car company by estimating the average number of each class of car physically present in the state in any year, based on the number of days railroad cars actually spend in the state. For example, if six flat cars spent 120 days each in the state, the Board of Equalization would assess the tax on the average value of two flat cars.

This program provides that the number of days spent within the state for repair purposes in any year does not count as time-in-state for purposes of the property tax assessment formula. The number of servicing days excluded from the computation cannot exceed 90 days per car per year, unless the claimant provides substantiation of the necessity of the additional days.

Rationale

This program provides a tax incentive for the repair and servicing of private railroad cars in California. The proponents of the program argue that, if this repair and servicing time were taxable, certain railroad cars would be taken out of the state to be serviced. It is argued that, by exempting the repair and servicing time, California's railroad car service industry is not at an economic disadvantage relative to the out-of-state service industry.

Exemption (Assessment):

Cargo Containers Used in Ocean Commerce

Description

This program exempts from the property tax qualified cargo containers principally used in transporting cargo in ocean commerce. A cargo container is defined as a specially designed receptacle which facilitates the carriage of goods by vessels and other means, and has a displacement of more than 1,000 cubic feet. This program does not apply to any cargo-carrying vehicle subject to registration under the California Motor Vehicle Code.

Rationale

This program provides tax relief to the owners of cargo containers, which it has been argued, gives an incentive for shippers to use California ports instead of other ports in the Pacific Northwest (such as Portland and Seattle). The program encourages the use of California ports to the extent that the exemption of cargo containers lowers the cost of using California ports relative to other ports, and to the extent that this cost savings is not offset by other factors. The actual volume of trade that would be diverted to non-California ports in the absence of this program would depend on such factors as (1) the sensitivity of shippers' demands for California port use to changes in the cost of using such facilities, and (2) the actual magnitude of the increase in such costs attributable to the property taxation of cargo containers.

Comments

The economic and fiscal impacts of this program were reviewed in 1978 by our office (see The Economic and Fiscal Impacts of California's Cargo Container Property Tax Exemption, Legislative Analyst's Office, Report 78-5, March 1978, 35 pages). This study concluded that, while it was impossible to measure accurately the amount of trade diversion or changes in shipping rates attributable to this program, elimination of the program at that time would most likely have resulted in a positive net fiscal impact on California state and local governments.

Exemption (Assessment):

Exhibition Exemption

Description

This program exempts from the property tax qualified personal property brought into the state temporarily for use in a public exhibit. To qualify, the property must be subject to property tax in another state or country, and any taxes due must have been paid prior to claiming the exemption in California.

Rationale

This program provides a tax incentive for nonresidents to exhibit property in California, such as automobiles, artwork, crafts, and other such items. In the absence of the program, such property owners would be required, in effect, to pay "double taxes" on any property being exhibited on the property tax lien date (January 1 of each year). This tax treatment might discourage nonresidents from exhibiting property of public interest within California.

Exemption (Assessment):

Works of Art Available for Display

Description

This program exempts from the property tax privately owned works of art made available for display in: (1) a publicly owned art gallery, (2) a publicly owned museum, or (3) a museum which is both regularly open to the public and operated by a nonprofit organization. To qualify, the art must have been made available for display within a certain period of time prior to the property tax lien date, and must meet certain artistic criteria. The exemption does not apply to art loaned by any person who holds works of art primarily for purposes of sale.

Rationale

This program provides a tax incentive for individuals to loan art works to qualified museums, by exempting such works from the property tax. The underlying rationale for the program is to promote the public display of artwork in California.

Exemption (Assessment):

Works of Art Owned by the Artist

Description

This program provides a special property tax valuation for qualified works of art owned by the artist who produced them. Art that is held by a person engaged in the business of selling or producing art is considered personal property and, as such, may be subject to the property tax (see below).

This program provides that the taxable value of art which is held by its creator shall equal the value of the materials used to create the artwork. Artwork may qualify for this program only if it has never been sold or exhibited.

Rationale

This program provides tax relief to artists by reducing the cost to them of maintaining a collection of their own artwork. The rationale for the program is that absent an actual sale of a piece of artwork, its taxable value can be difficult to determine. By valuing such artwork solely in terms of its materials, this program is intended to ease tax administration by reducing the number of appealed assessments.

Comments

In the absence of this program, some artwork owned by artists potentially would be exempt either as business inventory or as personal property used as household furnishings. In addition, certain materials used to create the artwork could be exempt from taxation as business inventory.

Exemption (Assessment):

Aerospace Museum Displays

Description

This program exempts from the property tax aircraft loaned or donated for display in either (1) a publicly owned aerospace museum or (2) an aerospace museum which is both regularly open to the public and operated by a nonprofit organization. The property must either have been made available for display for a period of 90 days during the 12-month period immediately prior to the property tax lien date, or the person claiming the exemption must certify in writing that the property will be made available for display for at least 90 days following the first day the property was on public display. The exemption does not apply to aircraft loaned by any person who holds aircraft primarily for purposes of sale.

Rationale

This program provides an incentive for aircraft owners to lend or donate specified aircraft to qualifying aerospace museums. The rationale for the program is that aircraft used for display purposes are functionally similar to works of art and, therefore, deserve comparable treatment under the property tax.

Comments

This program was sponsored by the San Diego Aerospace Museum. The museum also qualifies for a sales and use tax program which exempts from taxation the transfer of certain tangible personal property to aerospace museums. According to the Board of Equalization, the San Diego Aerospace Museum is the only museum in California that currently qualifies for these programs.

Exemption (Assessment):

Aircraft of Historical Significance

Description

This program exempts from taxation aircraft of historical significance. To qualify for this exemption, aircraft must be 35 years or older or be a model of which there are fewer than five in existence worldwide. In addition, aircraft must be held primarily for purposes other than sale and must be on public display at least 12 days each year.

Rationale

This program provides tax relief to owners of aircraft of historical significance. The underlying rationale for this program is to promote the preservation and public display of aircraft of historical significance.

Exemption (Administrative):

Assessments of $5,000 or Less

Description

This program allows county boards of supervisors to exempt from the property tax those properties on which the total net tax liability is lower than the cost of assessing and collecting the tax. Under this authority, county boards may not exempt property with an assessed value in excess of $5,000. For temporary possessory interest in convention, cultural, or fairground facilities, the exemption limit is $50,000.

Rationale

This program provides tax relief to the owners of low-valued property. The rationale for the program is to simplify administration of the property tax. The value of certain properties is so low that the annual tax revenues attributable to them would not offset the costs of collecting the tax. This program allows counties to forego incurring these net administrative losses.

Exemption (Administrative):

Supplemental Roll Tax Assessments

Of $20 or Less

Description

This program permits county auditors to cancel supplemental property taxes due on a property if the amount of these taxes is $20 or less.

Rationale

This program provides tax relief to taxpayers who transfer or construct low-valued property. The rationale for the program is to simplify administration of the supplemental property tax. The revenues generated by collecting supplemental roll assessments of $20 or less may not offset the costs of collection.

Comments

Several county assessors have pointed out that most of the costs associated with supplemental property taxes involve the assessment rather than the collection of the tax. These assessors claim that, once the assessment is made, it is cost-effective to collect the tax. To the extent that this is the case, the above program rationale may not be valid for certain properties.

Exemption (Administrative):

Fixtures Excluded From the Supplemental Roll

Description

This program exempts qualifying fixtures from supplemental property tax assessment. In order to qualify, the fixtures must be valued as a separate appraisal unit from the structure on the property. Fixtures are real property that originally had the character of personal property, such as equipment, but have been affixed to and incorporated into real (primarily business) property.

Prior to the exemption, the assessed value of qualifying fixtures was placed on the supplemental tax roll for the year in which it was installed. The property owner then received a supplemental tax bill for the tax on the additional assessed value, prorated to reflect the remaining portion of the tax year.

Under this program, qualifying new fixtures added to a property are exempt from supplemental assessment, so that they are not taxed until the fiscal year following the one in which they are installed. Fixtures that qualify for this program include manufacturing machinery or store fixtures, which are appraised separately from any building. The program does not include fixtures such as elevators or air conditioners which are appraised as part of a building.

Rationale

This program provides tax relief to businesses that add qualifying fixtures. It does so by eliminating any property tax on these fixtures during the remainder of the tax year in which they are installed. The program's rationale relates to considerations of administrative efficiency and cost-effectiveness. Counties argue that compiling information on fixture changes and determining the proper supplemental tax amounts on fixture additions and removals made throughout the year is administratively burdensome, and that the additional revenue does not justify the expense of assessing and collecting these taxes.

Exemption (Administrative):

Interests That Represent Less Than

Five Percent of the Property's Total Value

Description

This program exempts from reappraisals transfers of ownership interests in any property which represent less than 5 percent of the entire property's full market value. The qualifying transfers must have a market value of less than $10,000. When several interests are transferred in any given assessment year, they are accumulated. If the total transfer exceeds 5 percent or $10,000, then all of the transferred interests are reappraised.

Property exempted from reappraisal under this program retains the value ascribed to it prior to the transfer. To the extent that the market value of the property has increased and would otherwise be reflected in the reassessment of the property, this program reduces the tax liability on such property.

Rationale

This program provides property tax relief to the owners of the qualifying property. The underlying rationale for the program is to simplify administration of the property tax. The tax revenues from reassessing incremental transfers of property valued under $10,000 may not offset the county costs for assessing, billing, and collecting the taxes due.

Return to California's Tax Expenditure Programs, Property Taxes, Table of Contents
Return to California's Tax Expenditure Programs, Full Table of Contents
Return to Legislative Analyst's Office Home Page