The state provides tax relief—both as subventions to local governments and as direct payments to eligible taxpayers—through a number of programs contained within this budget item. The budget proposes $672 million General Fund in tax relief. This represents a modest decline (3 percent) from the $694 million in current–year spending, due to the Governor’s budget reduction proposals.
The largest tax relief program is the homeowners’ exemption ($443 million), which provides property tax relief to nearly 6 million homeowners. This program, which is required by the State Constitution, grants a $7,000 property tax exemption on the assessed value of owner–occupied dwellings and requires the state to reimburse local governments for the resulting reduction in property tax revenues. The exemption reduces the typical homeowner’s taxes by about $75 annually. In order to account for the expected reduction in the number of homeowners claiming the exemption, the Governor’s budget proposes a decrease of $4.5 million, or 1 percent, from the amount budgeted for 2007–08. Other tax relief programs include senior citizens’ tax assistance programs ($172 million), a senior citizens’ property tax deferral program ($23 million), and subventions to local governments for open space preservation ($35 million). We discuss these programs further below.
We recommend that the Legislature enact legislation to stop the state from renewing or entering into new Williamson Act contracts. The program is not a cost–effective land conservation program. (Reduce Item 9100–101–0001 by $3.9 million.)
Background. The Williamson Act allows cities and counties to enter into contracts with landowners to restrict certain property to open space and agricultural uses. In return for these restrictions, the property owners pay reduced property taxes because the land is assessed at a lower–than–maximum level. The amount of the state subvention to localities is based on the amount and type of land under contract, but is less than the actual reduction in local property tax revenues. The Department of Conservation (DOC), which administers the program, estimates that individual landowners save anywhere from 20 percent to 75 percent in reduced property taxes each year, depending upon their circumstances.
The contracts entered into between local governments and property owners are ten–year contracts. Such contracts are typically renewed each year for an additional year, such that the term on the contract remains at a constant ten years. In the event the contract is not renewed, the tax on the property gradually returns over a ten–year period to the level at which comparable, but unrestricted, land is taxed.
The Administration’s Proposal. The administration proposes to delete $3.9 million of General Fund support for Williamson Act subventions—leaving $35 million in funding. This proposal would reduce all subventions by 10 percent in the budget year, while still allowing the program to enter into additional contracts with local governments.
Subventions Not a Cost–Effective Land Conservation Program. In the past, our office has recommended a phased–out elimination of this subventions program (see the Analysis of the 2004–05 Budget Bill, pages F–120 through F–122). Our recommendation has been based on our assessment that the act is not a cost–effective land conservation program. In many cases, it may subsidize landowners for behavior they would have taken regardless. The administration’s 10 percent reduction of all subventions would provide local governments with less money per contract than they expected when they signed the contracts. In contrast, a gradual phase–out of subventions would provide the promised amount of funds to local governments who entered into Williamson Act contracts, while also stopping the state from incurring any liabilities from new or renewed contracts.
Greater Long–Term Savings. In its first year, our recommendation would provide a similar level of savings as the Governor’s budget. Each subsequent year, however, our approach would provide greater savings. By the tenth year, 100 percent of subvention funding ($39 million, assuming current funding levels) would be saved. In addition, DOC’s administrative costs to oversee the subvention program—currently $2.1 million from the Soil Conservation Fund—could be gradually reduced over the phase–out period. The administration’s proposed trailer bill language would need to be modified to implement our recommendation.
We recommend that the Legislature reject the administration’s proposal which makes across–the–board cuts to three senior citizen assistance programs. Instead, we recommend that the Legislature (1) maintain existing income thresholds and funding levels in the Senior Citizens’ Property Tax Deferral program, and (2) roll back grants in the Senior Citizens’ Property Tax Assistance program by 45 percent to 1999–00 levels and institute an income ceiling in the program of $33,000. Together, these changes would result in General Fund savings of approximately $18.5 million in 2008–09. (Reduce Item 9100–101–0001 by $18.5 million.)
Background. There are currently three property tax assistance programs available for eligible senior citizens over the age of 62, the blind, and the disabled. Each of the programs is tied—directly or indirectly—to property taxes paid by participants in the programs.
- Senior Citizen Renters' Tax Assistance Program. This program provides grants directly to renters in order to offset a portion of the property taxes that are passed on to them in the form of increased rent. In 2007, the program served about 130,000 participants and was limited to those renters with incomes less than $42,770 (this amount is indexed annually for inflation). The amount of assistance provided varies on a sliding scale—with the lowest income renters receiving the most assistance, up to $348 annually.
- Senior Citizens' Property Tax Assistance Program. This program provides grants directly to homeowners in order to offset a portion of their property tax bill. It has the same income limits as the renters’ program. In 2007, the program served about 450,000 participants. As with the renters’ program, assistance is provided on a sliding scale—up to $473 annually.
- Senior Citizens' Property Tax Deferral Program. This program allows homeowners essentially to borrow from the state to pay a portion of their property tax bill. In turn, the state places a lien on the property so that when the property is eventually sold, the state is repaid. The default rate for the program is quite low, with about 99 percent of these types of loans eventually repaid to the state with interest. In 2007, the program was open to individuals with incomes less than $31,500 and served about 8,000 participants.
Recent Program Expansions. All three programs have been significantly expanded in recent years. For the renters’ and homeowners’ grant assistance programs, Chapter 322, Statutes of 1998 (AB 2797, Cardoza), increased incomes beginning in 1999–00 from about $13,000 annual household income to about $33,000. These income levels were also required to be indexed based on the cost of living. As part of the 2001–02 budget package, benefit payments were increased by about 45 percent on an ongoing basis. Combined, these tax assistance increases resulted in additional expenditures of more than $175 million annually. The deferral program was recently significantly expanded by Chapter 616, Statutes 2006 (AB 2738, Wyland), which provides for annual increases in the program’s income ceiling through 2009–10. Future growth in the income ceilings will be tied to the cost of living beginning in 2010–11.
The Administration’s Proposal. The administration proposes several changes in the senior citizens’ property tax assistance and deferral programs, resulting in total General Fund savings of $22 million. First, the Governor’s budget reduces all grants for eligible renters (savings of $15 million) and homeowners ($4 million). In addition, the administration proposes to reduce the income eligibility ceiling for the deferral program from $35,500 to $34,000, resulting in savings of $2.6 million.
Savings Primarily Would Come From Lowest–Income Renters. The administration’s proposal reduces all assistance payments by 10 percent regardless of the recipients’ financial situation. This across–the–board approach results in some seemingly counterproductive consequences. The bulk of the savings would come from the lowest–income renters. For instance, more than $10 million would come from reduced grants to renters with annual incomes less than $12,000. While an average homeowner with an income of $40,000 would see his or her payment reduced by $2, a renter with an income of $10,000 would have his or her payment reduced by $35.
Any Reductions Should Be More Focused. As an alternative, we recommend that the Legislature focus reductions on the homeowners’ grant assistance program rather than the program that provides assistance to renters. While our approach would reduce grants to homeowners, the state’s property tax deferral program offers a safety net for low–income homeowners to help ensure they can meet their financial obligations. Such a safety net is unavailable for renters. To preserve the homeowners’ safety net, we recommend no changes be made to the deferral program. In order to achieve savings in the homeowners’ grant assistance program, the Legislature could roll back the program to its operational level in 1999–00. This change would lower the income ceiling to $33,000 and reduce grant benefits to program participants by 45 percent, resulting in a General Fund savings of $18.5 million in 2008–09 (similar to the total amount of savings proposed by the administration).
Option for Additional Savings. If the Legislature sought additional savings from these programs, it could roll back renters’ grants to 1999–00 amounts, perhaps on a more temporary basis. This change would lower the income ceiling to $33,000 and reduce grant benefits to program participants by 45 percent—resulting in an additional General Fund savings of approximately $68 million in the budget year.
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