California's
Tax Expenditure Programs

Property Tax Programs--Part 2

Contents

• Religious Worship or Religious Purposes
• ("Church Exemption")
• Transfers Within The Same
• Religious Denomination
• Leases by a Charitable Organization
• To a Government for Charitable Purposes
• Private Property Used by a
• Public Library or Free Museum
• Public Schools, Colleges, and Universities
• Private Colleges and Seminaries
• State College Management
• Student Bookstores
• Student Body Organizations
• Nonprofit Entities Using property for
• Selected Public Purposes
• Designated Institutions
• Cemetery Property
• San Diego Supercomputer Center
• Disaster-Damaged Property
• Property Damaged by Misfortune or Calamity
• Environmental Contamination
• Property Condemned Pursuant to
• Eminent Domain Proceedings
• Earthquake Safety Improvements
• Fire Safety Improvements
• Improvements for Disabled Accessibility
• Homes and Improvements for Disabled Persons
• Active Solar Energy Systems
• Veterans' Exemption

Exemption (Assessment):

Religious Worship or Religious Purposes

("Church Exemption")

Description

The California Constitution, Article XIII, Section 3(f) directly exempts from taxation property used for religious worship. This is known as the "church exemption," and covers facilities used for religious instruction.

In addition, Article XIII, Sections 4(b) and 4(d) of the Constitution, authorizes the Legislature to exempt property used for religious purposes generally and for church parking. Under this broader "religious exemption," the Legislature has exempted from the property tax real property owned or leased exclusively for religious worship or other specified religious purposes. Under this program, church parking lots, social halls and community centers, retreats, nurseries and pre-schools, and parochial K-12 schools are exempt from the property tax.

Rationale

This program provides tax relief to religious organizations by exempting from taxation property used for religious purposes, church parking lots, and parochial schools. The purpose of the program is to promote the establishment and maintenance of houses of worship and related activities, by reducing their operating costs. The rationale offered is that religious institutions should be free from financial burdens imposed by government to the maximum possible extent.

Comments

The religious exemption is included within the broader "welfare exemption" that covers property owned by qualifying nonprofit organizations and used for charitable, religious, or hospital purposes. Property owned by religious organizations and used primarily for charitable, rather than religious, purposes usually qualifies for a property tax exemption under the welfare exemption. The religious exemption generally does not apply to homes provided to religious leaders.

Exemption (Reassessment):

Transfers Within The Same

Religious Denomination

Description

This program exempts from reappraisal taxable property (for example, property which is not used for religious purposes) transferred between specified corporations belonging to the same religious denomination. The transferring and receiving corporations must be a "corporation sole" (that is, a corporation represented by an individual who has independent legal decision-making authority), religious corporation, or public-benefit corporation, and the same denomination's laws, rules, regulations, or canons must regulate the transferor and transferee.

In an hierarchical church, such as the Roman Catholic Church, each diocese is a corporation sole. Thus, in the absence of this program, a transfer of property from one diocese to another could trigger a property tax reassessment. This program provides that the transferred property retains the value ascribed to the property prior to the transfer.

Religious property owned by a religious organization is not affected by this program, because such property is exempt under the welfare exemption. However, many religious organizations own residences or income properties which are affected by this program.

Rationale

This program was sponsored by the California Catholic Conference to clarify that transfers of property between dioceses are exempt from reappraisal. The rationale behind the program is that the larger religious denomination, not the corporation sole, should be considered the owner of the property for tax purposes.

Exemption (Assessment):

Leases by a Charitable Organization

To a Government for Charitable Purposes

Description

This program exempts from the property tax real property which is owned by an organization qualifying for the welfare exemption, but which is leased by a government agency. The welfare exemption provides that property which is used by a qualified charitable organization exclusively for its own charitable purposes is exempt from the property tax. This program extends this tax exemption to property which is leased by such organizations to a government entity.

Rationale

This program provides an incentive to qualified charitable organizations to enter into leases of property to a governmental agency. The purpose of the program is to facilitate sale-leaseback arrangements between otherwise tax-exempt charitable organizations and government agencies. Such sale-leaseback arrangements are often undertaken by local governments as an alternative to borrowing funds for capital improvements.

The tax exemption gives the charitable organization an incentive to raise funds for its charitable purposes through leases with government agencies, since the organization will thereby incur no property tax. It also makes the government a more attractive lessor than other lessors in the eyes of the organization, since property leased to these other lessors would generally be taxable.

Exemption (Assessment):

Private Property Used by a

Public Library or Free Museum

Description

This program exempts from the property tax privately owned property used by a public library or a free museum.

Rationale

This program provides tax relief to public libraries and free museums by reducing their property tax liabilities. The program also provides an incentive for the establishment and maintenance of such institutions to the extent that it reduces their operating costs.

According to the Board of Equalization (BOE), in the case of public libraries, the exemption primarily applies to land or structures leased by a government for the operation of a public library. This is a common arrangement for the establishment of smaller branch libraries. In the absence of the exemption, the owner of the land would be liable for the property tax. This liability would be passed on to government in the form of higher rents. The exemption for public libraries exists to facilitate the leasing of land for the government operation of such facilities.

In the case of museums, the rationale behind the program is that museums that charge no admission are providing a public service.

Comments

According to the BOE, the exemption for free museums is not widely used, as most private museums in California charge an admission fee.

Exemption (Assessment):

Public Schools, Colleges, and Universities

Description

This program exempts from the property tax property used exclusively for public schools, community colleges, state colleges, and state universities (including the University of California). The exemption also applies to off-campus facilities owned or leased by an apprenticeship program sponsor, provided that these facilities are used exclusively by the public schools for specified classes.

Rationale

This program provides tax relief to public educational institutions by eliminating the tax on their properties. Thus, the exemption reduces the annual operating costs of public schools.

Exemption (Assessment):

Private Colleges and Seminaries

Description

This program exempts from the property tax buildings, land, equipment, and securities used exclusively for educational purposes by private nonprofit colleges and seminaries. Qualifying institutions must meet specified admission requirements, and must confer upon their graduates at least one academic or professional degree based on a program of at least two years of liberal arts studies, or three years of professional studies.

Rationale

This program provides tax relief to private colleges and seminaries and to their students. It does so by annually reducing operating costs which are, in turn, passed on in the form of lower tuition and student fees. The rationale behind the program is that lower costs promote greater college participation.

Exemption (Assessment):

State College Management

Description

This program exempts from the property tax personal property used in the management of state colleges, but owned by an auxiliary nonprofit corporation or student body organization. In order to qualify, the state must have entered into a contract with the corporation or organization under which services are provided or equipment is leased.

Rationale

This program essentially extends the tax relief provided under the college exemption to student body organizations and other nonprofit entities that provide services or lease equipment to state colleges. It also provides tax relief to the state colleges, to the extent that any property tax savings are passed on to the colleges in the form of lower costs. The rationale behind the program is to promote the establishment and maintenance of such organizations by lowering their operating costs.

Exemption (Assessment):

Student Bookstores

Description

This program exempts from the property tax personal property used or owned by a nonprofit corporation which operates a student bookstore affiliated with a nonprofit college or seminary, or with the University of California.

Rationale

This program provides tax relief to nonprofit corporations, such as student body organizations, which operate bookstores for nonprofit colleges or seminaries. It also provides tax relief to bookstore customers, to the extent that lower operating costs are reflected in lower prices for books and student supplies. The rationale behind the program is that it promotes the establishment and maintenance of nonprofit bookstores by reducing their operating costs, which in turn can help to lower the costs to students of obtaining a college education.

Exemption (Assessment):

Student Body Organizations

Description

This program exempts from the property tax personal property owned or used exclusively by a qualified student body organization, as specified in the California Education Code. To qualify, the student body organization must be organized within a community college or K-12 public school.

Rationale

This program provides tax relief to specified student body organizations. The underlying rationale for the program is that these organizations play a supportive role in educational institutions through their fund-raising and social activities and, as such, are deserving of public financial support.

Exemption (Assessment):

Nonprofit Entities Using property for

Selected Public Purposes

Description

This program exempts from the property tax real property which is owned by a qualified nonprofit entity and is used for a specified public purpose. Such qualifying purposes include property owned by a transit development board and property used exclusively for agricultural fair use pursuant to a contract with a county board of supervisors.

Rationale

This program provides tax relief to qualified nonprofit entities engaged in valid public purposes. As such, this exemption can be viewed as an extension of the exemption for government property. These nonprofit entities, however, would not be fully exempt from property taxation absent this exemption.

Comments

This program initially was implemented to provide tax relief to the San Diego and Arizona Eastern Railroad. This company was created in the 1970s by the San Diego Metropolitan Transit Development Board, which was interested in acquiring the right-of-way for urban rail mass transit.

The manner in which the railroad was purchased ceded ownership to the nonprofit corporation. The transit authority made the purchase in this manner in order to avoid a laborious and expensive title search, and to comply with certain restrictions imposed by the federal Interstate Commerce Commission.

In 1980, the Board of Equalization (BOE) determined that the railroad was subject to property taxes because it was not owned by a government agency. Thus, without this program, the BOE would require taxation of the railroad's property.

Exemption (Assessment):

Designated Institutions

Description

This program exempts from the property tax real property owned by the California School of Mechanical Arts, California Academy of Sciences, and Cogswell Polytechnical College. It also exempts property held in trust for the Huntington Library and Art Gallery.

Rationale

This program provides direct tax relief to the above-cited institutions. It also provides relief to their students, to the extent that the lower property taxes are reflected in lower tuition and student fees. The rationale behind the program is to encourage the development and operation of the specified institutions, and reflects the view that these institutions are deserving of public financial support.

Comments

The above constitutional provision authorizes the Legislature to implement this program, which it has done. Most property held by these institutions would be exempt under the welfare exemption. This program extends the exemption to all of their property, including property used for income production.

Exemption (Assessment):

Cemetery Property

Description

This program exempts from the property tax qualified property owned by a nonprofit corporation which is (1) used or held for storing human remains or (2) used for the care and maintenance of such property. The program does not, however, apply to undeveloped property held for future use.

Rationale

This program provides tax relief to nonprofit corporations that sell and maintain cemetery plots, and to the individuals who purchase the plots.

One rationale for the program is that it simplifies administration of the property tax. Once in use, individual plots have little market value and, therefore, would generate minimal property tax revenues. Moreover, there are potentially significant problems involved with tax collection, particularly for older plots where an heir may no longer exist. The revenues generated from a property tax on individual plots probably would not, therefore, offset the costs of assessing and collecting the tax.

Exemption (Assessment):

San Diego Supercomputer Center

Description

This program exempts from taxation all of the computer equipment of the San Diego Supercomputer Center, located on the campus of the University of California, San Diego. Although the computer center is owned by the university and is exempt from direct taxation under the general exemption for university property, it is leased to a private operator. This lease creates a possessory interest in the computer center, which would be taxable in the absence of this program.

Rationale

The program reduces the operating costs of the San Diego Supercomputer Center by eliminating annual property tax payments. The rationale for the program is that most of the funding for operating the center comes from the federal government and the university, and the center serves public policy objectives established by the National Science Foundation. Consequently, it is argued that the center serves a worthy public purpose, and exempting it from taxation reduces the level of federal and university funds that must be raised each year to support its operating costs.

Comments

This program was established by Chapter 1559, Statutes of 1988 (SB 2584, Ellis).

Exemption (Reassessment):

Disaster-Damaged Property

Description

This program provides that property which is either rebuilt or acquired as a replacement for disaster-damaged property shall be assessed at the same value as the original property prior to the disaster.

In the case of real property, qualifying property must have been damaged on or after July 1, 1985, and: (1) the Governor must have declared that a disaster occurred, (2) the disaster must have reduced the market value of the property by more than one-half, and (3) the replacement property must be comparable to, and located in the same county as the property damaged by the disaster. Property owners may transfer the base year value of qualifying disaster-damaged properties to another county, provided that the board of supervisors in that county has adopted an ordinance authorizing such transfers. In cases where the market value of the replacement property exceeds 120 percent of the market value of the original property, the original assessment is adjusted upward by the amount of the excess.

For mobilehomes that are taxed as personal property, this exemption provides that assessed value will not increase for any mobilehome that has been reconstructed or replaced by a comparable mobilehome due to damage or destruction by any misfortune or calamity.

Rationale

This program provides tax relief to disaster victims by reducing their tax liability on rebuilt or replacement property. The rationale for the program is that persons who are forced to replace their residences on account of a natural disaster should not have to face an increased tax liability as an additional consequence of the disaster.

Comments

The constitutional provisions of this exemption were approved by the voters as Proposition 8 (November 1978), Proposition 50 (June 1986), and Proposition 171 (November 1993). The provisions authorizing intercounty transfers were added by Chapter 72, Statutes of 1994 (AB 382, Lee).

Special Assessment:

Property Damaged by Misfortune or Calamity

Description

This program reduces the assessed value of qualified damaged property in proportion to the reduction in the market value of the property caused by the damage. Because the assessed value of most properties is significantly less than their current market value, this program can provide a tax reduction for properties whose market value after the damage still exceeds their pre-damage assessed value. In the absence of this program, the assessed value of damaged property is reduced only if its market value after the damage is less than its assessed value. In order to qualify under the program, the damage must have been caused by a disaster, or by misfortune or calamity, and the damage must be at least $5,000. The program is available only if adopted by a county ordinance.

Example. A supermarket with a market value of $1 million and an assessed value of $700,000 sustains $200,000 of damage in an earthquake. The damage reduces the market value of the property by 20 percent and, therefore, the assessed value also is reduced by 20 percent--to $560,000. In the absence of this program, there would not be any reduction in assessed value, because the damage has not reduced the property's market value below its existing assessed value.

Rationale

The program provides tax relief to owners of property damaged in a disaster or in calamities, such as fires. The program is rationalized on the basis that property owners who suffer disasters or calamities should receive tax relief in order to mitigate their losses.

Comments

Not all counties have ordinances implementing this program. Some counties have adopted an implementing ordinance only for a limited period of time following major disasters.

Exemption (Reassessment):

Environmental Contamination

Description

This exemption allows property owners to transfer their current assessed value to a replacement property within their county if the original property was environmentally contaminated. This contamination could be caused, for example, by the presence of toxic or hazardous materials. The replacement property could involve either (1) the repair or reconstruction of a damaged structure on the contaminated site or (2) purchase of a similar structure on a different site.

In order to qualify for this special treatment, all of the following conditions need to be met:

• A residential property (for example, a house or condominium) is made uninhabitable or a nonresidential property (for example, a store or business) is made unusable by an environmental problem.



• The current owner did not know of the environmental problem when the property was purchased or built.



• A state or federal government agency designates the property as a toxic hazard, environmental hazard, or environmental clean-up site.

• A property is substantially damaged or destroyed by the environmental clean-up efforts.



• A lead government agency stipulates that the property was not made uninhabitable or unusable by an act or omission of the current owner.

The exemption applies only to replacement property acquired, constructed, or repaired (1) after January 1, 1995 and (2) within five years after ownership of the contaminated property is sold or transferred. A county is given the authority to extend this exemption to property owners moving from other counties and replacing environmentally contaminated property.

Rationale

This program is similar to the existing exemption for owners of property damaged by natural disasters. Since the property owner must not have caused the environmental contamination in order to qualify for the exemption, tax relief is given to property owners who are suffering from an environmental problem outside of their control.

Comments

This exemption was added to the Constitution by the voters as Proposition 1 in November 1998. As result, it has not yet been used and it is unclear how many properties will be eligible under its provisions.

Exemption (Reassessment):

Property Condemned Pursuant to

Eminent Domain Proceedings

Description

This program allows the owner of real property or a mobile home acquired by a government entity through eminent domain proceedings or inverse condemnation, to carry over his or her original assessed value to a comparable replacement property. In cases where the market value of the replacement property exceeds 120 percent of the market value of the original property, the original assessment is adjusted upward by the amount of this excess.

This program seeks to ensure that taxes on a similar new property are equivalent to those that were levied on the old property prior to its acquisition by a government. To the extent that the market value of the replacement property exceeds the assessed value of the original property, this program effectively reduces the tax assessment on the replacement property. Moreover, this program excludes from the assessed value a portion of the market value of a more expensive replacement property.

Rationale

This program provides tax relief to property owners who are displaced from their property as a result of eminent domain proceedings. The rationale for this program is that property owners who must move because the government has taken their property should not also be required to pay higher taxes simply because they acquire replacement property.

Exemption (Assessment):

Earthquake Safety Improvements

Description

This program exempts from reassessment as new construction any qualifying reconstruction or improvements made to existing buildings after November 5, 1990 that have been identified by local governments as being hazardous to life in the event of an earthquake. In order to qualify, the reconstruction or improvements must be required by a local earthquake safety ordinance or employ earthquake hazard mitigation technologies approved by the State Architect. In the case of required improvements to buildings with unreinforced masonry-bearing walls, the exemption is limited to 15 years, but it includes improvements made after June 4, 1984.

Rationale

This program provides tax relief to property owners who add qualifying earthquake safety improvements to their buildings. It does this by eliminating any increase in assessed value that otherwise would take place because of the value added to such buildings by these improvements. The primary rationale for the program is to protect life and property by promoting the rehabilitation of buildings that would be unsafe in an earthquake. Program proponents also argue that providing an incentive for earthquake safety improvements will protect the tax base and reduce future disaster mitigation costs.

Comments

The 15-year exemption for improvements to buildings with unreinforced masonry-bearing walls was authorized by Proposition 23, adopted at the June 1984 statewide primary election. The authority for the unlimited exemption for earthquake safety improvements to other types of buildings was added by Proposition 127, approved at the November 1990 statewide general election.

Exemption (Reassessment):

Fire Safety Improvements

Description

This program exempts from reappraisal as new construction the construction or installation in an existing building of fire sprinkler systems, other fire extinguishing systems, fire detection systems, or fire-related egress improvements. The exemption applies to systems completed on or after November 7, 1984.

Rationale

This program provides tax relief to building owners who add fire safety improvements to their buildings. It does so by exempting such systems from reappraisal as new construction, thus reducing the cost to the property owner of providing for the fire equipment. Upon a change in ownership, however, the value of the fire equipment would be reflected in the new assessed value of the property to the extent that it increases the property's market value.

Comments

Fire safety improvements often are required by local building codes when older buildings are renovated. This exemption was approved by the voters in November 1984 as Proposition 31.

Exemption (Reassessment):

Improvements for Disabled Accessibility

Description

This program exempts from reassessment as new construction any qualifying improvements or modifications made to existing buildings on or after June 7, 1994 that have been made to improve accessibility by disabled persons. Such improvements include access ramps, widening of doorways and hallways, barrier removal, access modifications to restroom facilities and elevators, and any other modification that would cause it to meet or exceed the accessibility standards of the 1990 Americans With Disabilities Act and the most recent California Building Standards Code that is in effect on the date of the application for a building permit.

Rationale

This program provides tax relief to property owners who make modifications to their buildings to improve accessibility for disabled persons. It does this by eliminating any increase in assessed value that otherwise would take place because of the value added to such buildings by these modifications. The primary rationale for the program is to encourage property owners to make modifications to improve accessibility for disabled persons.

Comments

This program was added by Proposition 110 of the June 1990 statewide primary election.

Exemption (Reassessment):

Homes and Improvements for Disabled Persons

Description

This program allows severely and permanently disabled persons, regardless of their age, to transfer the assessed value of their existing home to a replacement home in the same manner as provided for homeowners over the age of 55. In order to qualify, the disability must necessitate the move for either physical or financial reasons. The replacement residence generally must be in the same county as the original residence, and it must be bought or built within two years of the sale of the original dwelling. Further, the value of the replacement home cannot exceed the value of 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.

This program also excludes from reappraisal any building improvements that make an owner-occupied home more accessible to, and usable by, a permanently and severely disabled person who is a permanent resident of the dwelling.

Rationale

This program provides tax relief to disabled persons who must move because of their disability. 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 disabled person to the extent that the market value of the replacement home is greater than the assessed value of the original home. The program also prevents any increase in property taxes that otherwise would result from improvements made to a home to accommodate a disabled person. Program proponents argue that disabilities reduce or eliminate income, so that disabled persons who must move or modify their dwellings often cannot afford higher property taxes.

Comments

Although the program's rationale is based on the need to provide tax relief to disabled persons, specific evidence of need is generally not required to qualify.

This program was authorized by Proposition 110, which was approved at the June 1990 statewide primary election, and was implemented by Chapter 1494, Statutes of 1990 (AB 3843, Cannella). It applies to replacement homes acquired and improvements completed after June 5, 1990.

Exemption (Assessment):

Active Solar Energy Systems

Description

This program exempts from assessment as new construction certain active solar energy systems. To qualify, a system must produce heat, electricity, or mechanical energy, and its collection and storage devices must be thermally isolated from the space where the energy is used. Wind energy systems do not qualify. The exemption applies to systems constructed or added after March 1, 1981. The law also specifies that the exemption does not apply to that portion of the construction or addition associated with solar swimming pool heaters which is in excess of the cost of a comparable conventional fossil fuel heating system. Because they are not assessed when they are built, qualifying solar energy systems remain exempt from property taxation until a change of ownership occurs and triggers an assessment.

Rationale

This program provides a tax incentive for the expanded use of solar energy technology. It accomplishes this by reducing the relative cost of such installations compared to conventional systems. This reduction in the relative cost of active solar energy systems may, in combination with the net energy cost savings provided by such systems, result in lower total installation, operating, and maintenance costs over the system's life than the total costs for comparable conventional systems. The program's underlying rationale is the view that promoting solar energy technologies is desirable and, therefore, worthy of public financial support.

Comments

This program is scheduled to sunset on January 1, 2006.

Exemption (Assessment):

Veterans' Exemption

Description

This program exempts from the property tax up to the first $4,000 of assessed value of property owned by a veteran. Veterans may not claim both this exemption and the homeowners' exemption on the same piece of property. Most U.S. veterans qualify for the program. In addition, property owned by a veteran's widow or widower may qualify for the exemption as long as he or she remains unmarried. A deceased veteran's parents also may qualify.

Rationale

This program is intended to provide tax relief to qualified veterans and their families. The rationale for the program is that veterans have served their country and, therefore, are deserving of certain governmental benefits.

Comments

According to the Board of Equalization (BOE), this exemption has not been claimed frequently since the homeowners' exemption became available. This is because the homeowners' exemption has the greater value to the taxpayer. The BOE also points out that, when this exemption is claimed, it most commonly is claimed on boats and airplanes.

Previous requirements that veterans must have resided in California when they were inducted into the armed services were deleted by Proposition 93, approved in the November 1988 statewide general election. Similar residency requirements in other states have been judged unconstitutional by the federal courts.

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