Legislative Analyst's Office, February 1999

California's
Tax Expenditure Programs

Property Tax Programs--Overview


This section provides information on tax expenditure programs (TEPs) that affect the property tax levies on real property and tangible personal property throughout the state. Virtually all property tax revenues are distributed among the various local government jurisdictions within the county in which the property is located. The property tax is largely administered by local assessors in each of the 58 counties. The Board of Equalization (BOE) provides oversight, is responsible for certain administrative functions, and assesses specific categories of properties.

General Property Taxes

Unlike most other state and local revenue sources, the property tax is a tax on "stock" (or point-in-time value) rather than on "flow" (such as an income flow under the PIT and BCT). Property taxes are levied on the owners of property and are based on the dollar value of the property at a particular point in time. For this reason, the property tax is sometimes referred to as an "ad valorem" (or "according to value") tax. The property tax applies to all classes of property--residential, commercial, industrial, agricultural, open space, timberland, and vacant land. The characteristics of the property tax, as well as certain administrative issues associated with it, are discussed below.

Tax Base. The property tax base consists of real property, as well as certain types of tangible personal property. Real property includes land, permanently attached improvements (such as buildings and other structures), permanent fixtures (such as installed equipment and machinery), mineral rights, most mobilehomes, and real property located on tax-exempt land. Personal property subject to the property tax includes equipment, portable machinery, office furniture, vessels, and aircraft.

As the following descriptions of property tax expenditure programs illustrate, many types of property are exempt from the property tax, due to a variety of reasons. For example, federal government property is not taxable under federal law. Property owned by other governments or charitable organizations is not generally subject to the tax, nor is household personal property, automobiles and trucks (although vehicles are subject to an "in-lieu" license fee), stocks and bonds, and business inventories. Based on the various exemptions to the property tax, it should not be viewed as a broad-based wealth tax, but rather as a levy on specific types of real and tangible personal property.

Assessment Procedures. The assessment of most property, including personal residences, office buildings, and personal property, is done locally by county assessors.

Certain types of properties are assessed by the state, since they typically involve activities which cross county boundaries and have value only in combination with their related properties. These properties assessed by the state include utility and railroad property, pipelines, flumes, canals, ditches, and aqueducts.

Prior to the adoption of Proposition 13 in June 1978, properties were assessed based on market standards. Using one or a combination of several methodologies, a determination was made as to what the property was currently worth on the open market--that is, its "fair market value." The process of property assessment changed dramatically as a result of Proposition 13's mandated constitutional changes. For locally assessed real property, the state changed from an assessment system based on market value to one based on acquisition value. The most important aspects of the current approach are as follows:

Most properties are assessed annually on January 1 (the lien date). For properties that change ownership during the calendar year, the supplemental roll is the mechanism used to record the change in assessment immediately. Through the supplemental roll, the new owner pays a prorated tax to reflect the new assessment for the remainder of the year.

Property other than locally assessed real property continues to be assessed based on market standards that were used for all property prior to the adoption of Proposition 13. This approach applies to both locally assessed personal property and state assessed property. For locally assessed personal property, the county assessor has the responsibility for determining fair market value. For state assessed property, this assessment responsibility falls upon the BOE. No single appraisal method is used in establishing fair market value; rather, it is dependent upon the type of property, the purpose for which it is used, and its particular market characteristics. Common approaches to property valuation include: purchase price, adjusted sales price of comparable properties, replacement cost, and discounted value of a property's income stream.

Tax Rate. As a result of Proposition 13, the basic county-wide property tax rate is constitutionally limited to 1 percent of assessed value, although lower rates are permitted. Additional levies are possible for the payment of voter approved general obligation debt or for the funding of employee retirement plans adopted prior to July 1, 1978.

Property tax rates can vary within a county due to variation in the debt rates that are levied by local governmental jurisdictions. For 1997-98, average county-wide tax rates ranged from 1 percent (for those counties with no add-on rate), to 1.189 percent (for the City and County of San Francisco). The state average of county-wide rates for 1997-98 was 1.067 percent. The revenue reduction estimates shown in the following individual TEP reviews are based on the 1 percent tax rate.

Tax Levy. The property tax levy is calculated by taking the taxable assessed value and multiplying it by the property tax rate. The growth rate in the taxable assessed value (net of exemptions) was 3.3 percent from 1996-97 through 1997-98, while the change in the total levy for the same period was slightly higher at 3.7 percent. This discrepancy was caused by a slight increase in the average tax rate, due to increased debt assessments. The property tax annually raises more than $20 billion.

Allocation of Revenues. Property tax revenues are allocated among the various local government jurisdictions within the county based on a formula determined by the Legislature. The allocation formula is based largely on the distribution of property tax revenues which existed just prior to the adoption of Proposition 13. For state assessed properties, the allocation of property tax revenues among counties is prorated based on the location of the property.

Due to the change in assessment procedures and the limitation on the property tax rate, property tax revenues underwent a dramatic decline after Proposition 13 was approved in 1978. With the reduction in revenues, property tax revenue allocation among local governments has been adjusted on a number of occasions by legislation since Proposition 13 was adopted. In addition, the allocation of property tax revenues varies among counties. On a statewide basis, however, cities currently receive an average of 11 percent of total property tax revenues, counties approximately 19 percent, school districts 52 percent, and other local entities 18 percent.

In-Lieu Property Taxes

A number of types of property are exempt from the property tax and are instead subject to an alternative tax. The revenues from these in-lieu property taxes are either returned to local governments or retained by the state.

Private Railroad Car Tax. Owners of private railroad cars must pay the private railroad car tax on cars operated in California. Under the federal Railroad Revitalization and Regulatory Reform Act (4-R Act) adopted in 1976, states are prohibited from taxing railroad property more than other commercial and industrial property. Since railroad property is assessed annually based on fair market value, while commercial and industrial property is assessed based on acquisition value, California modifies its assessment of railroad cars using an adjustment ratio in order to comply with 4-R. For 1997-98, BOE applied an assessment ratio of 86.69. Revenues generated by the Private Railroad Car Tax are deposited in the state's General Fund. Total taxes billed in 1997-98 were $6.2 million.

Timber Yield Tax. Forest trees on private and public lands are subject to a severance tax at the time of their harvest, based on a tax rate which is determined periodically by the BOE. Since 1982, the tax rate has been 2.9 percent of the harvest value. Timber harvest volume from California lands has decreased in the recent past, declining from approximately 4.5 billion board feet in 1988 to approximately 2.4 billion board feet in 1996. Revenues are allocated to the counties where the timber is harvested, and totaled $26.7 million in calendar year 1996.

Racehorses. Qualifying racehorses are exempt from being taxed as personal property and instead are taxed based on their activities and earnings. This tax is administered by the counties, and revenues are treated in the same manner as general property taxes. The taxes are remitted to the assessor of the county in which the horses are quartered.

Vehicle License Fee (VLF). The VLF is an annual fee on the ownership of a registered vehicle in California, levied in place of taxing vehicles as personal property. Beginning January 1, 1999 (as part of a tax relief package enacted in 1998), the fee was lowered by 25 percent, bringing the tax rate to 1.5 percent of the estimated current value of the vehicle. All VLF revenues, as well as replacement revenues to account for the rate reduction, are distributed to cities and counties. The VLF raised about $4 billion in 1997-98.


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