Property Taxes: Contaminated Property. Legislative Constitutional Amendment.
	Analysis by the Legislative Analyst

Background

Local property taxes are based on each property's assessed value. As long as a property has the same owner, its assessed value generally cannot increase by more than 2 percent each year--even if the property's market value is increasing at a faster rate. As a result, the market value of many properties is higher than the assessed value. Whenever a property is sold or transferred, it is reappraised and its assessed value generally increases to reflect the current market value. In such cases, the property taxes for that piece of property also increase.

Current law allows for some exceptions to this general rule. For instance, homeowners over the age of 55 generally can transfer their current assessed value to a replacement home within their county and in some cases to other counties. Therefore, these homeowners do not experience an increase in property taxes when they purchase a replacement home.

Proposal

This constitutional amendment 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 would 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 cleanup site.
• A property is substantially damaged or destroyed by the environmental cleanup 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 measure 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 would be given the authority to extend this exemption to property owners moving from other counties and replacing environmentally contaminated property.

Fiscal Effect

By exempting these replacement properties from appraisal at market value, this measure could reduce property tax revenues to local governments. Currently, there appear to be relatively few properties that would qualify for this special treatment. As a result, the annual property tax revenue loss would likely be less than $1 million in the next few years. However, changes in environmental laws or the discovery of new environmental contaminations could significantly increase the number of eligible properties in the future.

Counties, cities, and special districts would bear about one-half of any annual revenue loss. The remainder of the loss would affect schools and community colleges, which also receive property tax revenue. Under existing law, these losses to schools and community colleges would be made up by the state.