February 5, 2016
This is the sixth blog post in our series California’s Property Tax: Where Does Your Money Go? In our earlier posts (here and here), we explained how local governments’ AB 8 shares—the amount of property tax they receive—are based on the property taxes they levied in the mid-1970s. As we discussed in this post, local governments’ shares of the property tax were set by the laws that implemented Proposition 13. Today’s post examines the conditions under which these shares change.
Shares Change Slightly Year-to-Year Due to Changes in Assessed Values. The taxable value of property—known as its assessed value—is based on its purchase price and increases annually by no more than 2 percent. When property is sold, the new assessed value reflects the price paid for the property (its market value). Because assessed value typically grows more slowly than market value, the assessed value of a property usually increases notably as a result of a sale. As we explain in our video, when property taxes are distributed, areas where assessed values grew receive additional property tax revenue. The portion of growth each local government receives is based on state laws implementing Proposition 13. As a result of the growth, local governments’ AB 8 shares can change slightly year-to-year depending on how much growth local governments receive relative to others in the county.
Changes in the Local Governments’ Jurisdictions Can—But Do Not Always—Affect Shares. There are thousands of local governments across California. As discussed in an earlier post, local governments include counties, cities, schools, and special districts. On occasion, local government changes—including forming a new local government or changing a local government’s boundaries—can affect local governments’ property taxes. Below, we discuss how and when local governments’ property tax shares change.
Formation. As discussed in a prior post, Proposition 13 made significant changes to property taxes for local governments. Generally, local governments formed after Proposition 13 receive property tax revenue based on the services they take over from existing local governments. When San Ramon formed in 1983, it took over most municipal responsibilities from Contra Costa County. As a result, San Ramon took a portion of Contra Costa County’s property tax revenue to provide those services.
Boundary Changes. Sometimes the boundaries of cities, schools, and special districts change. Often this happens to improve the efficiency of service delivery. For instance, if a city could provide services more efficiently to an area being served by the county, the determination could be made for the city to expand its boundaries and take over the municipal services in that area. In these cases, the local governments affected by the boundary change must negotiate how much property tax revenue should be exchanged. Recently, Huntington Beach expanded to encompass an area known as Sunset Beach. When this occurred, a portion of the property tax revenue funding Orange County’s services was transferred to Huntington Beach.
Dissolution. Local governments can dissolve if their services are taken over by another local government or private provider. The process for dissolution is complex, but by dissolving, a determination must be made as to how to distribute the local government’s property taxes. Generally, there are two choices: (1) reduce residents’ property tax rates (based on the share of property taxes the dissolved local government received) or (2) distribute the property taxes to another local government taking over some portion of the dissolved government’s services. In 2006, Los Trancos County Water District sold its water system to a private water provider. Despite no longer providing water services, the district continued to provide some other services—including fire safety, stormwater runoff management, and land management—using its property tax revenue. Almost ten years later, in 2015, the district dissolved by reaching an agreement with San Mateo County to take over these services in exchange for the district’s property tax revenues.
As described in the Los Trancos case, dissolving a district and transferring the property tax revenue can take many years. In some cases, districts continue to collect property tax revenue despite no longer providing the services for which they were originally created. A future post will discuss some examples of this phenomenon.
Follow @LAOEconTax on Twitter for regular California economy and tax updates.