Prop. 13 Ruling Means No Tax Refund

A state appeals court in Santa Ana on Friday spared governments across California a potential $10-billion hit by upholding how Orange and other counties assess property taxes.

The 4th District Court of Appeal said the technique used by Orange County in assessing taxes, called recapturing, and which is also used by counties across California, is constitutional under Proposition 13, the landmark property tax limit approved by voters in 1978.

The process allows the tax assessor to increase the value of property above Proposition 13’s annual 2% limit after it has lost value or stayed flat in previous years, in order to recover revenues lost because of the temporary market decline.

“The temporary nature of any reassessment for a decline in value cannot be overstressed,” Presiding Justice David G. Sills wrote for the court.

The ruling overturns an earlier decision by Orange County Superior Court Judge John M. Watson that invalidated the commonly accepted practice.

Had the appellate court upheld Watson’s ruling, the state estimated that as much as $10 billion in property tax revenue would have had to have been refunded to property owners whose assessments increased more than 2% in a year.

The case involved Seal Beach homeowner Rob Pool, a tax attorney who vowed to ask the state Supreme Court to review the unanimous decision released Friday.

The appellate justices were intimidated by the possibility of a flood of refund requests, he said, which representatives for state and local government argued in court briefs that they could not afford.

“I still think it’s all about the money,” Pool said. “They’re not dealing with the pure language of the [law].”

“For the state of California, this was proper and just,” said Orange County Assessor Webster J. Guillory.

Local government officials statewide were concerned about a contrary outcome, said Tom Wilson, chairman of the Orange County Board of Supervisors.

If the justices had upheld Watson’s 2001 ruling, the county’s general fund would have had to repay $18.6 million in property taxes, county Auditor-Controller David E. Sundstrom estimated.

“I’m sure officials all over the state are cheering,” Wilson said. “This sets a precedent and gives us a measure of relief. We’ve had enough to deal with from the state budget.”

State officials were also relieved.

“The ruling means the state doesn’t have a multibillion-dollar threat to its budget,” said H.D. Palmer, spokesman for the Department of Finance.

“The fiscal threat was substantial, at a time we’re already trying to close a budget gap of $14 billion.”

Pool and his wife, Renee Bezaire, were sued by Orange County in 1998 after successfully arguing before a local assessment appeals board that the 4% increase in their home’s assessment that year violated Proposition 13’s provisions.

The couple and their attorney, Pool’s law partner David Gangloff, argued that Proposition 13 limited assessment increases to no more than 2% over the previous year, regardless of whether the property’s value had recovered from a stagnant real-estate market.

Guillory and his attorney, Robert D. Luskin, argued that the 2% annual limit applied overall to each year since the property was purchased.

Even if there had been a temporary drop in value, they said, assessors were allowed to “recapture” the 2% annual amount that hadn’t been collected once the property regained its value.

The appellate court’s 17-page decision sided with Guillory’s argument. The 2% annual limit on property assessment increases, they said, was tied to the original purchase price, not to the previous year’s assessment.

However, the overall increase could not exceed more than 2% for each year after the property was purchased or underwent major construction.

The judges did a thorough job in studying the language of Proposition 13 and a second measure, Proposition 8, which was passed in 1978, said Orange County Treasurer John M.W. Moorlach.

Proposition 8 allowed for property assessments to be reduced in case of fire or other disaster.

The language of Proposition 13 “was sitting there the whole time and Judge Watson didn’t get it,” Moorlach said.

Despite the potential loss to the county, Watson’s ruling was popular among homeowners who had been hit with double-digit percentage increases in their property assessments.

Watson made the case a class-action, meaning it applied to all county property owners who had their property assessments recaptured.

Among those disappointed by Friday’s ruling was Nedra Crocker, a retired graphics artist from Fullerton, who has appealed her home’s assessment several times. After she would win a reduction in value, the county would return the following year and recapture it, she said.

“Every year is a renewed fight,” she said, even as neighbors who more recently bought their homes during a period of depressed prices saw their increases rise no more than 2% each year.

In an apparent show of sympathy with homeowners, the Orange County Board of Supervisors voted 4 to 1 against appealing Watson’s ruling.

Supervisors said it was up to the assessor to defend his assessment practices, and Guillory’s office filed the appeal.

In a brief filed with the appellate court, state finance officials estimated that $5.3 billion in refunds would have come from the state to reimburse refunds given by school districts.

County and city governments would lose $4.7 billion from refunds and would suffer from a future drop in their tax base.

The state refund estimates were based on four years’ worth of repayments -- the maximum allowed under the statute of limitations -- even though Watson’s ruling potentially extended refunds back to 1978, the year Proposition 13 was passed.