Los Angeles Times

November 13 2001

An Orange County Superior Court judge has ruled that the method that tax assessors in California use to determine how some properties are taxed violates state law.

The decision applies to a single Seal Beach homeowner but if upheld on appeal could cost local governments millions of dollars and result in lower property taxes for thousands of homeowners.

At the heart of the case is how to apply Proposition 13, the landmark 1978 ballot measure that severely limited the amount of property taxes that local governments could collect. Proposition 13 prohibits counties from raising the taxable value of properties by more than 2% a year. But counties have maintained that the provision doesn't apply when property values remained flat or dropped during a down housing market, then climbed back as real estate values rebounded.

In these cases, counties regularly raise the taxable value of the property beyond 2%. For example, a home whose value remained flat for two years before rising could be retroactively assessed by 2% for each of the years the property value did not rise.

That's what happened to attorney Robert Pool, who bought a $330,000 Seal Beach home with his wife, Renee Bezaire, in November 1995. For two years, the home's taxable value stayed the same, thanks to a flat real estate market. But in 1998, the assessor raised the taxable value to $343,332, arguing that the 4% jump was justified.

Judge John M. Watson ruled this month that the Orange County assessor violated Proposition 13 by increasing the taxable value of Pool's home by 4% in a single year.

County attorneys argued that the assessment was legal because it made up for years in which the property value did not increase. The county maintains it was merely "recapturing" the full tax value of the property, charging 2% for each of the years the property values did not rise.

This "recapturing method" is unconstitutional, Watson wrote in his Nov. 2 ruling. Proposition 13 was clear that taxable values can't rise more than 2% per year, regardless of how much the property value rebounds, he said.

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., said Watson's ruling is the first time the issue has been tested in court. "This has profound implications for property tax policy and Proposition 13, specifically," said Coupal, a Sacramento attorney.

Watson still must rule on a motion to broaden the complaint to class-action status, meaning its ruling could apply to other cases statewide. Watson also would have to decide whether class-action status would apply to all property owners appealing their retroactive tax increases or a much larger group who have seen their assessments rise by more than 2% annually in the last decade.

If Watson's decision is upheld on appeal, it could have financial ramifications throughout California.