Proposition 13 has given California property owners the assurance that their assessment of real property will not increase by more than 2% per year, depending on the annual rate of inflation.

What about deflation?

The measure is the California Consumer Price Index (CCPI) for all items as determined by the California Department of Industrial Relations. It is measured in October of each year.

To illustrate how the inflation factor is calculated, these were the calculations last year: The CCPI for October 2007 was 218.959, and for October 2008 was 226.572. Converting this to a percentage, the increase was 3.477%. However, for assessment purposes, the maximum allowable increase is 2% under Prop. 13.

Since Proposition 13 was adopted, the yearly inflation factor has been 2% except for five of the fiscal years: 1983-84; 1995-96; 1996-97; 1999-00; 2004-05. Applied to the lien date, or the annual date at which property is reassessed, the years represent 1983, 1995, 1996, 1999 and 2004, now on January 1st of each year. The inflation rate in those years was between 1% and just under 2%.

For 2008, although we saw the trouble with the economy clearly by last Fall, the January 1, 2009, assessments had the full 2% increase because the inflation factor was based on October 2007 to October 2008 data B before the main downturn.

What will happen for the January 1, 2010, assessments given the state of the economy this past year? Could assessment increases be zero? Yes. Could it be a negative number so that assessments are actually decreased? Yes.

Interesting little quirk in how the Prop. 13 limit on inflation was written into the legislation and regulations. The Revenue and Taxation Code provision says the inflation factor "shall be the percentage of change." The Board of Equalization rule says it more explicitly: "The full value of real property shall be modified to reflect the percentage change in cost of living" so long is it is not in excess of 2%.

This "percentage of change" provisions mean that it can be either increase or decrease.

The State Board of Equalization on September 2, 2009, issued a Letter to Assessors (http://www.boe.ca.gov/proptaxes/pdf/lta09036.pdf) stating that if current economic trends continue through October 2009, the inflation factor "could result in reductions" to assessments as of January 1, 2010. David J. Gau, Deputy Director of the Property and Special Taxes Department, wrote, "It is our opinion that [the statute] requires factor adjustment whether positive or negative. If positive, the increase is limited to 2 percent. However, there is no such limitation to downward adjustments, including instances in which the net change to the CCPI is zero or less than zero."

The CCPI data posted on the Department of Industrial Relations website (as of September 2, 2009)(http://www.dir.ca.gov/dlsr/CAPriceIndex.htm) shows the October 2008 index value of 226.572, and the latest data available is for June 2009 with an index value of 224.994, which is equal to percentage change in the CCPI of -0.7%.

There are still four more months to be tracked (July through October) so it as anyone=s guess as to whether the final number will be a negative number, which can serve to lower assessments for 2010.

However, it won't be until mid-December that we know the result, as it takes that long for the CCPI data to be compiled and then the final property tax inflation factor for the following year are published by the Board of Equalization.

It should be noted that thousands of property owners across the state have obtained lower assessed values this year due to the fair market value of the property falling lower than the assessed values. Assessors call this a AProp. 8" adjustment and it is separate from the annual inflation factor discussed above. The Prop. 8 adjustment is temporary and based on fluctuations in market values of real property.

The assessor continues to track the property's "factored base year value" each year (i.e., the assessed value as of March 1, 1975, or the market value at the time of purchase or other change in ownership, to which the inflation factor is added each year), and this is where the annual inflation factor is applied. Each year (for most property) the assessed value of property is the lower of the current market value or the factored base year value. When property is assessed under a Prop. 8 adjustment, the assessed value can be increased at the rate that the market value increases each year (there is no 2% limit to this rate of increase), until such time as the fair market value becomes, once again, higher than the factored base year value. At that point, the Prop. 8 benefit ceases and the factored base year value (as the lower value) will be the assessed value.

So if the CCPI number is a negative number, the Prop. 13 "factored base year value" of properties will decrease throughout the state, but whether there is in fact a lower assessment of each property depends on how the property is being assessed that year: if the factored base year value is the assessed value, or whether a lower market value under Prop. 8 or a lower economic value under the Williamson Act (or similar programs) is the assessed value.

The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained herein.

This page updated September, 2009
This article: www.taxlawsb.com/resources/PptyTax/Could Infl Go Down.htm