TPZ Taxation Issue
What Is Fair?
The Timberland Production Zone (TPZ) and the taxation policies relative to it are not well understood by many. There is a misconception that those who have homes on TPZ parcels have a “subsidized” tax rate on their property. To put this in perspective one must look at the totality of the tax treatment of a TPZ property in light of the following:
- Proposition 13
- The applicable annual tax rate
- TPZ Lands, Timber and Tax Treatment There of
- Tax equality and fairness
Proposition 13
After Prop 13 was adopted in 1978, the assessed valuation of all California real property was capped at a 2% per year increase in assessment values EXCEPT for TPZ lands and the timber growing upon these lands (standing timber is legally defined as real property). Real property assessment could only exceed this 2% yearly cap upon the sale of the property to a new owner. When a property is sold, the Assessor is allowed to reassess the property to current market value and the 2% per year cap is reinstituted upon the new assessment value.
Applicable Annual Tax Rate
The average annual tax rate of all real property in Humboldt County is slightly over 1% of the assessed value of the parcel. This rate will vary depending upon the number of special district bonds that may be pertinent to the parcel (i.e. school district, water districts etc.).The State’s yield tax rate that is applied to the assessed valuation of timber is currently 2.9%, nearly 3 times the rate of other real property.
TPZ Lands and Tax Treatment
The taxes derived from TPZ lands can be broken down into three categories:
- Those taxes derived from the underlying ground
- Those taxes derived from improvements upon the underlying ground and
- Those taxes derived via the State Timber Yield Tax
The State TPZ law exempts TPZ lands from the Prop 13 cap of a 2% per year assessment increase. Instead it allows the State Board of Equalization (BOE) to determine the assessment values on an annual basis. The BOE notifies the County Assessor annually as to what the permitted assessment will be. The initial assessed value of the highest Site TPZ land was originally set at $80/acre (1977) and in 2007 it was set at $248/acre. This reflects a 310% increase in assessed valuation, which equates to a 10% per year average annual increase in assessed valuation. This is 500% more than would be allowed were TPZ lands subject to Prop 13 (as all other lands are).
The County Assessor is permitted to assess the improvements upon a TPZ parcel in the same manner as a non TPZ parcel. A residence on a TPZ parcel is treated similarly to a house that is situated on a differently zoned parcel. It receives the benefits and constraints of Prop 13, just like a house elsewhere would. The Assessor is also allowed to assess the ground underlying the building site of an improved TPZ parcel and assess it as any other parcel. Normally this building site size is set at least one acre and is valued as such. So there is NO tax break given to the residence situated upon a TPZ parcel.
Standing timber is classified as real property and is subject to the State Yield Tax. Since the yield tax was implemented in 1976, the assessed valuation of young growth redwood timber has gone from an initial assessed valuation of $120/MBF (initial 1977 value) to $830/MBF (12/31/08 value). This is a 700% increase in valuation over a 31 year period, which reflects an average annual increase of over 22% per year. Contrast this to Prop 13’s cap of 2% per year for all other real property assessments.
Tax Equality and Tax Fairness
Taxation equality is a myth and owners of equal properties do not pay equal taxes.
For example: consider three separate, side-by-side identical subdivision houses (A, B&C). All three houses were built and sold in 1990 for $100,000 each. Taxes were (at 1% average) $1000/year.
In 1995 – House A sells for $150,000 – taxes are now $1500/year (1%)
Houses B&C taxes are $1104/year (Prop 13 adjusted)
In 2005 – House B sells for $300,000 – taxes are now $3000/year (1%)
House C taxes are $1345/year (Prop 13 adjusted)
House A taxes are $1826/year (prop 13 adjusted)
Three identical houses, each with a different taxation value.
Summary
In summary, once one gets beyond the rhetoric and sound bites of “tax payer subsidies” and “tax inequity” regarding TPZ lands, the facts are:
- Residences on TPZ lands are treated no differently than any other residence on non-TPZ lands.
- TPZ lands are exempt from the Prop 13 two percent annual assessment cap and have averaged a 10% annual assessment increase since inception of TPZ.
- Standing timber is exempt from Prop 13 and its increased annual assessment has averaged 22%/ year since the yield tax inception.
- The annual tax rate on timber is 3 times the rate of other real property.
- Tax policy is not “fair” and it is a rarity when identical properties pay identical taxes.
