Written July, 2004
Three Major Local Government Taxes
Vehicle License Fee (VLF)
Local Sales Tax
The State Constitution and existing statutes give the
Legislature authority over the three major taxes described in Figure 1. For
example, the Legislature has some authority to change tax rates; items subject
to taxation; and the distribution of tax revenues among local governments,
schools, and community college districts. The state has used this authority for
many purposes, including increasing funding for local services, reducing state
costs, reducing taxation, and addressing concerns regarding funding for
particular local governments. Figure 2 describes some past actions the
Legislature has taken, as well as actions that the state was considering during
the summer of 2004 (at the time this analysis was prepared).
Funding for Local Services. In 1979, the state shifted an
ongoing share of the property tax from schools and community colleges to
local governments (cities, counties, and special districts). This shift
limited local government program reductions after the revenue losses
resulting from the passage of Proposition 13, but increased state
costs to backfill schools’ and community colleges’ property tax
State Costs. In 1992 and 1993, the state shifted an ongoing
share of property taxes from local governments to schools and community
colleges. This had the effect of reducing local government resources and
reducing state costs. The state also reduced its costs by deferring
payments to local governments for state mandate reimbursements (most
notably, in 2002 and 2003) and for a portion of the VLF backfill (2003).
Taxation. Beginning in 1999, the state reduced the VLF rate to
provide tax relief. The state “backfilled” the resulting city and
county revenue losses
Concerns Regarding Funding for Specific Local Governments. In
the past, the state has at various times adjusted the annual allocation
of property taxes and VLF revenues to assist cities that received very
low shares of the local property tax.
Under Consideration in July 2004
State Costs. The state was considering shifting $1.3 billion
of property taxes in 2004-05 and in 2005-06 from local governments to
schools and community colleges to reduce state costs. The state also was
considering deferring 2004-05 mandate payments to local governments.
Local Finance. The state was considering replacing city and
The State Constitution generally requires the state to
reimburse local governments, schools, and community college districts when the
state “mandates” a new local program or higher level of service. For
example, the state requires local agencies to post agendas for their hearings.
As a mandate, the state must pay local governments, schools, and community
college districts for their costs to post these agendas. Because of the
state’s budget difficulties, the state has not provided mandate reimbursements
in recent years. Currently, the state owes these local agencies about $2 billion
for prior-years’ costs of state-mandated programs.
This measure amends the State Constitution to
significantly reduce the Legislature’s authority to make changes affecting any
local government’s revenues from the property tax, sales tax, and VLF.
Specifically, the measure requires approval by the state’s voters before a
legislative measure could take effect that reduced a local government’s
revenues below the amount or share it would have received based on laws in
effect on January 1, 2003. For example, this measure would require statewide
voter approval before a law took effect that:
Shifted property taxes from local governments to schools and
Changed how sales taxes are distributed among cities and counties.
Exchanged city sales taxes for increased property taxes.
Revised the formulas used to distribute property taxes among local
Proposition 65 also would suspend any law enacted
after November 1, 2003 that would have required voter approval under the terms
of this measure. Suspended laws would take effect only if they were approved by
the state’s voters at the next statewide election.
The measure provides two exceptions to these
voter-approval requirements. The state could enact laws that (1) shift
property taxes among consenting local governments or (2) replace VLF
revenues with an equal amount of alternative funds.
This measure also places into the State Constitution two
existing state statutes relating to local finance. These statutes require the
state to pay deferred VLF backfill revenues to cities and counties ($1.2 billion)
by August 2006 and reestablish the local sales tax rate at 1.25 percent
after the state’s deficit-related bonds are paid.
The measure amends the
State Constitution to reduce the state’s authority over local government,
school, and community college programs. Specifically, if the state does not
provide timely reimbursement for a mandate’s costs (other than mandates
related to employee rights), local agencies could choose not to comply with the
state requirement. The measure also appears to expand the circumstances under
which the state would be responsible for reimbursing local agencies for carrying
out a new state requirement. For example, the measure may increase the state’s
responsibility to reimburse local governments when the state increases a local
agency’s share of cost for a jointly financed state-local program.
Proposition 65 would reduce state authority over
local finances. Over time, it could have significant fiscal impacts on state and
local governments, as described below.
and More Stable Local Government Revenues. Given the number and magnitude of past state actions affecting local
taxes, this measure’s restrictions on the state’s authority to enact such
measures in the future would have potentially major fiscal effects on local
governments. For example, a legislative measure that reduces local government
revenues may not receive the necessary voter approval required under this
measure. In addition, there may be other cases where the Legislature and
Governor do not pursue legislation to reduce local revenues because of the
perceived difficulty in obtaining voter approval. In these cases, this measure
would result in local government revenues being more stable—and higher—than
otherwise would be the case. The magnitude of increased local revenues is
unknown and would depend on future actions by the Legislature, the Governor, and
the state’s voters. Given past actions by the state, however, this increase in
local government revenues could be in the billions of dollars annually. These
increased local revenues could result in higher spending on local programs or
decreased local fees or taxes.
Lower Resources for State Programs. In general, the measure’s
effect on state finances would be the opposite of its effect on local
finances. That is, this measure could result in decreased resources being
available for state programs than otherwise would be the case. This reduction,
in turn, would affect state spending and/or taxes. For example, if the state’s
voters rejected a proposal to use local government property taxes as part of the
state’s budget solution, the Legislature would need to take alternative actions
to resolve the state’s budget difficulties—such as increasing state taxes or
decreasing spending on other state programs. As with the local impact, the total
fiscal effect also could be in the billions of dollars annually.
Less Change to the Revenue of Individual Local
Governments. Proposition 65 restricts the state’s authority to
reallocate local tax revenues to address concerns regarding funding for specific
local governments or to restructure local government finance. For example,
measures that changed how local sales tax revenues are allocated to cities and
counties, or that shifted property taxes from a water district to another
special district, would not become effective until approved by voters at a
statewide election. If the state’s voters did not approve such reallocations,
or if the Legislature and Governor did not pursue them because of the perceived
difficulty in obtaining voter approval, this measure would result in fewer
changes to local government revenues than otherwise would have been the case.
This analysis was prepared in mid-July, before the
state’s budget for 2004-05 was adopted. At that time, the Legislature was
considering the Governor’s proposal to shift $1.3 billion of property taxes from local
governments to schools and community colleges in 2004-05 and again in
2005-06. This shift would reduce local government resources by $1.3 billion
in each of the two years. It would
also decrease state costs by comparable amounts (because higher property taxes
to schools and community colleges result in lower state education costs). This
property tax shift, if adopted in the 2004-05 budget, would be affected by
passage of Proposition 65. That is, the property tax shift would be
suspended until voted upon at the subsequent statewide election (currently
scheduled for March 2006). If voters approved the shift proposal, it would go
into effect. If voters rejected the proposal, it would not go into effect, and
the fiscal impacts described above would be reversed. That is:
Local governments would retain the $1.3 billion
in property tax revenues in 2004-05 and in 2005-06.
The state would experience increased costs of comparable amounts.
Because the measure appears to expand the circumstances
under which the state is required to reimburse local agencies, the measure may
increase future state costs or alter future state actions regarding local or
jointly funded state-local programs. While it is not possible to determine the
cost to reimburse local agencies for potential future state actions, our review
of state measures enacted in the past suggests that, over time, increased state
reimbursement costs could exceed a hundred million dollars annually.
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