Local Tax Conflict Heats Up

For decades, it’s been an article of political faith – as well as law – that local government taxes designated for particular purposes require two-thirds approval by voters.

The supermajority vote provision was created by Proposition 13, California’s famous – or infamous – property tax limit measure, passed by voters in 1978, and later bolstered by another initiative, Proposition 218.

Two years ago, however, the state Supreme Court seemingly carved out a way for local governments to sidestep that law. It implied, in ruling on a Southern California marijuana case, that if special purpose tax measures are placed on the ballot by initiative petition, rather than by the local governments themselves, the two-thirds vote threshold might not apply.

Ever since, those who want to raise local taxes have yearned to learn whether the Supreme Court really meant to make an exception and, not surprisingly, San Francisco’s very liberal city government, acting on the advice of City Attorney Dennis Herrera, volunteered to become the legal guinea pig.

Members of the city’s governing body, its Board of Supervisors, personally sponsored two tax increase initiatives last year, one for the June election and another in November, both listed on the ballot as “Proposition C.”

The June measure, a tax on commercial rents to finance early childhood education and child care services, received 51 percent voter support. The November proposal, a tax on businesses to finance services and housing for the homeless, garnered 61 percent voter support.

With both votes below two-thirds, opponents of the measures sued, contending that they were invalid. The city began collecting the taxes, but not spending them, while the legal battle raged.

Last week, San Francisco Superior Court Judge Ethan Schulman agreed with Herrera and validated both taxes. However, he doesn’t have the last word. Business and anti-tax groups, such as the Howard Jarvis Taxpayers Association, vowed “an immediate appeal” and the issue is clearly headed to the state Supreme Court for a definitive ruling.

A third San Francisco tax measure, also placed by initiative petition and receiving a simple majority approval from voters in 2018, is also being contested. Proposition G imposes a new “parcel tax” on homes and other real estate to increase teacher pay.

Were the state’s highest court to convert its 2017 implication into declarative law, it would almost completely change the dynamics of local tax battles.

Rather than propose special purpose taxes directly, local officials and their political allies, especially public employee unions, could do it via initiative petition and completely bypass the long-standing supermajority vote requirement.

There is, however, another wrinkle to the situation.

Last year, as the San Francisco tax measures were being challenged, the state Supreme Court issued another decision that could affect the eventual outcome.

It declared that when former San Diego Mayor Jerry Sanders sponsored a 2012 ballot measure to reform city pensions, he was acting in an official capacity, not as a private citizen, and therefore was legally obligated to “meet and confer” with unions on something that affected their members’ compensation.

Logically, if Sanders was under that legal obligation as an official while sponsoring a ballot measure, then members of the San Francisco Board of Supervisors also were acting officially, and not as ordinary citizens, when they sponsored their tax measures. If so, their measures probably should have been subject to the supermajority rule.

It will be interesting to see how the court balances one ruling with the other, if it can, with financial stakes astronomically high in the outcome.

This article was originally published by CalMatters.org

Service Tax Proposal is a Veiled Tax Increase

California’s elected leaders are enjoying the fruits of a go-go economy, with record surpluses and record spending on education. So naturally there’s talk of tax increases.

Californians have enjoyed nearly 10 years of economic growth, and one of the biggest beneficiaries has been the state budget.

Since the depths of the recession the state budget has increased by 82%. That’s more than $95 billion. Compare that to the recession years when governor and legislators were forced to cut tens of billions of dollars in spending.

Healthy reserves and more spending on schools: what could go wrong?

Plenty. What goes up will inevitably crash down. Gov. Gavin Newsom earlier this month pointed to economic “headwinds.”

California’s state budget is notoriously volatile. The top 1% of earners pays nearly half of all income taxes. These taxes provide 70% of all general fund revenues. The Newsom administration forecasts that a moderate recession could reduce state revenues by $70 billion over three years.

A handful of elected officials and deep thinkers believe the answer to this volatility is to impose a new state sales tax on services. They say we need to “modernize” our state tax code. That means adding a sales tax to services like auto repair, accounting, attorneys, architects, advertising. And that’s just the “A”s.   

My organization, California Foundation for Commerce and Education, dug into this claim, and asked Encina Advisors, led by Justin Adams, a Stanford-trained economist, to determine its validity. We found:

  • A state sales tax on services would not meaningfully reduce budget volatility, no matter how you slice it. We looked at a variety of proposals that have been introduced in the Legislature in recent years and projected their impact on California’s budget revenue in future years.  None of the proposals would have meaningfully reduced budget volatility.
  • The primary driver of California’s budget volatility is the state’s reliance on the personal income tax. Unless lawmakers and voters commit to modifying the personal income tax rates, they’re not serious about addressing budget volatility.

We are inevitably led to conclude that, far from being an answer to budget volatility, a tax on services is merely a thinly-veiled effort to raise taxes and pull even more revenue into state government.

Finally, and most troubling, a sales tax on services would make California’s affordability crisis worse.

We found that adding a sales tax on services would increase the costs to consumers and businesses of services they use every day from lawn care to lawyers, child care to morticians. Limiting the new sales tax to services purchased by businesses won’t shield consumers. Businesses will simply pass along those costs.

Worse, these added costs to businesses are baked into prices every time the product or service moves along the production chain, a dynamic called “pyramiding.”

We found that a 5% sales tax on business services would increase the cost of a typical new house by 3%, from $546,000 to more than $562,000. This comes from adding a tax to the contractors, attorneys, architects, real estate, mortgage financing and other services that go into the cost of a house.

The costs of building new schools or expanding or repairing infrastructure would be similarly boosted by a higher services tax.

With record budget surpluses, talk of new taxes should be political malpractice. Since a services tax doesn’t itself reduce budget volatility, dressing it up as a tax reform is like painting stripes on a donkey and calling it a zebra.


Loren Kaye is president of California Foundation for Commerce and Education, Loren.Kaye@CalChamber.com. He wrote this commentary for CALmatters.

Use $21 Billion Surplus Instead of Taxing Californians More

California has a record $21.5 billion surplus.

That’s the good news. The bad news is that we have all that money because you are being overtaxed.

Earlier this month, Gov. Gavin Newsom released his revised budget proposal, the largest in California history.

At a staggering $214 billion dollars, the budget is larger than that of most nations and every other state.

The budget also includes a new $140 million tax on water customers to help all Californians have access to clean water.

Clean water is important, and there are a million people in the Central Valley without access to it. But do we need a new tax to pay for it?  Maybe we don’t.

To read the entire column, please click here.

California May Be Reaching the Point of ‘Taxuration’


taxesThe phenomenon of “taxuration” occurs when taxpayers are so saturated with new tax-hike proposals that they start to rebel. According to a new poll, taxuration may have finally arrived in California, if hasn’t been here already.

Last week, the Public Policy Institute of California released the findings of a survey showing that a majority of likely voters in the state aren’t very happy with the tax burdens they are forced to pay. Most Californians say the state’s tax system is unfair, which is a reversal from the same question asked in March 2017. More importantly, a solid majority of likely voters in California think they pay more taxes to state and local governments than they should.

While perception is often not correlated with reality, it appears that Californians have a fairly realistic understanding of the tax burden in the state relative to other states. According to the report, “The public’s perceptions are somewhat in line with fiscal facts: California’s state and local tax collections per capita in 2015 were 10th-highest in the nation,” citing the left leaning Tax Policy Center. Note that another think tank, the Tax Foundation, ranks California even higher in tax burden.

It shouldn’t be surprising to anyone paying attention that citizens are reaching the breaking point on tax hikes. Every day seems to bring a new big tax-hike proposal emanating from the state Capitol. Just one example that popped up this week was a proposal to bring back California’s estate tax, which was repealed by voters in 1982. Other tax-hike proposals in the mix include higher income tax rates, a water tax, a soda tax, sales tax on services and a so-called “carbon intensity” tax. (Don’t ask.)

To read the entire column, please click here.

Are Big Tax Increases Coming to California?


TaxesGavin Newsom’s election as governor and the expanded Democratic Party majorities in the Legislature have raised hopes in some quarters and fears in others that big tax increases may be on the horizon.

During his campaign for governor last year, Newsom pledged support for a variety of expensive public services, including universal health insurance coverage and universal pre-kindergarten care and education.

His initial budget offered only token appropriations for those and other items on his wish list, but were he to seriously pursue them, they would require tens of billions of dollars in new taxes each year.

Newsom has proposed a new tax on water to pay for cleaning up municipal water supplies in impoverished communities. Several other targeted taxes have also been introduced in the Legislature.

Meanwhile, an initiative has qualified for the 2020 ballot to undo some of Proposition 13’s property tax limits. The measure would create a “split roll,” removing the 2 percent annual cap on increases in assessed valuation for non-residential, non-agricultural commercial property, such as office building and shopping centers.

If passed, it would raise property taxes by perhaps $10 billion a year – a lot of money, certainly, but far short of what the most ambitious service expansions would need. However, the initial polling on the split-roll measure doesn’t bode well for its passage, and the commercial real estate industry has pledged to spend $100 million to defeat it.

The more likely avenue for big tax increases would be some version of tax reform, which Newsom has endorsed in principle.

However, it must contend with the simple fact that we Californians are, in the aggregate, already carrying one of the nation’s highest tax burdens and quite possibly the highest.

The Tax Foundation, a Washington-based organization that charts taxation trends, has California at No. 6 in state and local tax burden as a percentage of personal income, the most accepted method of comparison. It pegs Californians’ burden at 11 percent of personal income.

However, that’s based on 2012 data, so it is seven years out of date, and it does not include all forms of taxation.

A more up-to-date estimate is that California’s state and local governments collect about $325 billion a year in taxes, and that works out to 12.5 percent of personal income, estimated by the state as $2.6 trillion this year, thus putting us very near the top of the states.

So, assuming that Newsom and his fellow Democrats in the Legislature want a bigger tax bite to finance their expansionist ambitions, what form would it take?

Income taxes? They already supply 71 percent of the state’s general fund revenues, half of them are paid by the top 1 percent of taxpayers and California already has the nation’s highest marginal tax rate, 13.3 percent on incomes over $1 million.

Sales taxes? We’re at or near the top in those rates as well, 10 percent in many communities.

Property taxes? That would require not just a split roll for commercial property, but voter permission to virtually repeal Proposition 13’s protections for homes, which polling indicates would be close to impossible.

The real world effect of a big tax increase, moreover, would be magnified by new federal tax laws that sharply limit deductions for state and local taxes, raising the likelihood of a political backlash.

So are we going to see a big tax increase? However much Newsom, et al, might want it, the political lift would be daunting.

This article was originally published by CalMatters.org

California Voters Could Be Asked To Impose An Estate Tax

property taxCalifornia voters would consider a state-mandated tax on the assets of wealthy residents, one that could generate as much as $1 billion a year for low-income families, under legislation introduced in the state Legislature on Tuesday.

The bill would ask voters next year to impose an estate tax of a size equal to what was loosened in 2017 by President Trump and Republicans in Congress as part of a broad tax overhaul law. The goal, said the proposal’s author, is to create an overall tax burden for wealthy Californians equal to what existed before the federal tax break was created.

Under Senate Bill 378, the revenues from the tax would be earmarked for programs designed to combat income inequality.

“A California estate tax benefits low-income families by helping them build wealth and end the cycle of intergenerational poverty,” state Sen. Scott Wiener (D-San Francisco) said in a written statement. …

Click here to read the full article from the Los Angeles Times

California Lawmakers Want More Dollars from the Middle Class


TaxesBlue collars in California are once again being targeted by lawmakers with a multitude of new taxes on the energy industry that will trickle into their pocketbooks.

Our current slate of lawmakers are aware from the California’s Legislative Analyst’s Office reports that personal income tax liability is concentrated among its top earners. Shockingly, almost 70% of the general fund comes from less than 5% of the population. The Governor’s budget summary for 2019-2020 reflects this scary trend.

The State has 40 million residents and relies on less than three percent or just over one million of its wage earners for most of the revenue allocated to the general fund. It’s enlightening to know that there are more than one million millionaires in California in the “basket” to help with the funding.

For more dollars and diversity, our lawmakers definitely need to be more creative in procuring attaining a great share of tax revenues from blue collar to support all the government programs. These extra costs on blue collar residents will “ensure” that California continues to suffer the highest percentage of people in poverty, homeless and welfare crisis that’s so acute it shocks the world.

A few of the creative new tax actions by our lawmakers for 2019 and 2020 under serious consideration are:

  • SB-246 Oil and Gas severance tax
  • AB-40 Zero-emission vehicles: comprehensive strategy
  • Property Tax Initiative on “Split Roll” to assess commercial and industrial properties at fair market value while leaving homeowners’ Proposition 13 protections in place

 

The 95% of the residents not contributing significantly to the General Fund, and most likely not able to afford an EV, will start picking up a higher percentage of the revenue directed to the General Fund and help subsidize grid infrastructure, charging technology, and the endless list of government programs that are now principally funded by the 5%.

The California Energy Island is a huge energy user requiring 60 million gallons of fuel manufactured daily in-state to meet the energy consumption demands of airlines, trucks and cars.

The extra costs imposed on the manufacturers are ultimately passed on to the consumers, a major reason that Californians already pay almost a dollar more for fuel than the rest of America, and more for the cost of electricity, that are both increasing with each new “tax “and additional regulation.

To manufacture those fuels out-of-state or out-of-the-country and ship them into California ports would be even more expensive to the consumer, and increase emissions to the world as no other location on earth has the same environmental controls than California.

Our lawmakers are getting votes by constantly attacking the energy industry, but the industry is not going anywhere. The industry’s just passing those additional costs onto the consumer, and wrongly absorbing the heat for raising the cost of fuel!

The unintended consequences of more taxes on energy is that the lifestyles of all 40 million residents of California that rely on the fuels and the products manufactured from those deep earth mineral/fuels, would result in blue collar folks contributing a greater portion to the General Fund than they now do. On the contrary, with no new taxes on the energy sector, the State can ensure that the top earning 5% continue to contribute 70% of the dollars to the General Fund.

ounder and ambassador for Energy & Infrastructure of PTS Advance, headquartered in Irvine, California.

5 bills target consumption of sugary drinks


SodaThe California Legislature’s determination to lessen the amount of sugary drinks consumed by state residents may never have been greater than now – at least if the metric used is the number of bills introduced. This session, five will be taken up, and more may be on the way.

For the third time, Assemblyman Richard Bloom, D-Santa Monica, has introduce a measure that would tax soda and other beverages sweetened with sugar.

The first two times, Bloom’s measure didn’t get out of committee after it faced intense, well-funded opposition from the American Beverage Association.

But Bloom told his hometown paper, the Santa Monica Daily Press, that the tax was urgently needed to nudge people to stop consuming so many unhealthy drinks.

“Everyone would acknowledge that health care costs are skyrocketing,” he said. “Diabetes and obesity are ongoing health-care crises and we need to get serious about prevention.”

Revenue from the tax – which has not been established yet but which was 2 cents per ounce in Bloom’s previous bills – would pay for programs meant to reduce diabetes and obesity. Bloom said 9 percent of state residents are diabetic and nearly half are at risk of developing diabetes.

Measure would ban Big Gulp-size sodas

Bloom’s bill will have plenty of similar company this year.

Assemblyman David Chiu, D-San Francisco, proposes a ban on soda servings of larger than 16 ounces in seal-able cups sold at restaurants and grocery stores. A similar ban in New York City was thrown out by New York state courts – but not for a reason that has relevance in California. Judges repeatedly held that the New York City’s health board overstepped its powers in imposing the ban and should have deferred to the New York state Legislature.

Assemblywoman Buffy Wicks, D-Oakland, hopes to end the common practice of displaying sodas near the checkout stands of food, convenience and other retail stores.

Sen. Bill Monning, D-Carmel, is for the fourth time proposing that sugary drinks sold in California have labels warning of their health risks. Monning said if tobacco products’ health risks are made plain with warning labels, so should the risks of soda.

Assemblyman Rob Bonta, D-Alameda, is touting a bill intended to prevent beverage companies from offering stores special deals with lower prices for sugary drinks.

Studies split on effect of Berkeley soda tax

Soda foes got good news on Feb. 21 when the American Journal of Public Health published a study saying that soda consumption plunged 52 percent in Berkeley in the first three years after the city adopted a soda tax.

But other research into Berkeley’s soda tax is far less encouraging, according to University of Southern California professor Michael Thom. He told the Santa Monica newspaper there was no evidence that residents reduced their caloric or sugar consumption and asserted there is little, if any, proof that soda taxes have a positive effect on human health.

A Harvard Business Review study based on an analysis of millions of transactions at California stores by Duke University professors Bryan Bollinger and Steven Sexton was also skeptical of claims of success in Berkeley. Published in January 2018, it noted that since most residents worked outside of Berkeley, they could readily buy cheaper soda elsewhere. The study also pointed to a factor not mentioned in any recent newspaper coverage of soda taxes:

“We found that much of the cost of the tax is not being passed along to consumers,” Bollinger and Sexton wrote. “Fewer than half of supermarkets changed the price of soda in response to the tax, and prices at chain drug stores did not change at all.”

This article was originally published by CalWatchdog.com

Is it time for California’s taxpayers to go on strike?


Tax reformAround California, public school teachers are on strike seeking more pay, better benefits and less competition from charter schools. They are also demanding that the rest of us pay higher taxes. Indeed, as part of the agreement that ended the strike in Los Angeles, teachers forced a concession out of the school district to officially support the partial repeal of Proposition 13 as it applies to business properties. That would have the effect of raising California property taxes as much as $11 billion annually and would surely accelerate the well-documented business flight out of California.

It’s not as though Californians are currently under-taxed. With the highest income tax rate, the highest state sales tax rate and second highest gas tax in America, it’s tough to make that argument.

So, I’m curious as to what would happen if, in reaction to the teachers’ strikes in L.A., Oakland and Sacramento, taxpayers decided to go on strike? The media seems obsessed with large, public demonstrations of crowds wracked with angst and victimhood. School districts lose millions of dollars when teachers go on strike because it impacts the Average Daily Attendance figures that provide the basis for disbursing tax dollars. But if taxpayers went on strike, how much more would they lose?

The reaction to a taxpayer strike would surely invoke claims that taxpayers are greedy, anti-education heathens. But, in reality, the vast majority of taxpayers are very much pro-education. They just don’t like the product they’re forced to pay for.

Let’s first dispel the urban legend that Proposition 13 “starved” education in the Golden State.

To read the entire column, please click here.

New Tax Proposals Hurt the Middle-Class


TaxesNo one disputes that California has a big budget surplus. According to the Office of the Legislative Analyst, California has budget reserves in excess of $18 billion. Our budget reserves exceed the entire state budget of eighteen other states.

One would think that the funds available for discretionary spending would chill any appetite for higher taxes. But this is California.

Despite the highest income tax rate, the highest state sales tax rate and the second highest gas tax, both our newly elected governor and our extremely progressive legislature desire to impose yet even higher taxes.

The most surprising thing about two of the new tax proposals is that they hurt the very groups the majority party claims that it is trying to help.

During his tenure as governor, Jerry Brown succeeded in shepherding through several tax hikes. However, he was unsuccessful in pushing a new 911 surcharge and a precedent-setting tax on water.

But as is common in California, new tax proposals never really die and these two have been resurrected in Gov. Newsom’s proposed budget.

To read the entire column, please click here.