Tax Solutions to CA Bankruptcy Limited and Controversial

Like canaries in the coal mine, the bankruptcy declarations of Stockton and San Bernardino should be a warning to the leadership in the legislature and local governments – fix the finances before it’s too late.

Unfortunately, it won’t be easy to reverse the big spending promises made on pension and health care costs, which represent a growing portion of government budgets. According to the Stanford Institute for Economic Policy Research, between 1999 and 2010, pensions grew at 11.4% a year in California’s biggest cities and counties, about twice as fast as spending on services such as public safety, social services, health and recreation squeezing these segments of the budget. Stockton was spending about $13 million on pensions a decade ago, by 2010 it was $30 million “and will double again over the next five years, unless something is changed,” according to Joe Nation, former state legislator and Stanford economics professor.

Yet, advocates in the public sector are ready to go to court to stop some of the necessary changes.

Union leaders have blamed mismanagement leading to the cities’ fiscal crises. Stockton lost money on a major development and a San Bernardino union leader charged that projects such as funding a downtown movie theater helped create the bankruptcy.

Bad choices, yes, but the long-term and larger problem for the budget is the growing obligations to workers and retirees.

Given the financial difficulties, some cities are considering tax increases to dig out of, or prevent, bankruptcy. However, voter approval is needed for local tax increases and would seem unlikely.

Still, city managers are considering taxes. The one tax mentioned in both San Bernardino and Los Angeles is the property transfer tax.

According to a Wall Street Journal editorial, a recent budget analysis in San Bernardino recommended increasing the property transfer tax by nearly 500%. The Los Angeles Daily News reported that the City of Los Angeles Chief Administrative Officer, Miguel Santana, proposed a ballot measure to double the documentary transfer tax on the sales price of a real estate property as a hedge against L.A.’s budget problems.

The property transfer tax has been in and out of court many times since Section 4 of Proposition 13 declared that a transaction tax or sales tax on the sale of real property was prohibited.

However, courts have determined that since that section of Prop 13 dealt with “Special Taxes,” a transfer property tax for general tax purposes is acceptable, as long as the people pass it with a majority vote.

Would voters approve such a tax?

They might not get a chance. There is a question if the tax can be raised over a certain amount per $1,000 of property value. Tim Bittle, attorney for the Howard Jarvis Taxpayers Association, questions whether transfer tax rates can be increased beyond certain limits that were in place when Proposition 62, an initiative authored by Howard Jarvis, was passed in 1986. Bittle says while there have been appellate court cases in this area, the Supreme Court has never ruled.

A Proposition 62 test case could arise from city efforts to raise real property transaction taxes in the face of bankruptcy.

(Joel Fox is the Editor of Fox & Hounds and President of the Small Business Action Committee. Originally posted on Fox & Hounds.)