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PROTECTION OF LOCAL GOVERNMENT REVENUES
Legislative Constitutional Amendment
THE QUESTION
Should the California Constitution be amended to reduce the Legislature's
authority over major local government revenue sources, including property
taxes, sales taxes and vehicle license fees (VLF), and to require that
local programs and services mandated by the state be suspended if state
funding is not provided?
BACKGROUND
Local Government Funding
California cities, counties, and special districts provide services such
as fire and police protection, water, libraries, and parks and recreation
programs. Local governments pay for these programs and services with money
from local taxes, fees, and user charges; state and federal aid; and other
sources. Three taxes play a major role in local finance because they raise
significant sums of general-purpose revenues that local governments may
use to pay for a variety of programs and services. These three taxes are
the property tax, the uniform local sales tax, and the vehicle license
fee (VLF). Many local governments also impose optional local sales taxes
and use these revenues to support specific programs, such as transportation.
Figure 1 provides information on these major revenue sources.
| FIGURE 1
LOCAL GOVERNMENT TAXES
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Property Tax
- Local governments receive general-purpose
revenues from a 1 percent property tax levied on real property.
- During the 2003-04 fiscal year, local governments
received approximately $15 billion in property tax revenues.
(An additional $16 billion in property taxes went to schools
and community colleges.)
- There is wide variation in the share of property
taxes received by individual local governments. This variation
largely reflects differences among local agency property tax
rates during the mid-1970s, the period on which the state's
property tax allocation laws are based.
Vehicle License Fee (VLF)
- The VLF is a tax levied annually on the value
of vehicles registered in the state.
- For about a half century, the VLF rate was
2 percent of vehicle value. In 1999, the Legislature began reducing
the rate charged to vehicle owners, with the state "backfilling"
the resulting city and county revenue losses.
- During 2003-04, the VLF (set at a rate of
0.65 percent of vehicle value) and the VLF backfill would have
provided about $5.9 billion to cities and counties. The state,
however, deferred payment of part of the backfill to 2006.
- Under current law, most VLF revenues are
allocated to counties for health and social services programs.
Some VLF revenues are allocated to cities for general purposes.
Local Sales Tax (Uniform)
- Cities and counties receive revenues from
a uniform local sales tax levied on the purchase price of most
goods--such as clothing, automobiles, and restaurant meals.
This tax is sometimes called the "Bradley-Burns" sales tax.
- During 2003-04, this tax was levied at a rate
of 1.25 percent and generated about $5.9 billion-
- Under current law, 80 percent of sales tax
revenues are distributed to local governments based on where
sales occur--to a city if the sale occurs within its boundaries,
or to a county if the sale occurs in an unincorporated area.
The remaining 20 percent of local sales tax revenues are allocated
to counties for transportation purposes.
- Beginning in 2004-05, local governments will
receive additional property taxes to replace some local sales
tax revenues that are pledged to pay debt service on state deficit-related
bonds, approved by voters in March 2004.
Local Sales Tax (Optional)
- Cities and counties can impose certain additional
sales taxes for local purposes.
- During 2003-04, 40 jurisdictions levied these
optional sales taxes and generated about $3.1 billion.
- Most revenues are used for transportation purposes.
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State Authority Over Local Finance
The State Constitution and existing statutes give the Legislature authority
over the 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, addressing concerns regarding funding for particular
local governments, and restructuring local finance. Figure 2 describes
some of these past actions the Legislature has taken.
| FIGURE 2
MAJOR STATE ACTIONS AFFECTING LOCAL FINANCE
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| Increasing 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 losses.
Reducing State Costs.
In 1992 and 1993, the state shifted an ongoing share of property
taxes from local governments to schools and community colleges.
In 2004, the state enacted a similar two-year shift of property
taxes ($1.3 billion annually) from local governments to schools
and community colleges. These shifts 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, 2003,
and 2004) and for a portion of the vehicle license fee (VLF) "backfill"
(2003), described below.
Reducing Taxation.
Beginning in 1999, the state reduced the VLF rate to provide tax
relief. The state backfilled the resulting city and county revenue
losses.
Addressing 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.
Restructuring Local Finance.
In 2004, the state replaced city and county VLF backfill revenues
with property taxes shifted from schools and community colleges.
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Requirement to Reimburse for State Mandates
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 in recent years reimbursements for many mandated
costs. Currently, the state owes these local agencies about $2 billion
for the prior-year costs of state-mandated programs. In other cases, the
state has "suspended" state mandates, eliminating both local government
responsibility for complying with the mandate and the need for state reimbursements.
PROPOSAL
Limitations on Legislature's Authority to Change Local Revenues
This measure amends the State Constitution to significantly reduce the
state's authority over major local government revenue sources. Under the
measure the state could not:
- Reduce Local Sales Tax Rates or Alter the Method of Allocation.
The measure prohibits the state from: reducing any local sales
tax rate, limiting existing local government authority to levy a sales
tax rate, or changing the allocation of local sales tax revenues. For
example, the state could not reduce a city's uniform or optional sales
tax rate, or enact laws that shift sales taxes from a city to the county
in which it is located.
- Shift Property Taxes From Local Governments to Schools
or Community Colleges. The measure generally prohibits
the state from shifting to schools or community colleges any share of
property tax revenues allocated to local governments for any fiscal
year under the laws in effect as of November 3, 2004. The measure also
specifies that any change in how property tax revenues are shared among
local governments within a county must be approved by two-thirds of
both houses of the Legislature (instead of by majority votes). For example,
state actions that shifted a share of property tax revenues from one
local special district to another, or from a city to the county, would
require approval by two-thirds of both houses of the Legislature. Finally,
the measure prohibits the state from reducing the property tax revenues
provided to cities and counties as replacement for the local sales tax
revenues redirected to the state and pledged to pay debt service on
state deficit-related bonds approved by voters in March 2004.
- Decrease VLF Revenues Without Providing Replacement Funding.
If the state reduces the VLF rate below its current level,
the measure requires the state to provide local governments with equal
replacement revenues. The measure also requires the state to allocate
VLF revenues to county health and social services programs and local
governments.
The measure provides two significant exceptions to the above restrictions
regarding sales and property taxes. First, beginning in 2008-09, the state
may shift to schools and community colleges a limited amount of local
government property tax revenues if: the Governor proclaims that the shift
is needed due to a severe state financial hardship, the Legislature approves
the shift with a two-thirds vote of both houses, and certain other conditions
are met. The state must repay local governments for their property tax
losses, with interest, within three years. Second, the measure allows
the state to approve voluntary exchanges of local sales tax and property
tax revenues among local governments within a county.
State Mandates
The measure amends the State Constitution to require the state to suspend
certain state laws creating mandates in any year that the state does not
fully reimburse local governments for their costs to comply with the mandates.
Specifically, beginning July 1, 2005, the measure requires the state to
either fully fund each mandate affecting cities, counties, and special
districts or suspend the mandate's requirements for the fiscal year. This
provision does not apply to mandates relating to schools or community
colleges, or to those mandates relating to employee rights. The measure
also appears to expand the circumstances under which the state would be
responsible for reimbursing cities, counties, and special districts for
carrying out new state requirements. Specifically, the measure defines
as a mandate state actions that transfer to local governments financial
responsibility for a required program for which the state previously had
complete or partial financial responsibility. Under current law, some
such transfers of financial responsibilities may not be considered a state
mandate.
Related Provisions in Proposition 65
Proposition 65 on this ballot contains similar provisions affecting local
government finance and mandates. (The nearby box provides information
on the major similarities and differences between these measures.) Proposition
1A specifically states that if it and Proposition 65 are approved and
Proposition lA receives more yes votes, none of the provisions of Proposition
65 will go into effect.
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Propositions 1A and 65
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| Propositions 1 A and 65 both amend the State Constitution
to achieve three general objectives regarding state and local government
finance. The similarities and differences between the two measures
are highlighted below. |
| Limits State Authority to Reduce
Major Local Tax Revenues
Effect on 2004-05 State Budget.
- Proposition 65's restrictions apply
to state actions taken over the last year, and thus would prevent
a major component of the 2004-05 budget plan (a $1.3 billion
property tax shift in 2004-05 and again in 2005-06) from taking
effect unless approved by the state's voters at the subsequent
statewide election.
- Proposition 1A's restrictions apply
to future state actions only, and would allow the planned $1.3
billion property tax shift to occur in both years.
Effect on Future State Budgets.
- Proposition 65 allows the state to
modify major local tax revenues for the fiscal benefit of the
state, but only with the approval of the state's voters.
- Proposition 1A prohibits such state
changes, except for limited, short-term shifting of local property
taxes. The state must repay local governments for these property
tax losses within three years.
Reduces State Authority to Reallocate Tax Revenues Among
Local Governments
Effect on Revenue Allocation.
- Proposition 65 generally requires
state voter approval before the state can reduce any individual
local government's revenues from the property tax, uniform local
sales tax, or vehicle license fee (VLF).
- Proposition 1A prohibits the state
from reducing any local government's revenues from local sales
taxes, but maintains some state authority to alter the allocation
of property tax revenues, VLF revenues, and other taxes. Proposition
1 A does not include a state voter approval requirement.
Local Governments Affected.
- Proposition 65's restrictions apply
to cities, counties, special districts, and redevelopment agencies.
- Proposition 1A's restrictions do
not apply to redevelopment agencies.
Restricts State Authority to Impose Mandates on Local
Governments Without Reimbursement
- Proposition 65 authorizes local governments,
schools, and community college districts to decide whether or
not to comply with a state requirement if the state does not
fully reimburse local costs.
- Proposition 1A's mandate provisions
do not apply to schools and community colleges. If the state
does not fund a mandate in any year, the state must eliminate
local government's duty to implement it for that same time period.
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FISCAL EFFECTS
Proposition lA would reduce state authority over local finances. Over
time, it could have significant fiscal impacts on state and local governments,
as described below.
Long-Term Effect on Local and State Finance
- Higher and More Stable Local Government Revenues.
Given the number and magnitude of past state actions affecting
local taxes, this measure's restrictions on state authority to enact
such measures in the future would have potentially major fiscal effects
on local governments. For example, the state could not enact measures
that permanently shift property taxes from local governments to schools
in order to reduce state costs for education programs. 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
state. 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, because the state could not use local government
property taxes permanently 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 lA 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,
the state could not enact measures that changed how local sales tax
revenues are allocated to cities and counties. In addition, measures
that reallocated property taxes among local governments in a county
would require approval by two-thirds of the Members of each house of
the Legislature (rather than majority votes). As a result, this measure
would result in fewer changes to local government revenues than otherwise
would have been the case.
Effect on Local Programs and State Reimbursements
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 may exceed a hundred million dollars
annually.
WHAT A YES OR NO VOTE MEANS
A YES vote means that the California Constitution would
be amended to restrict the Legislature's authority over major local government
revenue and to require that local programs and services mandated by the
state be suspended if state funding is not provided.
A NO vote means that the California Constitution would
not be amended, and the Legislature's authority over major local government
revenue sources and mandated programs would remain the same.
SUPPORTERS SAY
Proposition 1A:
- Prevents further reduction in local revenues by the state, providing
stability and predictability for future funding of local services such
as public safety, health care, parks, roads and libraries.
- Provides the Legislature with flexibility to deal with future state
fiscal crises.
- Does not raise taxes or reduce state funding to schools.
- Increases fiscal accountability because tax dollars will be spent
at the local level where taxpayers have more control.
OPPONENTS SAY
Proposition 1A:
- Does not limit spending by local governments or require fiscal accountability
to protect local taxpayers.
- Locks into the Constitution a system of funding government that is
badly flawed.
- Allows the state to raid property taxes of school districts but not
of local governments.
- Makes it harder for state government to provide critical services
and address its ongoing budget deficit.
SUPPORT AND OPPOSITION
Official ballot arguments in support are signed by Governor Arnold Schwarzenegger;
Chief Michael Warren, President, California Fire Chiefs Association; Sheriff
Robert T. Doyle, President, California State Sheriffs' Association; Senator
Tom Torlakson, Chair, Senate Committee on Local Government; Lou Paulson,
President, California Professional Firefighters; and Cam Sanchez, President,
California Police Chiefs Association.
Official ballot arguments in opposition are signed by Carole Migden,
Chair, State Board of Equalization.
FOR MORE INFORMATION
Supporters
Yes on 1A Californians to Protect Local Taxpayers and Public Safety,
(800) 827-9086, www.yesonprop1A.com
Opponents
Carole Migden, Chair, State Board of Equalization, (415) 557-3000
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