Swap of Sales Tax for Property Tax Will Get Hearing: Assembly Speaker's Commission, Others Support Finance Reform
A commission appointed by Assembly Speaker Antonio Villaraigosa has recommended local governments swap sales tax revenue for a bigger cut of property taxes. The proposal is one of several intended to reduce city and county dependence on sales tax. However, it remains unclear whether lawmakers and Gov. Davis will take meaningful steps toward altering the complex fiscal system this year.
It is a two-handed situation. On the one hand, recommendations of the Speaker's Commission on State and Local Government Finance appear to be getting serious consideration, as a new joint standing committee of the Senate and Assembly was created to follow up. On the other hand, Davis's January budget proposal contained scant mention of local government finance. In fact, the governor chided local agencies for failing to spend transportation and housing funds already in their possession, a charge local officials hotly disputed.
David Abel, who chairs the Speaker's Commission, said momentum exists for changing a broken system. The 34 members of the commission — established to address "the impacts of topsy-turvy fiscal policy on governance and quality of life" — came from all over the state and represented every political persuasion. Yet the members agreed at the outset on nearly everything and cast unanimous votes during the year-long process, he said.
Plus, the Commission on Local Governance for the 21st Century — created by the Legislature to review the Cortese-Knox Act, which guides local agency formation commissions — reached similar conclusions about altering local government funding mechanisms, Abel noted. "The issues are not unclear to those who follow them," he said.
One of the primary issues noted by these two groups and by others is that local governments are heavily dependent upon sales tax revenue. This situation causes cities and counties to make land-use decisions based on short-term financial gain — jurisdictions often choose retail uses rather than manufacturing or houses — and pits communities against one another because the town that lures big boxes and car dealers gets more money. Plus, because cities and counties typically get only 10% to 20% of local property tax revenue — while schools get half or more — local decision-makers show little interest in lands that boost property values long-term, such as housing.
Recommendations from the Speaker's Commission included the following:
o Reduce the local cut of sales tax by half to 0.5%, in exchange for a similar portion of property tax revenue.
o Place the existing 0.5% countywide "transactions and use" tax authority in the state constitution to ensure that revenue does not supplant state spending.
o Over several years, return $1 billion in property tax revenue shifted from cities and counties to schools in 1992 and 1993.
o Clearly define responsibilities of the state and counties when a county is acting as an agent of the state.
Sales tax allocation examined
Under the Speaker's Commission's proposed swap of sales and property taxes, cities and counties in the first year would receive the same amount of property tax they received the prior year, augmented with the amount of sales tax it lost. In future years, each jurisdiction would get the amount of property tax received the prior year (including the sales tax adjustment), plus a share of property tax growth attributable to increased assessed value within their individual jurisdictions. Thus, if 15% of the increase in a county's assessed valuation occurred in one city, that city would get 15% of the growth in property taxes from the base year.
"I think the swap, which is a modest but practical step, is going to get a very fair and open hearing," Abel predicted. "There ought to be balanced decision-making … and not a dependence on sales tax revenue that skews the whole land-use decision-making process."
In recent months, the idea of reducing local government dependence on sales received support from the 21st Century panel, State Controller Kathleen Connell, and the California State Association of Counties. The 21st Century panel recommended "that the point-of-sale allocation of the sales tax be revised to mitigate its effect as an incentive for ‘fiscalization of land use' and that the allocation of property taxes should be increased to more completely fund property-related services."
A panel convened last year by Connell did not recommend a tax swap. Instead, her State Municipal Advisory Reform Team (SMART) recommended that the growth in sales tax revenue be apportioned according to population. "This will incentivize cash-starved municipalities to invest in community, housing and quality of life programs — instead of erecting huge car malls on cheap land to attract sales tax revenue," Connell said in a prepared statement. The SMART panel also said that the state should return a portion of the 1993 property tax shift, end "unfunded state mandates" and implement performance audits.
The counties association recommended that 90% of sales tax revenue growth, after a five-year phase-in, be allocated based on population and to ensure equity among jurisdictions within a county. Like Connell's panel, CSAC recommended keeping the situs-basis for existing sales tax revenue because many local governments have based their budgets on sales tax revenue. The counties association also urged a return of the 1993 property tax shift and constitutional protection of the local 0.5% "transactions and use" tax.
Naturally, all the talk about reallocating sales tax makes cities with large retail bases nervous. David Jones, a League of California Cities lobbyist, said it is easy for counties to support reallocating sales tax because counties receive only about one-seventh the amount of sales taxes that cities do.
"We are a situs-centric organization, so we have to tread lightly when it comes to swapping sales tax," Jones said.
Legislation not yet written
A key player in local government finance reform could be Assemblyman Robert Hertzberg (D-Van Nuys), whom Villaraigosa has tabbed as his successor. Hertzberg created the Commission on Local Governance for the 21st Century as part of a 1998 bill intended to ease the San Fernando Valley's pursuit of secession from the City of Los Angeles. When the Commission released its final report on January 20, Hertzberg vowed to put all the recommendations into one bill this year.
Paul Hefner, a Hertzberg aide, said the bill language would become clearer as analysts complete an examination of the recommendations. February 25 is the deadline to submit bills. Hefner noted that Hertzberg talks a great deal about the proper roles of different levels of government, regionalism, and the existing structure of government, which the assemblyman believes is failing.
Assemblyman Tom Torlakson (D-Martinez) is another likely player. Torlakson has proposed giving cities the option of swapping all their sales tax revenue for a bigger cut of property taxes. He also has discussed letting cities designate "good development" zones that have a jobs-housing balance and good transportation. Cities could get most or all of the property tax resulting from development in these zones. Again, these concepts have not yet appeared in bill form.
Last year, the Legislature directed the Legislative Analyst's Office to present alternatives for restructuring the property tax allocation system, partly to "give cities and counties greater fiscal incentives to approve land developments other than retail developments." The legislation, AB 676, set a December 31, 1999 deadline, but the LAO was still working on the report as of late January. The report should be complete shortly, said Marianne O'Malley, an LAO analyst.
Besides its immediate recommendations on fiscal reform, the Speaker's Commission also urged the Legislature and governor to begin developing a state policy on regional growth. The commission considered a plan to have local agencies and the state pool resources for regional efforts, but there is no legal structure in place for such pools, said Commission Chairman Abel. Still, the commission planned to discuss incentives for local governments to work together and share sales tax revenues during its final meeting in early February.
The pool concept, however, may go nowhere because there is no legal structure in place, said Commission Chairman Abel. Still, the commission planned to discuss incentives for local governments to work together and share sales tax revenues during its final meeting in early February.
The Speaker's Commission also urged development of "a set of state, regional and local ‘smart growth' policies to guide the development and conservation of the state." Such policies would require that local general plans be linked to regional plans, encourage efficient use of land through efforts such as mixed-used projects and reuse of brownfields, and infrastructure investment, especially in existing urban areas.
David Abel, Speaker's Commission on State and Local Government Finance Reform, (213) 629-9019.
Paul Hefner, Office of Assemblyman Robert Hertzberg, (916) 319-2040.
State Controller's Office: (916) 445-2636.
David Jones, League of California Cities, (916) 658-8200.