A Planners Guide to Financing Public Improvements

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Chapter 1

General Taxes

A general tax is "any tax imposed for general governmental purposes." (Section 1, Article XIII C, California Constitution). This does not include any tax imposed for specific purposes which is placed into a general fund (now defined as a "special tax" pursuant to Proposition 218). This clearly means that a special purpose agency such as a transportation authority can no longer impose general taxes, but instead is limited to special taxes requiring two-thirds majority voter approval.

The power to tax is not inherent. It "comes from the Legislature through its enactment of general laws which enable the local governing body to collect the taxes specified in those general laws" (California Building Industry Association v. Newhall School District, etc. et al. (1988) 206 Cal.App.3d 212). The ability of the Legislature to authorize local taxes is in turn limited by the State Constitution. Charter cities are an exception to this rule; their charters give them the power to levy taxes, as limited by the State Constitution.

Proposition 13 placed a limit on the revenues that cities, counties, and special districts could raise from ad valorem property taxes. In the years following its passage, local governments turned to alternative methods of taxation to recoup the reduction in revenues. Cities rediscovered business license taxes (Government Code section 37101), transient occupancy taxes (Rev. and Taxation Code section 7280), and utility user taxes to replace reduced general revenues. Counties, pursuant to SB 2557 (Chapter 466, Stats. 1990), have similar powers. In the following section on utility user taxes, references to "city" should be construed to mean city or county.

Before proposing any new or increased general tax, and prior to the public hearing at which the proposed tax is to be considered, the legislative body must conduct at least one public meeting at which testimony regarding the proposal will be allowed. Public notice of the meeting and the hearing must be provided, at the same time and in the same document, at least 45 days in advance of the hearing. Information contained in the notice must include the amount or rate of the tax, the activity to be taxed, the estimated annual revenue resulting from the tax, the method and frequency of collection, the dates, times, and locations of public meeting and hearing, and the name and number of a contact person within the agency proposing the tax or tax increase. The joint notice of the meeting and hearing must be published for three weeks in a newspaper of general circulation and mailed directly to those who have requested notice. There must be at least ten days advance notice of the public meeting, and the public hearing shall not be held less than seven days after the meeting. (Government Code section 54954.6)

Proposition 62

In 1986, California voters approved Proposition 62, an initiative measure aimed at closing the Farrell loophole (see Government Code section 53720 et seq.). The drafters of Proposition 62 intended that all proposed general taxes be subjected to a vote. Under its provisions, the local city council or board of supervisors, by 2/3 vote of its members at a public hearing, may place a general tax proposal on the jurisdiction-wide ballot. Approval of the tax requires affirmation by a simple majority of the electorate. The provisions of Proposition 62 apply retroactively to all general taxes adopted after July 31, 1985. Local jurisdictions were given until November 15, 1988 to gain voter approval of taxes levied during this "window period" (Government Code section 53727(b)).

From its inception, Proposition 62 has been a source of controversy. Prior to its adoption, the State Legislative Analyst and a southern California superior court each concluded that because it is a statutory (rather than constitutional) enactment, Proposition 62 does not apply to charter cities (which obtain their taxing powers from the State Constitution rather than from statute) to the extent that it contradicts the city charter.

Various Court of Appeal decisions after passage of Proposition 62 held that the measure unconstitutionally limited the ability of cities and counties to levy general taxes (City of Westminster et al. v. County of Orange et al. (1988) 204 Cal.App.3rd 623; City of Woodlake v. Logan (1991) 230 Cal.App.3rd 1058). However, in 1995 the constitutionality of Proposition 62 was vigorously affirmed by the 5-2 opinion of the California Supreme Court in Santa Clara County Local Transportation Authority v. Guardino (Howard Jarvis Taxpayers Assoc.) 11 Cal.4th 220. Although the facts of this case relate primarily to the "special tax" provisions of Proposition 62, the Court was clear in its support for the measure's applicability to general taxes as well. The Court majority specifically disapproved the interpretation set forth in the City of Woodlake decision.

Proposition 218 has enshrined the Court's direction in Guardino. In cities, counties, and charter cities, general taxes require electoral approval.

Proposition 218

In November 1996, voters enacted Proposition 218, a Constitutional amendment intended to close the so-called Proposition 13 loopholes relative to excise taxes, benefit assessments, and fees, and to settle arguments over the applicability of Proposition 62, the voting requirement for general taxes. Proposition 218 added Articles XIII C and XIII D to the California Constitution. Pursuant to section 1 of Proposition 218, it is to be known as the "Right to Vote on Taxes Act." Proposition 218 both controls how general taxes are levied and requires certain previously levied general taxes to be ratified by voters.

Proposition 218 reduces all taxes to either general taxes or special taxes. It defines a general tax as "any tax imposed for general governmental purposes." A special tax is "any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund." No special district (the definition of which includes school districts) may impose a general tax. By virtue of their specific purpose, taxes imposed by a special district are defined as special taxes. Charter cities, who had successfully argued that the statutory initiative Proposition 62 did not require them to submit general taxes to popular vote, now lose that argument to Proposition 218's constitutional amendment.

No local general tax may be imposed, extended, or increased until it has been submitted to and approved by a majority of the voters in the jurisdiction. Tax proposals can only be considered at scheduled general elections, unless the governing body of the city, county, or special district unanimously votes to place the question on the ballot at a special election.

Proposition 218 requires that any general tax imposed, extended, or increased since January 1, 1995 without benefit of voter approval must be placed on the ballot and ratified by November 5, 1998. This includes general taxes imposed by charter cities. Local jurisdictions must cease imposing any such tax that is not ratified by that date. In addition, Proposition 218 empowers voters within the jurisdiction to reduce or repeal any tax by initiative.

Summary of Proposition 218's Major Points

• Proposition 218 is a Constitutional amendment. It supersedes any conflicting statutory law.

• Proposition 218 applies to all local government agencies, including charter cities. It does not apply to state agencies.
  

General and Special Taxes (Article XIII C, California Constitution)

• No general tax may be imposed, extended, or increased without first being approved by a majority of the jurisdiction's voters. A general tax must be considered at a general election. Any other scheduling of the vote requires unanimous approval of the agency's governing board.

• All taxes imposed by any local government are deemed to be either general taxes or special taxes. "Special tax" includes any tax imposed for specific purposes which is placed into a general fund. Special districts can only impose special taxes, not general taxes.

• Any general tax imposed on or after January 1, 1995 which was not subjected to voter approval must be placed before the voters for ratification by November 5, 1998. Any tax not ratified by the voters is repealed.

• General and special taxes can be reduced or repealed through the initiative process.
  

Assessments and Fees (Article XIII D, California Constitution)

• Existing laws relating to development impact fees are not affected by Proposition 218.

• Benefit assessments and "property related fees and charges" cannot be imposed without prior voter approval. Property owners within the area subject to a proposed benefit assessment must be mailed ballots, a public hearing must be held, and affirmative ballots must be received from a weighted majority of the property owners before a benefit assessment can be imposed. No property related fee or charge may be imposed until the fee or charge is submitted to and approved by a majority of the affected property owners or, alternatively, two-thirds of the residents of the affected area.

• The definition of the "special benefit" for which an assessment may be levied is "a particular and distinct benefit over and above general benefits conferred on real property or to the public at large." General enhancement of property value does not constitute a special benefit.

• Assessments must be proportional to the particular special benefit conferred on each affected parcel. Only special benefits are assessable; any general benefit conferred on parcels must be identified and excluded from the assessment. Assessments must be imposed on benefiting local, state, and federal government property.

• Except for assessments securing bonded indebtedness, assessments previously approved by voters, and assessments financing capital costs, operations, or maintenance of sidewalks, streets, sewers, water, flood control, drainage systems, or vector control, assessments existing as of November 6, 1996 must comply with Proposition 218 by July 1, 1997 or be repealed.

• "Fee or charge" is defined as any levy other than an ad valorem tax, a special tax, or an assessment imposed by an agency upon a parcel or upon a person as an incident of property ownership. This is to include user fees and fees for property related services.

• No fee or charge may be imposed for a service that is not used by or immediately available to the property owner. So called "standby charges" are now classified as assessments.

• No fee or charge may be imposed for general governmental services such as police, fire, ambulance, or library services where the service is substantially as available to the public-at-large as it is to the property owners being charged.

• Fees and charges cannot exceed the proportional cost of the service attributable to the parcel. Further, revenues from the fee or charge cannot exceed the funds required to provide the property related service.

• Fees, charges, and assessments can be reduced or repealed through the initiative process.

County Sales Tax Legislation

Counties, especially rural counties with their relatively limited tax base, have claimed increasing distress over a lack of both general and transportation funding. For a variety of reasons, such as population growth, new state-mandated local programs, and increased crime, a few counties have approched insolvancy in the late 1980's. Tehama and Shasta Counties, for example, have cut back services such as sheriff's patrols, libraries, and road maintenance in an effort to stretch limited funds.

In an attempt to assist counties, two pieces of state legislation were enacted in 1987 which allow counties to increase their sales tax to finance transportation improvements or general expenditures. At the same time, the maximum allowable sales tax rate was increased.

Based on Proposition 218, any sales tax increase imposed for a specific purpose (such as transportation facilities), or by a single-purpose authority (such as a county transportation authority) is a special tax requiring approval by two-thirds of the electorate.

Revenue and Taxation Code section 7285 provides that any county may levy a sales tax increase to pay for general expenditures. This increase may be either 1/4 cent or 1/2 cent per dollar. The board of supervisors must approve the proposed increase by 2/3 vote before placing it on the countywide ballot. The tax must then be affirmed by a simple majority of the voters taking part in that election. The proceeds of the additional sales tax may be used for any government purpose, including capital improvements, salaries, maintenance, and equipment purchases.

Excise Taxes

"Although the California Constitution does not expressly prohibit multiple taxation, the provisions of Section 1 of Article XIII of the California Constitution, requiring that all property shall be taxed in proportion to its value, have been construed in a number of [court] decisions to prohibit the multiple taxation of property (citations). On the other hand, it has been held that there is no similar constitutional prohibition against the levy of multiple excise taxes (citations)."

Opinion #19078 of the California Legislative Counsel

In the words of the U.S. Supreme Court, an excise tax is "a tax imposed upon a single power over property incidental to ownership" (Bromley v. McCaughn (1929) 280 U.S. 124). It is not a property tax. Instead, it is a tax levied on one of the incidents of land ownership; not on the land itself nor on land ownership per se.

An excise tax must be reasonably based upon a rational governmental purpose, such as raising general revenues to pay for public improvements necessitated by new development. Accordingly, it should not be imposed on those who either are not exercising the privilege being taxed or do not receive some benefit from the improvements or services being financed by the tax. At the same time, since it is being imposed on a single activity or privilege of ownership, an excise tax must be collected from the person involved in that activity or privilege (not necessarily the property owner). For example, an excise tax on residential construction is properly levied on the builder.

Proposition 218 characterizes all taxes as either general taxes or special taxes. Since the proceeds of excise taxes must be placed into the general fund to avoid characterization as a special tax, they would clearly seem to be subject to the voting requirements established for general taxes. However, things are not that easy. The language of Proposition 218 and the statements by its authors which blur the lines between taxes, assessments, and fees may be interpreted in ways which could profoundly limit the use of excise taxes. The following interpretations are purely speculative, and are intended primarily to illustrate the ambiguity of Proposition 218 in this area.

Some excise taxes may be subject to the proportionality and voting requirements applicable to fees and charges. Proposition 218 defines a fee or charge as "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service" (Section 2(e), Article XIII D, California Constitution). An excise tax is neither an ad valorem tax, special tax, nor assessment. Therefore, perhaps an excise tax imposed upon developers as a condition of issuance of a building permit (such as that previously upheld in Centex Real Estate Corp. v. City of Vallejo (1993) 19 Cal.App.4th 1358) would be newly characterized as a fee or charge under Proposition 218. If this were the case, it would be limited strictly to the cost of the service or facility being financed and the levy imposed on each individual would be limited to the proportional cost of the service attributable to the parcel. Furthermore, imposing or increasing such a levy would require either simple majority approval of the owners of affected property or a two-thirds majority of area voters.

Another interpretation suggests that Proposition 218 may actually prohibit certain excise taxes. The reasoning is as follows: Proposition 218 provides that those taxes, assessments, fees or charges which may be assessed "upon any parcel of property or upon any person as an incident of property ownership" are limited to ad valorem property taxes, special taxes, assessments, and fees or charges (Section 3, Article XIII D, California Constitution). When an excise tax is physically collected through the property tax rolls, it might arguably be levied "upon [a] parcel of property." Since Proposition 218 excludes general taxes from its list of taxes which may be assessed in that situation, excise taxes would not be allowed.

Until these ambiguities are clarified, either by legislation or litigation, new excise taxes should be approached cautiously. On the assumption that they are general taxes, existing excise taxes imposed after January 1, 1995 should probably be put on the ballot for ratification by November 5, 1998.

Utility Users Tax

This is a general tax levied on utility customers. Cities are empowered to levy taxes upon the use of utilities (such as electricity, gas, telephone, and cable television) whether those utilities are provided by the city or by a public or private utility company. The utility company will bill its customers for this tax and collect the proceeds as part of its normal operations. The resulting revenues are then remitted to the city. Some cities, such as Culver City, impose a split-rate tax which levies different charges on residential and commercial users.

Courts have repeatedly upheld the concept of a utility users tax. In Rivera v. City of Fresno (1971) 6 Cal.3d 132, the California Supreme Court concluded that "cities may levy fees or taxes [on public utility users] solely for revenue purposes" and are not preempted by the state's regulation of public utilities. Fenton v. City of Delano (1984) 162 C.A.3d 400 held that utility users taxes did not require 2/3 voter approval since they are general taxes and not subject to the Constitutional provisions of Proposition 13.

Utility user taxes can no longer be imposed without popular approval. As a general tax, existing utility user taxes must be ratified by voters prior to November 6, 1998. New utility user taxes are subject to approval by a majority of voters in a scheduled general election.

New uncertainty over the future passage of utility taxes led two bond rating agencies to downgrade the City of San Diego's credit rating in December 1996. Although San Diego has traditionally avoided imposing a utility user tax, the fact that it could no longer do so without voter approval left Standard and Poors and Moody's Investment Services with concerns over the city's long-term ability to service debt on its general obligation bonds. The City of Sacramento's credit rating was also lowered in December 1996 in part for similar reasons.

Transient Occupancy Tax

(Revenue and Taxation Code section 7280)

The transient occupancy tax (TOT) is a popular type of excise tax available to both cities and counties. A TOT may be levied on the occupation of rooms in a hotel, inn, tourist home or house, motel, or other lodging where occupancy is to be 30 days or less. A TOT may also be levied on spaces in an RV park or campground (Chapter 1186, Stats. 1992). In concept, the revenues from a TOT can help offset general fund costs, such as police protection, street cleaning, and museums, that are engendered by the traveling public.

At this writing, over 340 cities and several counties levy transient occupancy taxes. Proposition 218 requires some existing TOTs (i.e., those enacted in 1995-96 without popular vote) to stand for a vote of ratification. Any new TOTs or increases must likewise be approved by voters.

Infrastructure Financing District

(Government Code section 53395 et seq.)

The Infrastructure Financing District (IFD) statute is a new way for a city or county to finance infrastructure improvements that are consistent with that city's or county's general plan. It taps the property tax through a variation on "tax increment financing," the financing method commonly employed by redevelopment agencies.

Tax increment financing relies upon diverting to the financing agency a portion of the property taxes being collected within the project area. Put very simply the diversion works like this: when a financing district is formed, the amount of taxes being collected is noted; any subsequent increase in revenues beyond this base amount is the tax increment and is set aside for the exclusive use of the financing agency.

The IFD is not a new kind of redevelopment agency. For example, when redevelopment is involved, the tax increment can include those taxes that normally would have gone to other taxing entities such as school districts and the county. Conflicts often arise between the redevelopment agency and the affected taxing entities over the loss of taxes by those agencies. This cannot happen in a IFD. IFD law provides that each of the other taxing agencies must grant its approval before any of its portion of the increment can be collected by the IFD. In no case can a school district dedicate any of its portion of the increment to the IFD.

Second, an IFD has no power of eminent domain. Unlike a redevelopment agency, it cannot condemn property.

Third, an IFD cannot be established within a redevelopment area. The two financing mechanisms are self-exclusive.

Fourth, an IFD should be established only in areas that are substantially undeveloped. Redevelopment, on the other hand, occurs in largely developed areas that are "blighted."

Fifth, 2/3 majority approval is required of the registered voters, or in some cases the property owners, within the proposed district in order to create an IFD. The redevelopment procedure contains no popular voting requirement.

An IFD may finance the purchase, construction, expansion, improvement, or rehabilitation of any real or other tangible property with an estimated useful life of 15 years or longer. Facilities which are purchased must be already constructed at the time of purchase.

This legislation attempts to ensure that IFD developments will not have a deleterious effect on low- and moderate-income housing supplies. IFDs are obligated to provide low- and moderate-income housing when they are used to construct housing and when, as a result of their activities, existing housing is demolished or removed (Government Code section 53395.5).

Facilities eligible for financing through an IFD include, but are not limited to the following (Government Code section 53395.3):

• highway interchanges, bridges, arterial streets, and transit facilities

• sewage treatment plants and interceptor lines

• water treatment facilities for urban use

• flood control structures

• child care facilities

• libraries

• parks, recreational facilities, and open space

• solid waste transfer and disposal facilities

Facilities financed by an IFD must be of community-wide significance and provide significant benefits to an area larger than the area of the district.

Such facilities need not be located within the boundaries of the IFD. Facilities financed through an IFD may not replace existing facilities or services. They can, however, supplement existing facilities and services as necessary to serve new development.

The IFD law creates a complex procedure for establishment of an IFD (Government Code section 53395.10 et seq.). Briefly, it involves adoption of a "resolution of intention" by the city or county proposing to create the district; preparation of a detailed financing plan that is sent to affected property owners and taxing entities; a public hearing for the purpose of receiving comments from the public and affected taxing agencies; and a voting procedure similar to that used under the Mello-Roos Community Facilities Act. If the IFD proposes to issue bonds, it must obtain the approval of a majority of the legislative body of the city or county creating the district and of 2/3 of the district electorate.

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