Existing law authorizes cities and counties, and, if specifically authorized, other local governmental entities, subject to certain limitations and approval requirements, to levy a transactions and use tax for general purposes, in accordance with the procedures and requirements set forth in the Transactions and Use Tax Law, including a requirement that the combined rate of all taxes imposed in accordance with that law in the county not exceed 2%.

This bill would increase that maximum combined rate to 3%.

Existing law authorizes cities and counties, and, if specifically authorized, other local governmental entities, subject to certain limitations and approval requirements, to levy a transactions and use tax for general purposes, in accordance with the procedures and requirements set forth in the Transactions and Use Tax Law, including a requirement that the combined rate of all taxes imposed in accordance with that law in the county not exceed 2%.

This bill would increase that maximum combined rate to 3%.

Existing law authorizes cities and counties, and, if specifically authorized, other local governmental entities, subject to certain limitations and approval requirements, to levy a transactions and use tax for general purposes, in accordance with the procedures and requirements set forth in the Transactions and Use Tax Law, including a requirement that the combined rate of all taxes imposed in accordance with that law in the county not exceed 2%.

This bill would increase that maximum combined rate to 3%.

Existing law authorizes cities and counties, subject to certain limitations and approval requirements, to levy a transactions and use tax for general purposes, in accordance with the procedures and requirements set forth in the Transactions and Use Tax Law, including a requirement that the combined rate of all taxes imposed in accordance with that law in the county not exceed 2%.

This bill would increase that maximum combined rate to 3%.

GOVERNOR'S VETO

GV Bill Id:AB 464

Author:(Mullin and Gordon)

As Enrolled Ver:July 21, 2015

2/3 vote

Original Committee Reference: REV. & TAX.

SUMMARY: Increases the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

The Senate amendments clarify that the increased 3% cap on the combined rate of all district taxes imposed in a county will apply to taxes and rates authorized to be imposed in the county on or after January 1, 2016. The combined rate of district taxes in a county authorized to be imposed before January 1, 2016, will remain at 2%.

EXISTING LAW:

1. Authorizes cities and counties, under the Bradley-Burns Uniform Local Sales and Use Tax (SUT) Law, to impose local SUT. (Revenue and Taxation Code (R&TC) commencing with Section 7200.)

2. Provides counties and cities, under the Transactions and Use Tax (TUT) Law and the Additional Local Taxes Law, with the authority to impose district taxes under specified conditions. (R&TC Sections 7251 and 7280.)

3. Provides that counties and cities may impose a district tax for general purposes and special purposes at a rate of 0.125%, or multiple thereof, if the ordinance imposing the tax is approved by the required percentage of voters in the city or county. (R&TC Section 7285.)

4. Provides that the combined rate of all district taxes imposed in accordance with the TUT Law in any county may not exceed 2%. (R&TC Section 7251.)

5. Exempts from the 2% cap the Counties of Alameda, Contra Costa, and Los Angeles, as specified.

6. Allows a county to establish a transportation authority to impose district taxes under the Public Utilities Code (PUC) and authorizes a county board of supervisors to designate a transportation-planning agency to impose a district tax. Requires that district taxes imposed under the PUC conform to the administrative provisions contained in the TUT Law.

7. Requires cities and counties to contract with the State Board of Equalization (BOE) to perform all functions in the administration and operations of the ordinances imposing the Bradley-Burns local taxes and district taxes.

AS PASSED BY THE ASSEMBLY, this bill increased the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

FISCAL EFFECT: None

COMMENTS:

1. Author's statement. The author has provided the following statement in support of this bill:

Current law allows cities and counties to impose transaction and use taxes, also known as district taxes, at a rate of up to 2% of total sales. This cap is quickly reached when both cities and counties impose their own district taxes. It is particularly problematic for counties because if one city within a county has reached the cap, then the county is precluded from raising additional district taxes. Similarly, cities that have already reached the cap are constrained when seeking additional funding for programs and services over and above the cap.

The 2% cap was implemented more than a decade ago, in 2003. Since then several bills have gone through the Legislature to create individual exceptions to the cap. Most of these bills were eventually signed into law, begging the policy question: If raising the cap is good for individual jurisdictions, then should we consider simply lifting it statewide? AB 464 does exactly this, and as a result it would not only make the policy statewide, but it would reduce the amount of piecemeal one-off bills going through the Legislature on the subject, savings state resources.

Throughout California, districts are reaching the current cap, and funding for services, including transportation, education and public safety, is declining. This bill gives local jurisdictions the freedom to seek voter approval for district tax increases by raising the cap from 2% to 3%. If the proposed tax goes for a specific purpose, it would require a two-thirds majority vote of the people living within the jurisdiction before going into effect. In other instances, when a jurisdiction proposes a general purpose tax, a majority vote would be required. AB 464 grants local governing bodies, and the people living within them, the much needed flexibility to raise additional funds for important programs and services.

2. Background. The TUT Law authorizes the adoption of local add-on rates to the combined state and local sales tax rate. Under existing law, cities and counties may impose a TUT (a district tax) for general or special purposes, subject to voter approval, provided that the combined countywide rate of tax does not exceed 2% (with the exception of the Counties of Alameda, Contra Costa, and Los Angeles). These taxes may be imposed either directly by the city or county, or through a special purpose entity established by the city or county. Counties may also create a transportation authority to impose district taxes under the PUC or designate a transportation planning agency to impose a district tax, subject to the applicable voter approval requirements. District taxes imposed under the PUC must conform to the administrative provisions contained in the TUT Law, including the requirement to contract with the BOE to perform all functions related to the administration and operation of the ordinance.

A district tax is imposed on the sale or the storage, use, or other consumption of tangible personal property in the jurisdiction that adopted the tax. Generally, a district tax is imposed at a rate of 0.125%, or 0.125% increments, up to the 2% limit. Some cities and counties have more than one district tax, while others have none. Currently, the district tax rates vary from 0.10% to 1%. The current combined state, local, and district rates range from 7.50% to 9.5% (with the exception of Cities of Albany, Hayward, San Leandro, and Union City in Alameda County; and the Cities of La Miranda, Pico Riviera, and South Gate in Los Angeles County). According to the BOE's analysis of this bill, as of April 1, 2015, 202 local jurisdictions, including cities, counties, and special purpose entities, impose a district tax for general or specific purposes. Of the 202 jurisdictions, 48 are county-imposed taxes and 154 are city-imposed taxes. Of the 48 county-imposed taxes, 44 are imposed for special purposes. Of the 154 city-imposed taxes, 124 are general purpose taxes and 30 are special purpose taxes.

3. Existing 2% combined countywide cap. In 1987, the Legislature imposed a maximum combined rate of 1% on all district taxes within any county. That rate was incrementally increased ‑ first to 1.5% in 1990 and then to 2% in 2003.

The Legislature has previously granted exemptions to the 2% statutory cap for transactions and use taxes to support countywide transportation programs. For example, in 2008, the Legislature authorized the Los Angeles County Metropolitan Transportation Authority to impose a TUT not subject to the 2% cap. (AB 23 (Feuer), Chapter 302, Statutes of 2008.) In 2011, a one-time exemption from the 2% TUT combined rate cap was allowed for Alameda County. (AB 1086 (Wieckowski), Chapter 327, Statutes of 2011.) Subsequently, in 2012, the Legislature extended the authority for Alameda County to impose a TUT, the rate of which – in combination with all other district taxes in the county – would exceed the 2% statutory cap. The Legislature also allowed Contra Costa County to adopt an ordinance imposing a TUT in the same manner as Alameda County (AB 210 (Wieckowski), Chapter 194, Statutes of 2013). Additionally, in 2014, the Legislature authorized the City of El Cerrito to adopt an ordinance proposing the imposition of a TUT that exceeds the 2% statutory limitation.

At the present time, the Counties of Alameda, Contra Costa, Los Angeles, and San Mateo have reached the 2% limit. The Counties of Marin, San Diego, and Sonoma are near the 2% limit.

4. Increasing the 2% Cap. In recent years, more and more cities and counties seek individual legislation to increase the current statutory 2% cap. This bill is intended to uniformly increase the combined statutory cap for all counties to 3%, instead of addressing the financial difficulties experienced by various cities and counties on a case-by-case basis.

Local governments often find it difficult to make up for decreases in state revenues with increases in local revenues because counties have limited authority to raise revenues and local special taxes require a two-thirds vote of the electorate. Furthermore, the interaction between city-imposed and county-imposed TUTs may cause some counties to "run out of room" under the 2% maximum combined rate of tax. When a city or district imposes a TUT, that tax rate counts toward the county's cap, which means that the county is restricted in its ability to raise revenues on a countywide basis. Since levying a tax on a countywide basis is the only way for the county to support its operations and fund services, including transportation, an imposition of a new, or extension of an existing, tax by a city or a district within the county will directly impact the county's ability to raise revenues. This bill may help counties that either have already reached, or are close to reaching, the 2% maximum combined rate limit to levy or extend a TUT.

Furthermore, cities and districts may also be constrained in their ability to impose a new or increase an existing TUT in the counties that have reached the 2% limit. As such, this bill would provide more flexibility for cities and other authorized agencies as well and would also drastically reduce the number of bills seeking to lift the cap on behalf of individual counties or cities.

5. No change in voting requirements. While this bill increases the countywide 2% cap, it does not change any of the voting requirements applicable to the passage of local taxes, including a TUT.

GOVERNOR'S VETO MESSAGE:

This bill would raise, on a blanket basis, the limit on local transactions and use tax for all counties and cities from two percent to three percent.

Although I have approved raising the limit for individual counties, I am reluctant to approve this measure in view of all the taxes being discussed and proposed for the 2016 ballot.

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0001405

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 464

Author:(Mullin and Gordon)

As Amended Ver:June 17, 2015

Majority vote

Original Committee Reference: REV. & TAX.

SUMMARY: Increases the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

The Senate amendments clarify that the increased 3% cap on the combined rate of all district taxes imposed in a county will apply to taxes and rates authorized to be imposed in the county on or after January 1, 2016. The combined rate of district taxes in a county authorized to be imposed before January 1, 2016, will remain at 2%.

EXISTING LAW:

1. Authorizes cities and counties, under the Bradley-Burns Uniform Local Sales and Use Tax (SUT) Law, to impose local SUT. [Revenue and Taxation Code (R&TC) commencing with Section 7200.]

2. Provides counties and cities, under the Transactions and Use Tax (TUT) Law and the Additional Local Taxes Law, with the authority to impose district taxes under specified conditions. (R&TC Sections 7251 and 7280.)

3. Provides that counties and cities may impose a district tax for general purposes and special purposes at a rate of 0.125%, or multiple thereof, if the ordinance imposing the tax is approved by the required percentage of voters in the city or county. (R&TC Section 7285.)

4. Provides that the combined rate of all district taxes imposed in accordance with the TUT law in any county may not exceed 2%. (R&TC Section 7251.)

5. Exempts from the 2% cap the Counties of Alameda, Contra Costa, and Los Angeles, as specified.

6. Allows a county to establish a transportation authority to impose district taxes under the Public Utilities Code (PUC) and authorizes a county board of supervisors to designate a transportation-planning agency to impose a district tax. Requires that district taxes imposed under the PUC conform to the administrative provisions contained in the TUT Law.

7. Requires cities and counties to contract with the State Board of Equalization (BOE) to perform all functions in the administration and operations of the ordinances imposing the Bradley-Burns local taxes and district taxes.

AS PASSED BY THE ASSEMBLY, this bill increased the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

FISCAL EFFECT: None

COMMENTS:

1. Author's statement. The author has provided the following statement in support of this bill:

"Current law allows cities and counties to impose transaction and use taxes, also known as district taxes, at a rate of up to 2% of total sales. This cap is quickly reached when both cities and counties impose their own district taxes. It is particularly problematic for counties because if one city within a county has reached the cap, then the county is precluded from raising additional district taxes. Similarly, cities that have already reached the cap are constrained when seeking additional funding for programs and services over and above the cap.

"The 2% cap was implemented more than a decade ago, in 2003. Since then several bills have gone through the Legislature to create individual exceptions to the cap. Most of these bills were eventually signed into law, begging the policy question: If raising the cap is good for individual jurisdictions, then should we consider simply lifting it statewide? AB 464 does exactly this, and as a result it would not only make the policy statewide, but it would reduce the amount of piecemeal one-off bills going through the Legislature on the subject, savings state resources.

"Throughout California, districts are reaching the current cap, and funding for services, including transportation, education and public safety, is declining. This bill gives local jurisdictions the freedom to seek voter approval for district tax increases by raising the cap from 2% to 3%. If the proposed tax goes for a specific purpose, it would require a two-thirds majority vote of the people living within the jurisdiction before going into effect. In other instances, when a jurisdiction proposes a general purpose tax, a majority vote would be required. AB 464 grants local governing bodies, and the people living within them, the much needed flexibility to raise additional funds for important programs and services."

2. Background. The TUT law authorizes the adoption of local add-on rates to the combined state and local sales tax rate. Under existing law, cities and counties may impose a TUT (a district tax) for general or special purposes, subject to voter approval, provided that the combined countywide rate of tax does not exceed 2% (with the exception of the Counties of Alameda, Contra Costa, and Los Angeles). These taxes may be imposed either directly by the city or county, or through a special purpose entity established by the city or county. Counties may also create a transportation authority to impose district taxes under the PUC or designate a transportation planning agency to impose a district tax, subject to the applicable voter approval requirements. District taxes imposed under the PUC must conform to the administrative provisions contained in the TUT Law, including the requirement to contract with the BOE to perform all functions related to the administration and operation of the ordinance.

A district tax is imposed on the sale or the storage, use, or other consumption of tangible personal property in the jurisdiction that adopted the tax. Generally, a district tax is imposed at a rate of 0.125%, or 0.125% increments, up to the 2% limit. Some cities and counties have more than one district tax, while others have none. Currently, the district tax rates vary from 0.10% to 1%. The current combined state, local, and district rates range from 7.50% to 9.5% (with the exception of Cities of Albany, Hayward, San Leandro, and Union City in Alameda County; and the Cities of La Miranda, Pico Riviera, and South Gate in Los Angeles County). According to the BOE's analysis of this bill, as of April 1, 2015, 202 local jurisdictions, including cities, counties, and special purpose entities, impose a district tax for general or specific purposes. Of the 202 jurisdictions, 48 are county-imposed taxes and 154 are city-imposed taxes. Of the 48 county-imposed taxes, 44 are imposed for special purposes. Of the 154 city-imposed taxes, 124 are general purpose taxes and 30 are special purpose taxes.

3. Existing 2% combined countywide cap. In 1987, the Legislature imposed a maximum combined rate of 1% on all district taxes within any county. That rate was incrementally increased ‑ first to 1.5% in 1990 and then to 2% in 2003.

The Legislature has previously granted exemptions to the 2% statutory cap for transactions and use taxes to support countywide transportation programs. For example, in 2008, the Legislature authorized the Los Angeles County Metropolitan Transportation Authority to impose a TUT not subject to the 2% cap. (AB 23 (Feuer), Chapter 302, Statutes of 2008.) In 2011, a one-time exemption from the 2% TUT combined rate cap was allowed for Alameda County. (AB 1086 (Wieckowski), Chapter 327, Statutes of 2011.) Subsequently, in 2012, the Legislature extended the authority for Alameda County to impose a TUT, the rate of which – in combination with all other district taxes in the county – would exceed the 2% statutory cap. The Legislature also allowed Contra Costa County to adopt an ordinance imposing a TUT in the same manner as Alameda County (AB 210 (Wieckowski), Chapter 194, Statutes of 2013). Additionally, in 2014, the Legislature authorized the City of El Cerrito to adopt an ordinance proposing the imposition of a TUT that exceeds the 2% statutory limitation.

At the present time, the Counties of Alameda, Contra Costa, Los Angeles, and San Mateo have reached the 2% limit. The Counties of Marin, San Diego, and Sonoma are near the 2% limit.

4. Increasing the 2% Cap. In recent years, more and more cities and counties seek individual legislation to increase the current statutory 2% cap. This bill is intended to uniformly increase the combined statutory cap for all counties to 3%, instead of addressing the financial difficulties experienced by various cities and counties on a case-by-case basis.

Local governments often find it difficult to make up for decreases in state revenues with increases in local revenues because counties have limited authority to raise revenues and local special taxes require a two-thirds vote of the electorate. Furthermore, the interaction between city-imposed and county-imposed TUTs may cause some counties to "run out of room" under the 2% maximum combined rate of tax. When a city or district imposes a TUT, that tax rate counts toward the county's cap, which means that the county is restricted in its ability to raise revenues on a countywide basis. Since levying a tax on a countywide basis is the only way for the county to support its operations and fund services, including transportation, an imposition of a new, or extension of an existing, tax by a city or a district within the county will directly impact the county's ability to raise revenues. This bill may help counties that either have already reached, or are close to reaching, the 2% maximum combined rate limit to levy or extend a TUT.

Furthermore, cities and districts may also be constrained in their ability to impose a new or increase an existing TUT in the counties that have reached the 2% limit. As such, this bill would provide more flexibility for cities and other authorized agencies as well and would also drastically reduce the number of bills seeking to lift the cap on behalf of individual counties or cities.

5. No change in voting requirements. While this bill increases the countywide 2% cap, it does not change any of the voting requirements applicable to the passage of local taxes, including a TUT.

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0001043

 THIRD READING  

Bill No: AB 464

Author: Mullin (D) and Gordon (D), et al.

Amended: 6/17/15 in Senate

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 4-2, 6/10/15

AYES: Hertzberg, Beall, Hernandez, Pavley

NOES: Nguyen, Moorlach

NO VOTE RECORDED: Lara

ASSEMBLY FLOOR: 45-31, 5/14/15 - See last page for vote

SUBJECT: Transactions and use taxes: maximum combined rate

SOURCE: Author

DIGEST: This bill increases the countywide transactions and use tax combined cap from 2% to 3%.

ANALYSIS:

Existing law:

1. Authorizes cities and counties to impose local transactions and use taxes.

2. Provides that the maximum combined rate of all transactions and use taxes that may be levied by authorized entities within a county is 2%

3. Provides that counties and cities may impose a transactions and use tax for general purposes and special purposes at a rate of 0.125%, or multiple thereof, if the ordinance imposing the tax is approved by the required percentage of voters in the city or county.

4. Exempts from the 2% cap the counties of Alameda, Contra Costa, and Los Angeles.

This bill:

1. Increases the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

2. Becomes effective January 1, 2016.

3. Applies the new 3% cap to the exemptions in the counties of Alameda, Contra Costa, and Los Angeles.

Background

Prior to 2003, cities lacked the ability to place transactions and use taxes before their voters without first obtaining approval by the Legislature to bring an ordinance before the city council, and, if approved at the council level, to the voters. This was remedied by SB 566 (Scott, Chapter 709, Statutes of 2003), which allowed cities and counties to impose additional sales and use taxes, called transactions and use taxes up to a uniform 2% cap for both cities and counties, in response to at least five bills a year seeking to impose the tax. The cap set an upper limit on the local rate, as California’s sales and use tax rate is very high.

In rare cases, the Legislature allows local agencies to exceed the 2% cap. The Legislature has previously granted exemptions to the 2% statutory cap for transactions and use taxes to support countywide transportation programs for Los Angeles, Alameda, and Contra Costa counties. AB 1086 (Wieckowski, Chapter 327, Statutes of 2011) allowed a one-time exemption for Alameda County from the 2% transactions and use tax combined rate cap. AB 210 (Wieckowski, Chapter 194, Statutes of 2013) extended the authority for Alameda County to adopt an ordinance imposing a transactions and use tax from January 1, 2014, to December 31, 2020, and allowed Contra Costa County to adopt an ordinance imposing a transactions and use tax in the same manner as Alameda County. Additionally, AB 1324 (Skinner, Chapter 795, Statutes of 2014) allowed the City of El Cerrito to adopt an ordinance to impose a transactions and use tax not to exceed 0.5% for general purposes that would, in combination with other taxes, exceed the statutory limit of 2%.

In 2003, SB 314 (Murray, Chapter 785) enacted provisions that authorized the Los Angeles County Metropolitan Transportation Authority (MTA) to impose a 0.5% transaction and use tax, not subject to the 2% cap for no more than six and one-half years, for specific transportation projects and programs. The MTA’s authority to put a tax measure on the ballot was never used. AB 2321 (Feuer, Chapter 302, Statutes of 2008) modified those provisions to allow MTA to impose a transactions and use tax for 30 years. SB 767 (De León, 2015), pending in the Senate Floor, and AB 338 (Hernández, 2015), pending in the Senate Transportation and Housing Committee, both authorize MTA to impose an additional countywide 0.5% transactions and use tax.

At the present time, the Counties of Alameda, Contra Costa, Los Angeles, and San Mateo have reached the 2% limit. The Counties of Marin, San Diego, and Sonoma Counties are near the 2% limit and the Cities of Albany, Hayward, San Leandro, Union City, La Miranda, Pico Riviera, and South Gate are above the 2% limit.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 6/17/15)

Alameda County Transportation Commission

American Federation of State, County, and Municipal Employees

California State Association of Counties

California State Council of Laborers

California Tax Reform Association

California Transit Association

City/County Association of Governments of San Mateo County

Marin County Board of Supervisors

Metropolitan Transportation Commission

MuniServices

San Mateo County Transportation Authority

Santa Clara Valley Transportation Authority

Self Help Counties Coalition

Service Employees International Union

Transportation Authority of Marin

OPPOSITION: (Verified 6/17/15)

Air Logistics Corporation

Alliance of Contra Costa Taxpayers

California Manufacturers and Technology Association

California Tank Lines, Inc.

California Taxpayers Association

Chemical Transfer Co.

Family Business Association

Kern County Taxpayers Association

Monterey County Farm Bureau

National Federation of Independent Business

Orange County Business Council

Orange County Taxpayers Association

San Diego Tax Fighters

Solano County Taxpayers Association

Superior Tank Wash Inc.

West Coast Leasing, LLC

West Coast Lumber & Building Material Association

ARGUMENTS IN SUPPORT: The proponents of this bill state that in many communities “throughout the state, local agencies are considering options for financing improvements in infrastructure, parks, public safety, and other local programs.” However, many agencies “are precluded from considering the option of an additional transactions and use tax due to the 2 percent cap on the combined rate.” The proponents note that the Legislature previously has considered “a number of measures that offered limited exceptions to the two-percent cap in certain California communities” and argue that perhaps “it is the appropriate time to consider a broad increase in the transactions and use tax cap.” The proponents also assert that “the existing two-percent cap on local sales tax severely limits local government's ability” to fund new and existing transportation and other vital local services since “many jurisdictions are already at or are near that threshold.” Increasing the cap from 2% to 3% “would provide local governments throughout the state with more flexibility to use sales tax measures as a strategy to support a growing scope of local needs.” Finally, the proponents note that this bill “gives local jurisdictions the freedom to seek voter approval for a local tax increase with local accountability.”

ARGUMENTS IN OPPOSITION: The opponents state that “California already has the highest sales and use tax rate in the country, with a combined minimum state and local sales tax rate of 7.5 percent.” Moreover, “local governments may impose additional transactions (sales) and use taxes, known as district taxes, generally capped at 2%.” The opponents argue that this bill increases the cost of conducting business in California, impose a regressive tax on disadvantaged communities.

ASSEMBLY FLOOR: 45-31, 5/14/15

AYES: Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chau, Chiu, Chu, Cooley, Cooper, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gipson, Gomez, Gonzalez, Gordon, Gray, Roger Hernández, Holden, Jones-Sawyer, Levine, Lopez, Low, McCarty, Medina, Mullin, Nazarian, O'Donnell, Quirk, Rendon, Ridley-Thomas, Rodriguez, Santiago, Mark Stone, Thurmond, Ting, Weber, Williams, Wood, Atkins

NOES: Achadjian, Travis Allen, Baker, Bigelow, Brough, Chang, Chávez, Dahle, Beth Gaines, Gallagher, Gatto, Grove, Hadley, Harper, Irwin, Jones, Kim, Lackey, Linder, Maienschein, Mathis, Mayes, Melendez, Obernolte, Olsen, Patterson, Salas, Steinorth, Wagner, Waldron, Wilk

NO VOTE RECORDED: Alejo, Dababneh, Daly, Perea

Prepared by: Myriam Bouaziz / GOV. & F. / (916) 651-4119

6/17/15 10:52:06

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

TRANSACTIONS AND USE TAXES:MAXIMUM COMBINED RATE

Increases the countywide transactions and use tax combined cap from 2% to 3%.

Background and Existing Law

The state sales and use tax rate is 7.50% as detailed below and is generally imposed on all tangible personal property unless specifically exempt.

Transactions & Use Tax

Prior to 2003, cities lacked the ability to place transactions and use taxes before their voters without first obtaining approval by the Legislature to bring an ordinance before the city council, and, if approved at the council level, to the voters. This was remedied by SB 566 (Scott, 2003), which allowed cities and counties to impose additional sales and use taxes, called transactions and use taxes (TUT) up to a uniform 2% cap for both cities and counties, in response to at least five bills a year seeking to impose the tax. The cap set an upper limit on the local rate, as California’s sales and use tax rate is very high. The tax must be imposed in increments of 0.125%.

In rare cases, the Legislature allows local agencies to exceed the 2% cap. The Legislature has previously granted exemptions to the 2% statutory cap for transactions and use taxes to support countywide transportation programs for Los Angeles, Alameda, and Contra Costa counties. AB 1086 (Wieckowski, 2011), allowed a one-time exemption for Alameda County from the 2% transactions and use tax combined rate cap. AB 210 (Wieckowski, 2013), extended the authority for Alameda County to adopt an ordinance imposing a transactions and use tax from January 1, 2014, to December 31, 2020, and allowed Contra Costa County to adopt an ordinance imposing a transactions and use tax in the same manner as Alameda County. Additionally, AB 1324 (Skinner, 2014), allowed the City of El Cerrito to adopt an ordinance to impose a transactions and use tax not to exceed 0.5% for general purposes that would, in combination with other taxes, exceed the statutory limit of 2%.

In 2003, SB 314 (Murray) enacted provisions that authorized the Los Angeles County Metropolitan Transportation Authority (MTA) to impose a 0.5% transaction and use tax, not subject to the 2% cap for no more than six and one-half years, for specific transportation projects and programs. The authority to put a tax measure on the ballot was never used. AB 2321 (Feuer, 2008), modified those provisions to allow MTA to impose a transactions and use tax for 30 years. SB 767 (De León), pending in the Senate Floor, and AB 338 (Hernández), pending in the Senate Transportation and Housing Committee, would both authorize MTA to impose an additional countywide 0.5% transactions and use tax.

At the present time, the Counties of Alameda, Contra Costa, Los Angeles, and San Mateo have reached the 2% limit. The counties of Marin, San Diego, and Sonoma Counties are near the 2% limit and the cities of Albany, Hayward, San Leandro, Union City, La Miranda, Pico Riviera, and South Gate are above the 2% limit.

AB 464 seeks to increase the current 2% cap to 3%.

Proposed Law

Senate Bill 464 increases the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

State Revenue Impact

None.

Comments

1. Purpose of the bill. According to the author, “Current law allows cities and counties to impose transaction and use taxes, also known as district taxes, at a rate of up to two percent of total sales. This cap is quickly reached when both cities and counties impose their own district taxes. This is particularly problematic for counties because if one city within a county has reached the cap, then the county is precluded from raising additional district taxes. Similarly, cities that have already reached the cap are constrained when seeking additional funding for programs and services over and above the cap.

The two percent cap was implemented more than a decade ago, in 2003. Since then, several bills have gone through the Legislature to create individual exceptions to the cap. Most of these bills were eventually signed into law, begging the policy question: If raising the cap is good for individual jurisdictions, then should we consider simply lifting it statewide? AB 464 does exactly this, and as a result it would not only apply the policy statewide, but it would also reduce the number of piecemeal one-off bills going through the Legislature, saving state resources.

Throughout California, districts are reaching the current cap, while funding for important services, like transit and public safety, is in decline. This bill gives local jurisdictions the freedom to seek voter approval for district tax increases by raising the cap from two to three percent of total sales. If the proposed tax increase goes for a specific purpose, it would trigger a two-thirds majority vote of the people living within the jurisdiction before taking effect. AB 464 grants local governing bodies, and the people living within them, the much needed flexibility to raise additional funds for important programs and services.”

2. How high is too high? Currently, California has the highest state sales tax rate in the United States at 7.5 percent, combined with the 2% cap; the rate in many parts of the state is 9.5%. There are also 7 cities with a combined rate of 10%. Furthermore, AB 464’s language raises the cap to 3%, but does not apply to the current exceptions to the 2% cap, so several cities in California could have combined sales and use tax rate of 11%. According to the California Budget & Policy Center 2015 Issue Brief, Who Pays Taxes in California?, low-income families spend nearly all of their incomes on basic necessities, including many goods that are subject to sales tax. In contrast, higher-income families tend to save a portion of their incomes or spend more of their incomes on services, which are not subject to the sales tax. Thus, for California’s poorest families, a higher tax means less money to spend on daily necessities. The Committee may wish to consider lowering the cap, applying a sunset, or ensuring past exceptions to the cap are subject to the new 3% cap.

3. Above the cap. In recent years, more and more cities and counties seek individual legislation to increase the current statutory 2% cap. This bill is intended to uniformly increase the combined statutory cap for all counties to 3%, instead of addressing the financial difficulties experienced by various cities and counties on a case-by-case basis.

Local governments often find it difficult to make up for decreases in state revenues with increases in local revenues because counties have limited authority to raise revenues, and local special taxes require a two-thirds vote of the electorate. Furthermore, the interaction between city-imposed and county-imposed TUTs may cause some counties to "run out of room" under the 2% maximum combined rate of tax. When a city or district imposes a TUT, that tax rate counts toward the county's cap, which means that the county is restricted in its ability to raise revenues on a countywide basis. Since levying a tax on a countywide basis is the only way for the county to support its operations and fund services, including transportation, an imposition of a new, or the extension of an existing, tax by a city or a district within the county will directly impact the county's ability to raise revenues. This bill may help counties that either have already reached, or are close to reaching, the 2% maximum combined rate limit to levy or extend a TUT.

Furthermore, cities and districts may also be constrained in their ability to impose a new or increase an existing TUT in the counties that have reached the 2% limit. As such, this bill would provide more flexibility for cities and other authorized agencies as well and would also drastically reduce the number of bills seeking to lift the cap on behalf of individual counties or cities.

4. No change in voting requirements. While this bill increases the countywide 2% cap, it does not change any of the voting requirements applicable to the passage of local taxes, including a TUT.

Assembly Actions

Assembly Revenue and Taxation 5-3

Assembly Local Government 5-3

Assembly Floor 45-31

Support and Opposition

(6/4/15)

Support: Alameda County Transportation Commission; American Federation of State, County, and Municipal Employees (AFSCME); California State Association of Counties; California State Council of Laborers; California Tax Reform Association; California Transit Association; City/County Association of Governments of San Mateo County; Marin County Board of Supervisors; Metropolitan Transportation Commission; San Mateo County Transportation Authority; Santa Clara Valley Transportation Authority; Self Help Counties Coalition; Service Employees International Union (SEIU); Transportation Authority of Marin.

Opposition: Air Logistics Corporation; Alliance of Contra Costa Taxpayers; California Manufacturers and Technology Association; California Tank Lines, Inc.; Chemical Transfer Co.; California Taxpayers Association; Family Business Association; Kern County Taxpayers Association; Monterey County Farm Bureau; National Federation of Independent Business; Orange County Business Council; Orange County Taxpayers Association; San Diego Tax Fighters; Solano County Taxpayers Association; Superior Tank Wash Inc.; West Coast Leasing, LLC; West Coast Lumber & Building Material Association

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 464

Author:(Mullin and Gordon)

As Amended Ver:April 6, 2015

Majority vote

SUMMARY: Increases the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

EXISTING LAW:

1. Authorizes cities and counties, under the Bradley-Burns Uniform Local Sales and Use Tax (SUT) Law, to impose local SUT.

2. Provides counties and cities, under the Transactions and Use Tax (TUT) Law and the Additional Local Taxes Law, with the authority to impose district taxes under specified conditions.

3. Provides that counties and cities may impose a district tax for general purposes and special purposes at a rate of 0.125%, or multiple thereof, if the ordinance imposing the tax is approved by the required percentage of voters in the city or county.

4. Provides that the combined rate of all district taxes imposed in accordance with the TUT law in any county may not exceed 2%.

5. Exempts from the 2% cap the Counties of Alameda, Contra Costa, and Los Angeles, as specified.

6. Allows a county to establish a transportation authority to impose district taxes under the Public Utilities Code (PUC) and authorizes a county board of supervisors to designate a transportation-planning agency to impose a district tax. Requires that district taxes imposed under the PUC conform to the administrative provisions contained in the TUT Law.

7. Requires cities and counties to contract with the State Board of Equalization (BOE) to perform all functions in the administration and operations of the ordinances imposing the Bradley-Burns local taxes and district taxes.

FISCAL EFFECT: None

COMMENTS:

1. Author's statement. The author has provided the following statement in support of this bill:

"Current law allows cities and counties to impose transaction and use taxes, also known as district taxes, at a rate of up to two percent of total sales. This cap is quickly reached when both cities and counties impose their own district taxes. It is particularly problematic for counties because if one city within a county has reached the cap, then the county is precluded from raising additional district taxes. Similarly, cities that have already reached the cap are constrained when seeking additional funding for programs and services over and above the cap.

"The two percent cap was implemented more than a decade ago, in 2003. Since then several bills have gone through the Legislature to create individual exceptions to the cap. Most of these bills were eventually signed into law, begging the policy question: If raising the cap is good for individual jurisdictions, then should we consider simply lifting it statewide? AB 464 does exactly this, and as a result it would not only make the policy statewide, but it would reduce the amount of piecemeal one-off bills going through the Legislature on the subject, savings state resources.

"Throughout California, districts are reaching the current cap, and funding for services, including transportation, education and public safety, is declining. This bill gives local jurisdictions the freedom to seek voter approval for district tax increases by raising the cap from two to three percent. If the proposed tax goes for a specific purpose, it would require a two-thirds majority vote of the people living within the jurisdiction before going into effect. In other instances, when a jurisdiction proposes a general purpose tax, a majority vote would be required. AB 464 grants local governing bodies, and the people living within them, the much needed flexibility to raise additional funds for important programs and services."

2. Background. The TUT law authorizes the adoption of local add-on rates to the combined state and local sales tax rate. Under existing law, cities and counties may impose a TUT (a district tax) for general or special purposes, subject to voter approval, provided that the combined countywide rate of tax does not exceed 2% (with the exception of the Counties of Alameda, Contra Costa, and Los Angeles). These taxes may be imposed either directly by the city or county, or through a special purpose entity established by the city or county. Counties may also create a transportation authority to impose district taxes under the PUC or designate a transportation planning agency to impose a district tax, subject to the applicable voter approval requirements. District taxes imposed under the PUC must conform to the administrative provisions contained in the TUT Law, including the requirement to contract with the BOE to perform all functions related to the administration and operation of the ordinance.

A district tax is imposed on the sale or the storage, use, or other consumption of tangible personal property in the jurisdiction that adopted the tax. Generally, a district tax is imposed at a rate of 0.125%, or 0.125% increments, up to the 2% limit. Some cities and counties have more than one district tax, while others have none. Currently, the district tax rates vary from 0.10% to 1%. The current combined state, local, and district rates range from 7.50% to 9.5% (with the exception of Cities of Albany, Hayward, San Leandro, and Union City in Alameda County; and the Cities of La Miranda, Pico Riviera, and South Gate in Los Angeles County). According to the BOE's analysis of this bill, as of April 1, 2015, 202 local jurisdictions, including cities, counties, and special purpose entities, impose a district tax for general or specific purposes. Of the 202 jurisdictions, 48 are county-imposed taxes and 154 are city-imposed taxes. Of the 48 county-imposed taxes, 44 are imposed for special purposes. Of the 154 city-imposed taxes, 124 are general purpose taxes and 30 are special purpose taxes.

3. Existing 2% combined countywide cap. In 1987, the Legislature imposed a maximum combined rate of 1% on all district taxes within any county. That rate was incrementally increased – first to 1.5% in 1990 and then to 2% in 2003. At the present time, the Counties of Alameda, Contra Costa, Los Angeles, and San Mateo have reached the 2% limit. The Counties of Marin, San Diego, and Sonoma are near the 2% limit.

4. Increasing the 2% Cap. In recent years, more and more cities and counties seek individual legislation to increase the current statutory 2% cap. This bill is intended to uniformly increase the combined statutory cap for all counties to 3%, instead of addressing the financial difficulties experienced by various cities and counties on a case-by-case basis.

Local governments often find it difficult to make up for decreases in state revenues with increases in local revenues because counties have limited authority to raise revenues and local special taxes require a two-thirds vote of the electorate. Furthermore, the interaction between city-imposed and county-imposed TUTs may cause some counties to "run out of room" under the 2% maximum combined rate of tax. When a city or district imposes a TUT, that tax rate counts toward the county's cap, which means that the county is restricted in its ability to raise revenues on a countywide basis. Since levying a tax on a countywide basis is the only way for the county to support its operations and fund services, including transportation, an imposition of a new, or extension of an existing, tax by a city or a district within the county will directly impact the county's ability to raise revenues. This bill may help counties that either have already reached, or are close to reaching, the 2% maximum combined rate limit to levy or extend a TUT.

Furthermore, cities and districts may also be constrained in their ability to impose a new or increase an existing TUT in the counties that have reached the 2% limit. As such, this bill would provide more flexibility for cities and other authorized agencies as well and would also drastically reduce the number of bills seeking to lift the cap on behalf of individual counties or cities.

5. No change in voting requirements. While this bill increases the countywide 2% cap, it does not change any of the voting requirements applicable to the passage of local taxes, including a TUT.

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0000288

Date of Hearing: April 29, 2015

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Brian Maienschein, Chair

ABPCA Bill Id:AB 464

Author:(Mullin and Gordon) – As Amended Ver:April 6, 2015

SUBJECT: Transactions and use taxes: maximum combined rate.

SUMMARY: Increases the countywide transactions and use tax combined rate cap from 2%
to 3%, statewide.

FISCAL EFFECT: None

COMMENTS:

1. Bill Summary. This bill increases the countywide transactions and use tax combined cap from 2% to 3%. Instead of addressing the needs of each county and city on an individual basis as the Legislature has done in the past, this bill will uniformly increase the statutory cap for all counties and provide more flexibility to local governments to raise revenue. This bill does not impact voter thresholds for specific or general purpose transactions and use taxes in existing law, and voters still have the final say in approving or voting down a local transactions and use tax measure.

This bill is sponsored by the San Mateo County Transportation Authority.

2. Author's Statement. According to the author, "Current law allows cities and counties to impose transaction and use taxes, also known as district taxes, at a rate of up to two percent of total sales. This cap is quickly reached when both cities and counties impose their own district taxes. It is particularly problematic for counties because if one city within a county has reached the cap, then the county is precluded from raising additional district taxes. Similarly, cities that have already reached the cap are constrained when seeking additional funding for programs and services over and above the cap.

"The two percent cap was implemented more than a decade ago, in 2003. Since then, several bills have gone through the Legislature to create individual exceptions to the cap. Most of these bills were eventually signed into law, begging the policy question: If raising the cap is good for individual jurisdictions, then should we consider simply lifting it statewide? This bill does exactly this, and as a result it would not only make the policy statewide, but it would reduce the amount of piecemeal one-off bills going through the Legislature on the subject, saving state resources.

"Throughout California, districts are reaching the current cap, and funding for services, including transportation, education and public safety, is declining. This bill gives local jurisdictions the freedom to seek voter approval for district tax increases by raising the cap from two to three percent. This bill grants local governing bodies, and the people living within them, the much needed flexibility to raise additional funds for important programs and services."

3. Transactions and Use Taxes. Existing law authorizes cities and counties to impose transactions and use taxes in 0.125% increments in addition to the state’s 7.5% sales tax provided that the combined rate in the county does not exceed 2%. Transactions and use taxes are taxes imposed on the total retail price of any tangible personal property and the use or storage of such property when sales tax is not paid. These types of taxes may be levied as general taxes (majority-vote required), which are unrestricted, or special taxes (two-thirds vote required), which are restricted for a specified use. The Transactions and Use Tax law authorizes the adoption of local add-on rates to the combined state and local sales tax rate. The law has been amended multiple times to authorize specific cities, counties, special districts and county transportation authorities to impose a transactions and use tax, if voters approve the tax.

Prior to 2003, cities lacked the ability to place transactions and use taxes before their voters without first obtaining approval by the Legislature to bring an ordinance before the city council, and, if approved at the council level, to the voters. This was remedied by SB 566 (Scott), Chapter 709, Statutes of 2003. SB 566 also contained provisions to increase a county's transactions and use tax cap because of the possibility that certain counties were going to run out of room under their caps, if cities within those counties approved transactions and use taxes.

Because of the interaction between city-imposed and county-imposed transactions and use taxes, the concern that counties will run into the 2% cap still applies today. Currently, the Counties of Alameda, Contra Costa, Los Angeles, and San Mateo have reached the 2% limit, and the Counties of Marin, San Diego, and Sonoma are near the 2% limit.

According to the Board of Equalization, as of April 1, 2015, there are 202 local jurisdictions (city, county, and special purpose entity) imposing a transactions and use tax for general or specific purposes. Of the 202 jurisdictions, 48 are county-imposed taxes and 154 are city-imposed taxes. Of the 48 county-imposed taxes, 44 are imposed for special purposes. Of the 154 city-imposed taxes, 124 are general purpose taxes and 30 are special purpose taxes.

4. Exemptions to the 2% Cap. The Legislature has previously granted exemptions to the
   2% statutory cap for transactions and use taxes to support countywide transportation programs for Los Angeles, Alameda, and Contra Costa counties.

AB 1086 (Wieckowski), Chapter 327, Statutes of 2011, allowed a one-time exemption for Alameda County from the 2% transactions and use tax combined rate cap. AB 210 (Wieckowski), Chapter 194, Statutes of 2013, extended the authority for Alameda County to adopt an ordinance imposing a transactions and use tax from January 1, 2014, to December 31, 2020, and allowed Contra Costa County to adopt an ordinance imposing a transactions and use tax in the same manner as Alameda County.

SB 314 (Murray), Chapter 785, Statutes of 2003, originally enacted provisions that authorized the Los Angeles County Metropolitan Transportation Authority (MTA) to impose a 0.5% transactions and use tax, not subject to the 2% cap for no more than six and one-half years, for specific transportation projects and programs. The authority to put a tax measure on the ballot was never used. AB 2321 (Feuer), Chapter 302, Statutes of 2008, modified those provisions to allow MTA to impose a transactions and use tax for 30 years. SB 767 (De León), pending in the Senate Appropriations Committee, and AB 338 (Hernández), pending in the Transportation Committee, would both authorize MTA to impose an additional countywide 0.5% transactions and use tax.

Additionally, AB 1324 (Skinner), Chapter 795, Statutes of 2014, allowed the City of
El Cerrito to adopt an ordinance to impose a transactions and use tax not to exceed 0.5%
for general purposes that would, in combination with other taxes, exceed the statutory limit of 2%.

5. Arguments in Support. Supporters argue that this bill will eliminate the piecemeal approach to exceeding the 2% cap and will provide local agencies with another funding option so they can provide high quality public services to their residents.

6. Arguments in Opposition. Opposition argues that this bill increases the cost of doing business and imposes a regressive tax on disadvantaged communities.

7. Double-Referral. This bill was heard in the Revenue and Taxation Committee on April 13, 2015, and passed with a 5-3 vote.

REGISTERED SUPPORT / OPPOSITION:

Support

San Mateo County Transportation Authority [SPONSOR]

Alameda County Transportation Commission

American Federation of State, County, and Municipal Employees

California State Association of Counties

California State Council of Laborers

California Tax Reform Association

California Transit Association

Metropolitan Transportation Commission

Santa Clara Valley Transportation Authority

Self Help Counties Coalition

Service Employees International Union

Opposition

Air Logistics Corporation

California Manufacturers and Technology Association

California Tank Lines, Inc.

California Taxpayers Association

Family Business Association

Kern County Taxpayers Association

National Federation of Independent Business

Orange County Business Council

Orange County Taxpayers Association

Superior Tank Wash Inc.

West Coast Leasing, LLC

West Coast Lumber & Building Material Association

Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958

Date of Hearing: April 13, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 464

Author:(Mullin) – As Amended Ver:April 6, 2015

Majority vote. Nonfiscal.

SUBJECT: Transactions and use taxes: maximum combined rate

SUMMARY: Increases the maximum combined rate of all transactions and use taxes (district taxes) that may be levied by authorized entities within a county from 2% to 3%.

EXISTING LAW:

1. Authorizes cities and counties, under the Bradley-Burns Uniform Local Sales and Use Tax (SUT) Law, to impose local SUT. [Revenue & Taxation Code (R&TC), commencing with Section 7200.]

2. Provides counties and cities, under the Transactions and Use Tax (TUT) Law and the Additional Local Taxes Law, with the authority to impose district taxes under specified conditions. (R&TC Section 7251 and 7280.)

3. Provides that counties and cities may impose a district tax for general purposes and special purposes at a rate of 0.125%, or multiple thereof, if the ordinance imposing the tax is approved by the required percentage of voters in the city or county. (R&TC Section 7285.)

4. Provides that the combined rate of all district taxes imposed in accordance with the TUT law in any county may not exceed 2%. (R&TC Section 7251.)
   
   

5. Exempts from the 2% cap the counties of Alameda, Contra Costa, and Los Angeles, as specified.
   
   

6. Allows a county to establish a transportation authority to impose district taxes under the Public Utilities Code (PUC) and authorizes a county board of supervisors to designate a transportation-planning agency to impose a district tax. Requires that district taxes imposed under the PUC conform to the administrative provisions contained in the TUT Law.
   
   

7. Requires cities and counties to contract with the State Board of Equalization (BOE) to perform all functions in the administration and operations of the ordinances imposing the Bradley-Burns local taxes and district taxes.

FISCAL EFFECT: No impact on General Fund revenues.

COMMENTS:

1. Author's statement. The author has provided the following statement in support of this bill:
   
   "Current law allows cities and counties to impose transaction and use taxes, also known as district taxes, at a rate of up to two percent of total sales. This cap is quickly reached when both cities and counties impose their own district taxes. It is particularly problematic for counties because if one city within a county has reached the cap, then the county is precluded from raising additional district taxes. Similarly, cities that have already reached the cap are constrained when seeking additional funding for programs and services over and above the cap.
   
   "The two percent cap was implemented more than a decade ago, in 2003. Since then several bills have gone through the Legislature to create individual exceptions to the cap. Most of these bills were eventually signed into law, begging the policy question: If raising the cap is good for individual jurisdictions, then should we consider simply lifting it statewide? AB 464 does exactly this, and as a result it would not only make the policy statewide, but it would reduce the amount of piecemeal one-off bills going through the Legislature on the subject, savings state resources.
   
   "Throughout California, districts are reaching the current cap, and funding for services, including transportation, education and public safety, is declining. This bill gives local jurisdictions the freedom to seek voter approval for district tax increases by raising the cap from two to three percent. If the proposed tax goes for a specific purpose, it would require a two-thirds majority vote of the people living within the jurisdiction before going into effect. In other instances, when a jurisdiction proposes a general purpose tax, a majority vote would be required. AB 464 grants local governing bodies, and the people living within them, the much needed flexibility to raise additional funds for important programs and services."

2. Arguments in support. The proponents of this bill state that in many communities "throughout the state, local agencies are considering options for financing improvements in infrastructure, parks, public safety, and other local programs." However, many agencies "are precluded from considering the option of an additional transactions and use tax due to the 2 percent cap on the combined rate." The proponents note that the Legislature previously has considered "a number of measures that offered limited exceptions to the two-percent cap in certain California communities" and argue that perhaps "it is the appropriate time to consider a broad increase in the transactions and use tax cap." The proponents also assert that "the existing two-percent cap on local sales tax severely limits local government's ability" to fund new and existing transportation and other vital local services since "many jurisdictions are already at or are near that threshold." Increasing the cap from 2% to 3% "would provide local governments throughout the state with more flexibility to use sales tax measures as a strategy to support a growing scope of local needs." Finally, the proponents note that this bill "gives local jurisdictions the freedom to seek voter approval for a local tax increase with local accountability."

3. Arguments in opposition. The opponents state that "California already has the highest sales and use tax rate in the country, with a combined minimum state and local sales tax rate of 7.5 percent." Moreover, "local governments may impose additional transactions (sales) and use taxes, known as district taxes, generally capped at 2%." The opponents argue that this bill would increase the cost of conducting business in California, impose a regressive tax on disadvantaged communities, and raise the sales tax rate to 11% in some areas.

4. Background. The TUT law authorizes the adoption of local add-on rates to the combined state and local sales tax rate. Under existing law, cities and counties may impose a TUT (a district tax) for general or special purposes, subject to voter approval, provided that the combined countywide rate of tax does not exceed 2% (with the exception of the Counties of Alameda, Contra Costa, and Los Angeles). These taxes may be imposed either directly by the city or county, or through a special purpose entity established by the city or county. Counties may also create a transportation authority to impose district taxes under the PUC or designate a transportation planning agency to impose a district tax, subject to the applicable voter approval requirements. District taxes imposed under the PUC must conform to the administrative provisions contained in the TUT Law, including the requirement to contract with the BOE to perform all functions related to the administration and operation of the ordinance.
   
   A district tax is imposed on the sale or the storage, use, or other consumption of tangible personal property in the jurisdiction that adopted the tax. Generally, a district tax is imposed at a rate of 0.125%, or 0.125% increments, up to the 2% limit. Some cities and counties have more than one district tax, while others have none. Currently, the district tax rates vary from 0.10% to 1%. The current combined state, local, and district rates range from 7.50% to 9.5% (with the exception of Cities of Albany, Hayward, San Leandro, and Union City in Alameda County; and the Cities of La Miranda, Pico Riviera, and South Gate in Los Angeles County). According to the BOE's analysis of this bill, as of April 1, 2015, 202 local jurisdictions, including cities, counties, and special purpose entities, impose a district tax for general or specific purposes. Of the 202 jurisdictions, 48 are county-imposed taxes and 154 are city-imposed taxes. Of the 48 county-imposed taxes, 44 are imposed for special purposes. Of the 154 city-imposed taxes, 124 are general purpose taxes and 30 are special purpose taxes.

5. Existing 2% combined countywide cap. In 1987, the Legislature imposed a maximum combined rate of 1% on all district taxes within any county. That rate was incrementally increased - first to 1.5% in 1990 and then to 2% in 2003.

The Legislature has previously granted exemptions to the 2% statutory cap for transactions and use taxes to support countywide transportation programs. For example, in 2008, the Legislature authorized the Los Angeles County Metropolitan Transportation Authority to impose a TUT not subject to the 2% cap. (Chapter 302, Stats. 2008.) In 2011, a one-time exemption from the 2% TUT combined rate cap was allowed for Alameda County. (Chapter 327, Stats. 2011.) Subsequently, in 2012, the Legislature extended the authority for Alameda County to impose a TUT, the rate of which - in combination with all other district taxes in the county - would exceed the 2% statutory cap. The Legislature also allowed Contra Costa County to adopt an ordinance imposing a TUT in the same manner as Alameda County (Chapter 194, Stat. 2013). Additionally, in 2014, the Legislature authorized the City of El Cerrito to adopt an ordinance proposing the imposition of a TUT that exceeds the 2% statutory limitation.

At the present time, the Counties of Alameda, Contra Costa, Los Angeles, and San Mateo have reached the 2% limit. The counties of Marin, San Diego, and Sonoma Counties are near the 2% limit.

6. Increasing the 2% Cap. In recent years, more and more cities and counties seek individual legislation to increase the current statutory 2% cap. This bill is intended to uniformly increase the combined statutory cap for all counties to 3%, instead of addressing the financial difficulties experienced by various cities and counties on a case-by-case basis.
   
   Local governments often find it difficult to make up for decreases in state revenues with increases in local revenues because counties have limited authority to raise revenues and local special taxes require a two-thirds vote of the electorate. Furthermore, the interaction between city-imposed and county-imposed TUTs may cause some counties to "run out of room" under the 2% maximum combined rate of tax. When a city or district imposes a TUT, that tax rate counts toward the county's cap, which means that the county is restricted in its ability to raise revenues on a countywide basis. Since levying a tax on a countywide basis is the only way for the county to support its operations and fund services, including transportation, an imposition of a new, or extension of an existing, tax by a city or a district within the county will directly impact the county's ability to raise revenues. This bill may help counties that either have already reached, or are close to reaching, the 2% maximum combined rate limit to levy or extend a TUT.

Furthermore, cities and districts may also be constrained in their ability to impose a new or increase an existing TUT in the counties that have reached the 2% limit. As such, this bill would provide more flexibility for cities and other authorized agencies as well and would also drastically reduce the number of bills seeking to lift the cap on behalf of individual counties or cities.

7. No change in voting requirements. While this bill increases the countywide 2% cap, it does not change any of the voting requirements applicable to the passage of local taxes, including a TUT.

8. Exporting the burdens of the tax. A TUT imposed in a county will be partially borne by residents of other jurisdictions. The argument for exporting taxes to nonresidents, however, is justified if nonresidents derive public-service benefits from a locality where the services are financed by local resident taxpayers. For example, tourism is an attractive tax exporting opportunity, where tourists in fact will bear the burden of the taxes imposed on sales of tangible personal property in the area. Perhaps residents of certain counties will be more amenable to levying a new, or increasing an existing, TUT knowing that the burden of that tax will be partially borne by non-residents.

9. BOE administrative costs. Cities and counties are required to contract with BOE to administer district taxes. As noted by the BOE staff in its analysis, this bill does not increase BOE's administrative costs. However, to the extent that more local tax measures are approved by local voters within a city or county, the BOE will need additional resources to administer new taxes.

REGISTERED SUPPORT / OPPOSITION:

Support

American Federation of State, County and Municipal Employees (AFSME), AFL-CIO

California Alliance for Jobs

California State Association of Counties

California State Council of Laborers

California Tax Reform Association

California Transit Association

Metropolitan Transportation Commission

San Mateo County Transportation Authority

Santa Clara Valley Transportation Authority

Self-Help Counties Coalition

Opposition

California Manufacturers & Technology Association

California Taxpayers Association

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098