September 22, 2008

Taxation Committee
Legislative Committee

The following is for study only and has NOT been approved by the Taxation Committee, Legislative or Executive Committees or the Board of Directors.

Issue
Should C.A.R. review its policy on the threshold votes required to impose a tax or sell bonds?

Action
Optional

Options
1. Do nothing. Continue with existing C.A.R. policy which generally requires a two-thirds vote threshold to impose a tax or sell bonds.

2. Create a task force. Have a task force review the existing tax vote thresholds and make a recommendation as to whether an attempt should be made to change the vote threshold needed to approve a tax or sell bonds.

3. Other.

Status/Summary
From time-to-time and, in particular, when the state is experiencing fiscal difficulties, C.A.R. has reviewed the state’s financial and taxation mechanisms in order to be “ahead of the curve” so-to-speak with regard to potential proposed changes to those mechanisms. To date, C.A.R. has maintained a policy that it “should judge proposals on a case-by-case basis, rather than precluding any approaches out of hand.” The vote threshold required for imposing taxes or selling bonds varies from a simple majority to two-thirds; however, education bonds can be approved with a 55 percent vote. One area that may warrant some consideration is that of the vote requirement for general taxes versus specific taxes. An argument could be made that the current vote requirements are backwards. Under existing law, a two-thirds vote is needed for a special tax (i.e., for a specific purpose) while a simple majority is needed for a general tax (i.e., for a general purpose). It would seem that if the public is provided with less information about how the tax funds are to be used, then a two-thirds vote should be required for approval. And, in fact, there have been instances in which cities knew the purpose for which the tax funds were going to be used but did not link the tax to the specific purpose in order to avoid the two-thirds vote requirement.

Discussion
The budget stalemate that occurred this summer resulted in the state operating without a state budget for approximately 2 ½ months. Given the difficulty in securing the two-thirds vote of each house of the legislature needed to pass the state budget, it is likely that legislators as well as special interest groups will be advancing proposals to lower the vote thresholds needed not only for approval of the state budget by the legislature but also the thresholds needed to approve the imposition of taxes and the sale of bonds.

During the last major fiscal crisis faced by the state in the early 1990s, C.A.R. conducted a review of the state’s financial and taxation mechanisms in order to be “ahead of the curve” so-to-speak with regard to potential proposed changes to those mechanisms. In 1990, the chair of the Special Committee on Taxation appointed the Tax Working Group to review the state’s finance and taxation mechanisms. Ultimately, the Tax Working Group concluded that C.A.R. should maintain its “case-by-case” decision making approach with regard to any proposed changes. In other words, the group felt that no overriding policy change should be made and, instead, any proposed changes to existing policy should be reviewed individually.

The basic guidelines recommended by the Tax Working Group, and approved by the Board of Directors in January 1991, are as follows:

*  No taxing mechanism is, in and of itself, either entirely positive or entirely negative. Thus, C.A.R. should judge proposals on a case-by-case basis, rather than precluding any approaches out of hand.

*  A general tax, such as sales and income taxes, should be levied to provide a general benefit, thereby spreading the cost of government over the largest number of citizens. Specific taxes, such as user fees, should be levied to support activities with narrowly defined benefits and not to fund programs that benefit society as a whole. For example, the real estate community should not shoulder the responsibility for housing the homeless, which is a societal problem.

*  General Obligation (GO) bonds should be used exclusively for capital expenditures, not to finance day-to-day operating and maintenance costs. The “flight to bonds” is placing an increasing burden on future generations.

*  To maintain some fiscal discipline on government spending, an overall budget limitation subject to periodic reviews should be in place. Additionally, given the difficulty of raising needed revenues, funds should be earmarked for specific uses when necessary.

Reflective of C.A.R. reviewing and changing its position on vote thresholds, the Board of Directors voted in 1988 to require only a simple majority vote for passage of school bonds. This shift in policy resulted in C.A.R. supporting Proposition 39 (November 2000) which reduced the vote requirement for local school bonds from two-thirds to 55% vote.

In June 2003, C.A.R. reviewed local government finance and taxation mechanisms with the establishment of the Vote Reduction Task Force whose mission was: “To review existing C.A.R. policy in the tax area and establish policy parameters for determining appropriate vote thresholds for local bonds and local special taxes.” Ultimately, this task force “concluded that maintaining C.A.R.’s ‘case-by-case’ decision-making approach was most effective.”

The votes required to approve tax increases are summarized in the following table:

                                   Tax Vote Requirements

Transfer taxes could be either general taxes (revenues to be used for general purposes) or special taxes (revenues to be used for a specific purpose). However, Proposition 13 specifically prohibits special transfer taxes. In addition, general law cities are limited to transfer taxes of $1.10 per $1,000 of the value of the property; there is no monetary limit on the transfer taxes that can be levied by charter cities.

Does the vote requirement for general taxes versus special taxes warrant consideration? An argument could be made that the current vote requirements are backwards. Currently, if the voting public is not told the purpose for the tax, then the vote requirement is a simple majority. On the other hand, if the purpose for the tax funds is specified, then a two-thirds vote is required for approval. It would seem that if the public is provided with less information about how the tax funds are to be used, then a higher vote threshold should be required for approval. In fact, there have been instances in which cities knew the purpose for which the tax funds were going to be used but did not link the tax to the specific purpose in order to avoid the two-thirds vote requirement.