BILL ANALYSIS Ó AB 686 Page 1 Date of Hearing: April 4, 2011 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Henry T. Perea, Chair AB 686 (Huffman) - As Amended: March 9, 2011 Majority vote. SUBJECT : Local sales and use taxes: transaction and use taxes. SUMMARY Decreases the rate at which a county or city may levy, increase, or extend a transactions and use tax (TUT) from 0.25%, or a multiple thereof, to a rate of 0.125%, or a multiple thereof. Specifically, this bill authorizes: 1)A county board of supervisors to levy, increase, or extend a TUT at a rate of 0.125%, or a multiple thereof, instead of 0.25%, if all of the applicable requirements are satisfied. 2)The governing body of a city to levy, increase, or extend a TUT at a rate of 0.125%, or a multiple thereof, instead of 0.25%, if all of the applicable requirements are satisfied. EXISTING LAW : 1)Authorizes local governments to impose, increase, or extend TUTs (also known as district taxes), under specified conditions. ÝRevenue and Taxation Code (R&TC) Part 1.6 (commencing with Section 7251) (TUT Law), and R&TC Part 1.7 (commencing with Section 7285) (Additional Local Tax Law)]. 2)Authorizes a county to impose a district tax for general purposes at a rate of 0.25%, or multiple thereof, if the ordinance proposing the tax is approved by a two-thirds vote of the board of supervisors and a majority vote of the qualified voters of the county. (R&TC Section 7285). 3)Authorizes a county to impose a district tax for special purposes at a rate of 0.25%, or multiple thereof, if the ordinance proposing the tax is approved by a two-thirds vote of the board of supervisors and a two-thirds vote of the qualified voters in the county. (R&TC Section 7285.5). 4)Authorizes a county to impose a district tax for funding AB 686 Page 2 libraries at a rate of either 0.125% or 0.25% for a period not to exceed 16 years. The ordinance proposing the tax must be approved by the board of supervisors and a two-thirds vote of the qualified voters of the county. The revenues must be used exclusively for funding public library construction, acquisition, programs, and operations within the county. 5)Authorizes a city to impose a district tax for general purposes at a rate of 0.25%, or multiple thereof, if the ordinance proposing the tax is approved by a two-thirds vote of all members of the governing body and a majority vote of the qualified voters. (R&TC Section 7285.9). 6)Authorizes a city to impose a district tax for special purposes at a rate of 0.25%, or multiple thereof, if the ordinance proposing the tax is approved by a two-thirds vote of all members of the governing body and a two-thirds vote of the qualified voters. (R&TC Section 7285.9). 7)Provides that the combined rate of all district taxed imposed in any county may not exceed 2%. 8)Requires cities and counties to contract with the State Board of Equalization to perform all functions in the administration and operations of the ordinances imposing the Bradley-Burns local taxes and district taxes. FISCAL EFFECT : The Board of Equalization (BOE) staff projects that, if all of the special taxing jurisdictions in the state increase a TUT by 0.125%, the annual gain in revenue would be $770 million in fiscal year (FY) 2012-13 and $818 million in FY 2013-14. COMMENTS : 1)Author's Statement . The author states that, "Current law allows cities and counties to propose tax measures to voters to pay for local services, such as public safety, schools, roads, parks, or libraries. This bill will allow voters to approve taxes in smaller increments, giving local governments flexibility to raise a more targeted amount of money to meet a specific community need while retaining current requirements for voter approval of tax measures." 2)Arguments in Support . The Marin County Board of Supervisors, AB 686 Page 3 the sponsor of this bill, argues that "county governments need the flexibility to ask their voters for more discrete levels of revenue augmentations that can be used for locally targeted needs." The proponents further assert that during "these times of financial challenges, local agencies need as much flexibility as possible to adapt to changing circumstances" and to address "local challenges while still ensuring appropriate oversight from the voting public." 3)Arguments in Opposition . The opponents argue that fewer "rates improve the structure of the sales tax and ease compliance for taxpayers." They state that additional increments, "half-percents, eights and sixteenths of a percent complicate the sales tax" and this bill "would further distort the intention and design of California's local sales tax." 2)The Purpose of this Bill . According to the author, by allowing local governments to propose tax increases to voters in smaller increments, AB 686 would provide needed flexibility and an important tool for local governments to fund local services, such as police, fire, schools, local transportation projects, parks and libraries. 3)Background . Under existing law, cities and counties may impose a district tax, in increments of 0.25%, for general or special purposes, subject to voter approval, provided that the combined rate of tax does not exceed 2%. 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 Public Utilities Code. As of April 1, 2011, 132 local jurisdictions, including cities, counties, and special purpose entities, impose a district tax for general or specific purposes. Generally, a district tax is imposed at a rate of 0.25%, or 0.25% 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%. Because the combined rate of all district taxes imposed within a county cannot exceed 2%, the current maximum combined state, local, and district rate is 10.25% (with the exception of two cities: the City of South Gate and the City of Pico Rivera that have a combined district tax rate of 10.75%). 4)New authority for cities and counties to impose a TUT at a AB 686 Page 4 lower rate. As discussed, cities, counties, and special districts are authorized to impose a general or special tax subject to voter approval, up to a total combined rate of 2%. This bill does not increase the 2% maximum combined rate of tax nor does it confer onto local governments any new authority to impose a district tax. What this bill proposes to do is simply allow local governments to impose a TUT at a rate of 0.125% rather than 0.25%. The BOE notes that counties, generally, impose TUTs at a rate of 0.25%, with the exception of the district tax imposed for library purposes ÝSB 154 (Thompson), Chapter 88, Statutes of 1997]. However, it appears that the Legislature set the rate of special tax at 0.25% as a matter of convenience, and not for any particular policy reason. 5)The 2% Cap . 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 imposes a TUT, that tax counts toward the county's cap. This bill does not increase the existing 2% threshold but, by lowering the minimum rate at which a TUT may be impose, it would provide a local government with flexibility to fund several small programs instead of one. 6)Will this bill help counties to raise more money? The stated purpose of this bill is to change counties' ability to raise funds to fund local services. As discussed, by providing for a lower rate of tax, this bill would allow local governments to levy a lesser tax that could support smaller projects and be more acceptable to the local voters. However, this bill does not increase the 2% cap, and thus, may be of very little use to counties that either have already reached (Los Angeles County), or are close to reaching, the 2% maximum combined rate limit (for example, Alameda, Contra Costa, and San Diego). 7)BOE administrative costs and concerns. Cities and counties are required to contract with BOE to administer district taxes. If a city or a county were to adopt a district tax at a lower rate of 0.125%, pursuant to this measure, it would be required to contract with, and reimburse BOE for, the actual AB 686 Page 5 administrative costs associated with the new tax. Costs for preparation and administration of this tax would be essentially the same as those associated with administering the 0.25% rate. However, the net revenue from imposing a tax at a rate of 0.25% versus a tax at a rate of 0.125% would be cut in half. The BOE staff also highlights an additional accounting burden on retailers associated with the new tax rate of 0.125%. While existing law authorized the imposition of a district tax at a rate of 0.125% for library purposes, only four counties currently levy a library district tax - the County of Fresno, the County of Nevada, the County of Solano, and the County of Stanislaus. The retailers would be required to update their computer programs for proper reporting and accounting if this bill were enacted. 8)Similar Legislation . AB 1086 (Wieckowski), introduced in the current legislative session, authorizes any local government entity in the County of Alameda to impose a TUT in excess of the 2% combined rate cap to support countywide transportation programs, as specified. AB 1086 is currently pending in the Assembly Local Government Committee. SB 653 (Steinberg), introduced in the current legislative session, authorizes the board of supervisors of any county or city and county, to place an ordinance or resolution on the ballot to propose to the voters a tax including, but not limited to, a local personal income tax, a local corporate income tax, and a local sales and use tax. SB 653 is in the Senate Governance and Finance Committee. AB 978 (Perez), introduced in the 2009-10 legislative session, would have authorized cities and counties to impose a TUT at a rate of 0.125% for funding of economic development projects. AB 978 was never heard by a policy committee. SB 264 (Alquist), Chapter 430, Statutes of 2007, authorized the Santa Clara Valley Transportation Authority to impose a TUT at a rate of 0.125% for transit facilities and services. AB 2321 (Feuer), Chapter 302, Statutes of 2008, extended from 6 years to 30 years the period within which a voter-approved AB 686 Page 6 0.5% local transportation sales tax in Los Angeles County may be imposed. REGISTERED SUPPORT / OPPOSITION : Support California State Association of Counties California Tax Reform Association League of California Cities The Marin County Board of Supervisors Opposition California Taxpayers Association Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098