BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 686
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          Date of Hearing:  May 2, 2011

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair

                    AB 686 (Huffman) - As Amended:  March 9, 2011

                                      VOTE ONLY
                                          
          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).  








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          4)Authorizes a county to impose a district tax for funding 
            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."








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           2)Arguments in Support  .  The Marin County Board of Supervisors, 
            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%).  








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           4)New authority for cities and counties to impose a TUT at a 
            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 








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            a lower rate of 0.125%, pursuant to this measure, it would be 
            required to contract with, and reimburse BOE for, the actual 
            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 686
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          AB 2321 (Feuer), Chapter 302, Statutes of 2008, extended from 6 
            years to 30 years the period within which a voter-approved 
            0.5% local transportation sales tax in Los Angeles County may 
            be imposed.  

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Professional Firefighters
          California State Association of Counties
          California Tax Reform Association
          League of California Cities
          Marin County Board of Supervisors
          MuniServices, LLC

           Opposition 
           
          California Taxpayers Association
          Howard Jarvis Taxpayers Association
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916) 
          319-2098