BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 464                           |Hearing    |6/10/15  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Mullin                           |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |4/6/15                           |Fiscal:    |No       |
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          |Consultant|Bouaziz                                               |
          |:         |                                                      |
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                   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.  

          
                   ------------------------------------------------------------- 
                  |       |                    |                                |
                  | Rate  |    Jurisdiction    |       Purpose/Authority        |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |3.9375%|State (General      |State general purposes          |
                  |       |Fund)               |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |1.0625%|Local Revenue Fund  |Realignment of local public     |
                  |       |2011                |safety services                 |
                  |       |                    |                                |
                  |       |                    |                                |







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                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.25% |State (Fiscal       |Repayment of the Economic       |
                  |       |Recovery Fund)      |Recovery Bonds                  |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.25% |State (Education    |Schools and community college   |
                  |       |Protection Account) |funding                         |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local        |Local governments to fund       |
                  |       |Revenue Fund)       |health and welfare programs     |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local Public |Local governments to fund       |
                  |       |Safety Fund)        |public safety services          |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 1.00% |Local (City/County) |City and county general         |
                  |       |                    |operations. Dedicated to county |
                  |       |                    |transportation purposes         |
                  |       |0.75% City and      |                                |
                  |       |County              |                                |
                  |       |                    |                                |
                  |       |0.25% County        |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 7.50% |Total Statewide     |                                |
                  |       |Rate                |                                |
                  |       |                    |                                |
                   ------------------------------------------------------------- 
          

           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  








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          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.








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          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  








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          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  








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          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  








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          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  


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