BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 464 |Hearing |6/10/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Mullin |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |4/6/15 |Fiscal: |No | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Bouaziz | |: | | ----------------------------------------------------------------- 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 | | | | | | | | | AB 464 (Mullin) 4/6/15 Page 2 of ? | | | | |-------+--------------------+--------------------------------| | | | | | 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 AB 464 (Mullin) 4/6/15 Page 3 of ? 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 (Mullin) 4/6/15 Page 4 of ? 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 AB 464 (Mullin) 4/6/15 Page 5 of ? 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 AB 464 (Mullin) 4/6/15 Page 6 of ? 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 AB 464 (Mullin) 4/6/15 Page 7 of ? 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 --