BILL ANALYSIS
AB 1849
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Date of Hearing: April 14, 2010
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 1849 (Norby) - As Amended: April 5, 2010
SUBJECT : Local government finance: cities: school districts:
exchange revenue.
SUMMARY : Allows a city to exchange amounts of its sales tax for
ad valorem property taxes of the revenues of the school
districts located within that city. Specifically, this bill :
1)Provides that, notwithstanding any other law, for the 2011-12
fiscal year and each fiscal year thereafter, a city may elect
to exchange amounts of its general funds equal to the city
exchange amount for the ad valorem property tax revenues of
the school districts located within that city.
2)Provides that a city that makes an election to exchange
amounts shall be required to exchange revenues in the fiscal
year in which the election is made and in each of the next
four following fiscal years.
3)Provides that if an election is made, the auditor of the
county in which the city is located shall do both of the
following:
a) For the first fiscal year for which a city elects to
exchange revenue, the auditor shall do the following:
i) Increase, by the city equity amount, the total
amount of ad valorem property tax revenue that is
otherwise required to be allocated to the city;
ii) Decrease, by the city exchange amount, the total
amount of ad valorem property tax revenue that is
otherwise required to be allocated to all school
districts within the city; and,
(1) Provides that this reduction for each school
district shall be the percentage share of the total
reduction that is equal to the proportion that the
total amount of ad valorem tax revenue that is
otherwise required to be allocated to the school
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district bears to the total amount of ad valorem
property tax that is otherwise required to be
allocated to all school located within the city that
makes an election to exchange amounts.
iii) Transfer from the general fund of the city to all
school districts located within that city amounts equal
to the total amount of the reduction for each school
district determined above.
b) For the following fiscal years, the auditor shall do
both of the following:
i) Incorporate the allocation adjustments made by i)
and ii) above into the ad valorem property tax revenue
apportionments made pursuant to the Basic Revenue
Allocations provided in Article 2 of the Revenue and
Taxation Code; and,
ii) Transfer from the general fund of the city to each
school district located within that city a proportionate
share of the city exchange amount received by that city
during each fiscal year.
(1) A school district's proportionate share of the
city exchange amount shall be equal to the proportion
that the total amount of ad valorem tax revenue that
is otherwise required to be allocated to the school
district bears to the total amount of ad valorem
property tax that is otherwise required to be
allocated to all school districts located within the
city; and,
(2) Provides that the transfer shall be made at
the same time that ad valorem property tax revenues
are apportioned by the auditor, and provides that the
electing city and each school district shall cooperate
with the auditor in implementation.
4)Requires a city that makes an election to exchange amounts,
during each fiscal year that an exchange is required, to
report to the auditor of the county in which the city is
located, within 15 days of the receipt of tax revenues under
the Bradley-Burns Uniform Local Sales and Use Tax (Bradley
Burns Tax Law) both of the following:
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a) The date on which the city received the tax revenues
under the Bradley-Burns Tax Law; and,
b) The amount of tax revenues received by the city under
the Bradley-Burns Tax Law.
5)Requires the auditor to use the information reported by the
city pursuant to this section to determine the city exchange
amount for purposes of making the allocations and transfers
required by 3) above.
6)Defines "city exchange amount" to mean, with respect to a city
that makes an election to exchange amounts of its general
funds, is equal to either of the following:
a) One-half of the amount of tax revenues transmitted to
the city under the Bradley-Burns Tax Law; or,
b) The entire amount of tax revenue transmitted to the city
under the Bradley-Burns Tax Law.
7)Provides that if the Commission on State Mandates determines
that this act contains costs mandated by the state,
reimbursement to local agencies and school districts for those
costs shall be made pursuant to Part 7 of Division 4 of Title
2 of the Government Code.
EXISTING LAW :
1)Limits ad valorem taxes on real property to 1% of the full
cash value of that property as set forth in the California
Constitution.
2)Provides that property taxes are collected by counties and
allocated to cities, counties, special districts,
redevelopment agencies, and school districts within the county
pursuant to statutory allocation formulas.
3)Provides for a sales tax that is imposed on the total retail
price of any tangible personal property sold in California,
including a 1% Bradley-Burns Local Sales and Use Tax rate.
4)Provides for allocation of the Bradley-Burns Local Sales and
Use Tax to the city in which the sale occurs.
5)Provides for a standard statewide sales tax rate of 8.25%
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(7.25% state rate and 1% local rate), in addition to other
locally imposed taxes.
6)Prohibits cities, counties, and redevelopment agencies from
offering any financial assistance to an auto dealership or a
big box retailer that relocates from one city or county to
another community in the same market area, unless the
receiving community offers a contract to share some of the
resulting sales tax revenues with the other city or county.
7)Prohibits a local agency from entering into any form of
agreement with a retailer that would involve the shifting of
any amount of Bradley-Burns local tax proceeds if the
agreement results in a reduction in the amount of revenue that
is received by another local agency from the same retailer if
it is located within that other local agency, and continues to
maintain a physical presence and location there.
FISCAL EFFECT : Unknown
COMMENTS :
1)This bill authorizes a city, for the 2011-12 fiscal year and
for each fiscal year going forward for five years, to elect to
exchange amounts of its general fund (sales tax) equal to the
"city exchange amount" for the ad valorem property tax
revenues of the school districts located within that city.
2)AB 1849 is an author-sponsored measure. The author lists the
following reasons for the bill:
"Due to the passage of Propositions 13, 172 and 218, along
with laws enacted by the State Legislature such as SB 8
(Greene), local governments have been forced into reliance on
sources of revenue other than the property tax, most notably
the sales tax, locally imposed fees and assessments, and state
funding. Sales tax revenues have become ever more appealing,
now representing as much as 40% of some cities' budgets. This
over-reliance on sales tax revenue has led cities to engage in
bidding wars with each other for retail developments, has
discouraged the construction of residential developments, and
has left local governments highly dependent on the state for
their fiscal stability. In addition, sales tax revenue has
historically fluctuated greatly with the economy, creating
great budgetary uncertainty for those governments that depend
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heavily upon it.
AB 1849, FRESH (Fiscal Reform: Equity, Stability, Harmony),
would enable cities to stabilize their finances by giving them
the option to reduce the influence of volatile sales tax in
exchange for the property tax. This will incentivize balanced
land use and the maintenance of quality neighborhoods that
provide basic services essential to providing a good quality
of life. The voluntary swap of sales tax revenue for property
tax revenue will
free cities from the fiscalization of land use
decision-making, thus discouraging unhealthy competition for
retail sales and encouraging residential construction. While
some cities that are projected to lose revenue overall in the
long run will decide not to make the exchange, many cities
that cannot depend on ever-growing sales tax revenue will find
the option a great relief to their ongoing budgetary
concerns."
3)Sales taxes are taxes imposed on the total retail price of any
tangible personal property sold in the state of California. A
portion of the tax is a state tax, and the other portion is
locally imposed. The local portion, called the 1% local
Bradley-Burns, is a general tax, and unrestricted in its
usage. The State Board of Equalization (BOE) collects the tax,
and municipalities contract with BOE for their services.
Generally, the local sales tax portion is allocated by the
"point of sale" method, meaning the revenues go to the
jurisdiction where the retailer's place of business is
located.
Property taxes are imposed on real property and tangible
personal property located within the state. The property tax
is ad valorem, meaning that it is based on the value of the
property. Proposition 13 (1978) limits the real property tax
rate to 1% of a property's assessed value. County assessors
are charged with the assessment of real property, and that
amount is paid to the county tax collector and allocated to
local taxing agencies including cities, the county, special
districts, and school districts according to statutory
formula. Staff notes that jurisdictions vary widely on the
amounts of property tax received.
4)Flips, Swaps and Borrowing . Proposition 57, passed by voters
in 2004, enacted the California Economic Recovery Bond Act,
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otherwise known as the "Triple Flip." The provisions of the
Act increased the state portion of the sales and use tax rate
by 0.25%, and decreased the Bradley-Burns local sales and use
tax rate by 0.25%. The state uses the increase to pay for
bonds issued for deficit reduction, called Economic Recovery
Bonds, and cities and counties are reimbursed for the 0.25%
reduction to local sales and use taxes through a shift of
local property tax revenues from schools.
Another swap of local revenues occurred in 2004 - the Vehicle
License Fee (VLF) for Property Tax Swap, which is still part
of the complicated fiscal structure of cities. The 2004 State
Budget reduced the VLF rate from 2% to 0.65%, repealed the
state general fund backfill to cities and counties for the
reduced VLF rate, and then established reimbursement amounts
in the form of additional property tax to each city and county
for differences as a result of these changes.
The 2009-10 budget including provisions suspending Proposition
1A, meaning that the state borrowed 8% of the total property
tax revenues that otherwise would have been received by
cities, counties and special districts.
The Committee may wish to ask the author how the provisions of
AB 1849 would deal with the very complicated nature of both
property tax and sales tax, especially in light of all the
flips, swaps, and borrowing that has occurred in recent years.
5)Unintended Consequences . One of the recent swaps, the 2004
VLF for Property Tax Swap, produced some unintended and
undesired consequences for newly incorporated cities. That
swap provided Property-Tax-in-Lieu of VLF to replace VLF
revenues to cities that existed in 2004. When a city
incorporates, it essentially becomes a participant in the VLF
revenues allocated among cities. However, cities that were
not in existence in 2004 had no VLF adjustment amount. The
Legislature remedied this problem with the passage of AB 1602
(Laird), Chapter 556, Statues of 2006.
Because the fiscal structure of local governments is so
intertwined with the state's fiscal structure, the Legislature
should proceed with caution and do a thorough analysis of any
revenue swap for potential unintended and undesired
consequences.
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6)Local Government Fiscal Restructuring . There is a long history
of discussions about local government fiscal restructuring,
including the realignment of the state and local fiscal
relationship. Numerous working groups, blue ribbon
commissions, and legislators and staff have studied options
for reform of the state-local fiscal relationship, especially
in light of the evolution of local government budgets and the
impacts from Education Revenue Augmentation Fund (ERAF)
shifts, General Fund "loans," and an increasingly more and
more complicated local government fiscal situation that is
complete with flips, swaps, borrowing, and transfers.
This bill falls in a long line of other bills that attempt to
initiate local and state government fiscal reform, including:
a) SB 1982 and SCA 18 (Alpert, 2000): Declared the intent
of the Legislature to address local government issues
involving, among other things, the consideration of all
local government revenue sources, including sales taxes, in
a meaningful discussion of reform of the fiscal
relationship between the state and local governments;
b) AB 680 (Steinberg, 2002): Would have enacted the
Sacramento Regional Smart Growth Act of 2002, to reallocate
local sales and use tax revenues within the greater
Sacramento region, as a solution to the fiscalization of
land use;
c) AB 1221 (Steinberg, 2003): Would have exchanged a
portion of a city's or county's locally levied sales tax
revenue for an equivalent amount of property tax revenue
from the state. Enactment of the bill was contingent on
voter approval of a constitutional amendment that would
have guaranteed cities and counties a minimum Bradley-Burns
sales tax rate;
d) AB 3105 and ACA 30 (Campbell / Steinberg, 2004): Would
have enacted the Local Government Property Tax Protection
Act of 2004, which was intended to modify the revenue
sources on which local governments rely in order to promote
local revenue stability, increase housing development, and
incentivize balanced land uses; and,
e) SB 1774 and SCA 22 (Johnson / Torlakson, 2004): Would
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have restructured the flow of property tax, local sales
tax, and VLF revenues to local governments.
7)Questions about Implementation and Effects of Bill . AB 1849
provides a simple mechanism for cities to be able to swap
sales tax for the presumed more stable revenue source of
property tax. The Committee may wish to ask the author to
address the following questions, which are not explicitly
covered in the bill:
a) The provisions of the bill allow a city to initiate the
exchange of sales tax for property tax; however, what if
the school district(s) located in that city do not agree?
b) It appears that the author's intent is for the city to
exchange sales tax for property tax, and the subsequent
growth in assessed valuation with that property tax.
However, this is not explicit in the definitions included
in the bill.
c) The bill provides for a five-year timeframe for the
exchange. Is this five-year limit long enough for a city
to capture the stability of property tax?
d) Given the limited protection of local revenue streams
and recent state borrowing, deferrals, suspensions, and
transfers, would cities voluntarily use this program?
Should the author include provisions that provide
protection for local governments?
e) While this bill is aimed at creating a voluntary program
to benefit cities, there are broader implications for both
the state and school districts. Would the state be
required to backfill schools if the exchange resulted in
less revenue to school districts? How would basic aid
school districts be affected? These issues are beyond the
scope of this Committee, but the Committee may wish to
additionally consider the potential impacts on entities
besides cities.
f) The theories behind the bill make several assumptions:
first, that property tax is a more stable revenue source
than sales tax for local governments, and second, that
fiscalization of land use would be less likely to occur if
the two revenue streams were swapped. The Committee may
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wish to discuss these theories, especially in light of the
recent housing crisis.
g) The provisions of the bill give additional
responsibilities to county auditors, including transferring
from the general fund of the city "a proportionate share of
the city exchange amount" which would go to school
districts. Should county auditors be given the authority
to transfer funds from the city's general fund? Are the
provisions of the bill implementable by county auditors?
1)Support Arguments . This bill sets up a voluntary program and
does not require participation by cities. It provides another
option for cities and may make sense for some jurisdictions.
Additionally, the bill continues what has been a long
discussion on fiscal reform and the impacts that state
decisions have had on local communities.
2)Opposition Arguments . There are many questions about how the
bill might potentially affect the state, schools, and the
existing fiscal structure of local governments, which has been
additionally complicated by flips, swaps, borrowing,
transfers, and delays of revenue in recent years.
3)This bill is double-referred to the Committee on Education.
REGISTERED SUPPORT / OPPOSITION :
Support
Denis Bilodeau, Councilmember, City of Orange
Philip B. Tsunoda, Mayor, City of Aliso Viejo
Shawn Nelson, Councilmember, City of Fullerton
Opposition
CA Association of School Business Officials
City of Lakewood
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Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958