California Local Governments

The California Legislative Analyst's Office (LAO) recently issued a brief report on California's numerous local governments (Overview of California's Local Government). The report points out something I think most people don't know. We have a lot of local jurisdictions:

• 58 counties
• 480 cities
• 425 redevelopment agencies
• "Nearly 3,400 Special Districts. Most provide a single service (such as fire protection or waste disposal). About two-thirds have independently elected boards or board members appointed for terms."
• 1,000+ K-12 and Community College Districts

The report notes a few of the restraints imposed on local governments, but not all. For example, it notes that local governments can't change the property tax rate or change how property tax revenues are allocated among local governments - even though property tax is a local government revenue source. There are a lot of topics very summarized by noting them in a timeline covering 38 years of state-local relationship milestones (page 4 - I highly recommend it - you may be surprised at the number of restrictions on local governments and that many were imposed by voters).

I think it is important that more attention be paid to effects of existing and proposed tax changes on local governments. One topic I've written about frequently is our outdated sales tax base. The base is controlled by the state legislature so local governments are stuck with it even though sales tax is a significant tax for local jurisdictions. It has led to odd decisionmaking over the years because one way cities can increase their sales tax revenues is to get big-box retailers to locate inside their borders. Sellers of tangible personal property are preferred to those that sell services.

While local governments can seek a vote of the electorate to increase a sales tax rate, an already high state sales tax rate makes that difficult to do. In addition, there is a state imposed cap on the local sales tax rate. Local governments are prohibited by state law from imposing an income tax. While local governments have a fair amount of control over utility user taxes, the transient occupancy tax and the business license tax, the base for these taxes is limited and does not adequately link to all types of services provided at the local level.

Local governments also face problems with subventions and other state controls. For example, through subvention and other arrangements, local governments obtain some taxes collected at the state level. For example, about 35% of the state gasoline excise tax is distributed to cities and counties for transportation purposes. Because the tax is not collected by local governments and there is no legal mandate that a portion belongs to local governments (as exists for the sales tax), it is possible for the state to take or borrow the funds. For example, in budget negotiations in June 2009, the assembly budget committee and others considered shifting some of these tax funds to other state purposes.*

* California State Assembly Committee on the Budget, Floor Report of the 2009-10 State Budget, 6/23/09, pg 16. The report states: "Accepts the Governor’s proposal to shift approximately $1 billion of transportation revenues from local governments and instead use the funds to pay debt service on transportation bonds. The shift will be in place for two years instead of the Governor’s permanent proposal. Proposition 1B funds will be accelerated to mitigate the impact of this cut on local governments." Also, LAO, 2009-10 Budget Analysis Series – Transportation, 2/09.

Another problem with the state-local fiscal relationship is the lack of transparency due to the design of the structure and the odd changes that get such names as "backfills," "triple flips," and "swaps." As noted in the Senate analysis to AB 676 (1999):

“After 20 years of voter initiatives, legislative reactions, and local
adjustments, the state/local fiscal relationship is nearly incomprehensible.”

This is an unfortunate situation and one that doesn't look like it will get better soon. What the LAO report lays out and what I added above are still just small pieces of understanding the overly complex state-local fiscal relationship. I don't think the problems should be ignored in any discussions of tax reform. Yet, that is often what happens. A recent example was the report from the Commission on the 21st Century Economy. One of their recommendations was to replace most of the state sales tax with a very broad business net receipts tax (BNRT). There was no mention of updating the sales tax base for the benefit of local governments that would still rely on it or of sharing any of the BNRT revenues with local governments.

What do you think?