On September 28, 1995, the California Supreme Court decided Santa Clara County Local Transportation Authority v. Guardino, which finally cleared up the legal uncertainty about the validity of Proposition 62. That decision became final on December 14, 1995.
This policy brief, by Cal-Tax Director of Research Stephen Kroes, provides a brief history of Proposition 62 and discusses the issues surrounding implementation of the Supreme Court's decision.
In 1978, voters approved Proposition 13, lowering property taxes and placing other restrictions on local government taxation. Proposition 13 included a section stating that "Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district..." Special taxes were not defined in the proposition, and that ambiguity led to litigation.
In 1982, the state Supreme Court decided City and County of San Francisco v. Farrell, which defined the term special tax as any tax earmarked for a specific purpose. If revenues from a tax were to be placed in a general fund to be used for general government purposes, that tax would be considered a general tax, subject to no popular vote requirement.
By the mid-1980s, several groups, including Cal-Tax, became involved in an effort to require a majority popular vote for local general taxes. In 1985, Cal-Tax sponsored SCA 27 (Seymour) and ACA 26 (Johnson) constitutional amendments which would have established majority-vote requirements for local general taxes. Those legislative measures included explicit exemptions which would have allowed county transportation districts to continue levying sales taxes with majority popular votes. Both measures failed to pass the Legislature.
The Howard Jarvis Taxpayers Association took some of the language from bills sponsored by Cal-Tax and wrote a statutory initiative, which qualified as Proposition 62 and was approved by voters in November 1986. Cal-Tax supported the initiative, which consisted of these major elements:
At the time, Cal-Tax, the Legislative Counsel, and others believed that Proposition 62 would allow majority-vote sales taxes in transportation districts, if the districts did not have the power to levy a property tax. This provision was not written as explicitly as it had been in the legislative measures and was an attempt to codify criteria established by the state Supreme Court in the Richmond decision of 1982 (Los Angeles County Transportation Commission v. Richmond).
Evidently, the Howard Jarvis Taxpayers Association did not share the belief that Proposition 62 allowed majority-vote local transportation taxes. In 1992, the Jarvis association became involved in Santa Clara County Local Transportation Authority v. Guardino, arguing that Santa Clara's Measure A sales tax was invalid because it was approved by less than two-thirds of local voters.
In 1988, the Fourth District Court of Appeals decided City of Westminster v. County of Orange, declaring that Proposition 62's voter approval requirement for existing (pre-1986) taxes was unconstitutional. The court equated the vote requirement to a referendum on taxes, which is prohibited by the state Constitution. The state Supreme Court declined to review the case.
The rationale in the Westminster case was expanded in 1991 by the Fifth District Court of Appeal. In City of Woodlake v. Logan, the court ruled that Proposition 62's requirement for popular votes on future local taxes also provided for unconstitutional referenda. The state Supreme Court also declined to review this case. This decision removed the vote requirement for local general taxes, but the requirement for a two-thirds vote on local special taxes remained in effect, since it was also written in the Constitution as Article XIII A, or Proposition 13.
In response to the Woodlake decision, cities and counties increased and imposed new general taxes in the 1990s without voter approval. These commonly took the form of utility users, business license, and hotel taxes.
It is difficult to estimate the number and dollar amounts of tax increases enacted during this period. A recent survey of cities conducted by the League of California Cities found that, in 220 general law cities that responded, about $400 million has been collected from taxes that may be in violation of Proposition 62. That is a cumulative figure, but since many of these taxes were imposed in recent years, about $200 million is estimated in ongoing annual collections.
The California State Association of Counties did a similar survey and found that about $100 million in county taxes may be invalid under Proposition 62.
In 1992, Santa Clara County placed Measure A, a countywide 0.5 percent sales tax for transportation, on the ballot. The measure was designed to replace an existing sales tax which would expire in 1995. Measure A was approved by 54.1 percent of the voters. Soon after its approval, lawsuits were filed by opponents of the tax. The county desired to issue bonds based on the anticipated revenues, but the county auditor-controller (Carl Guardino) refused to sign the bonds until Measure A's legality was certain.
The county transportation authority filed suit, asking the Court of Appeal to take original jurisdiction and validate the tax. The Appeals Court ruled that Measure A was invalid, because it was a special tax requiring a two-thirds vote, according to the state Constitution. In making that decision, the court relied on the state Supreme Court's 1991 opinion in Rider v. County of San Diego.
Rider involved a San Diego countywide sales tax for criminal justice facilities. The county had authorization from the Legislature to place the measure on the ballot for majority-voter approval. It passed in June 1988 with a 50.8 percent majority. In 1991, the state Supreme Court ruled that the tax was a special tax according to the courts' definition of special tax as mentioned in Article XIII A, section 4 of the state Constitution. As a special tax, the measure required two-thirds voter approval.
The revenue from that San Diego tax had been impounded during legal appeals after the trial court ruled that the tax was invalid. The courts required that the revenue be refunded to taxpayers, and the Legislature provided the methods for making the refunds.
In September 1995, the state Supreme Court reviewed Santa Clara County Local Transportation Authority v. Guardino and agreed with the appeals court that Santa Clara's Measure A was a special tax, which was invalid because it did not receive a two-thirds voter approval.
In the written opinion, the court mentioned that it could have based its decision on the Constitution, as it did in Rider and as the appeals court did, but that it would be better to decide this matter by reference to the statutes enacted by Proposition 62. This was done deliberately to clear up the legal uncertainty surrounding Proposition 62. In addition, the court cited "well-established principle" that an appeal to the Constitution should not be used if statutory law is sufficient to settle the matter.
By deciding the Guardino case on the basis of Proposition 62, the Supreme Court declared that Proposition 62 is constitutional. This overturns the precedent set at the appeals court level in Woodlake. The court said, "The decision in City of Woodlake v. Logan... is erroneous, and it is hereby disapproved."
Two primary policy changes are now clear from the Guardino case:
The second point, regarding general taxes, is the more far-reaching of the two changes, since it affects hundreds of local governments. Although the decision answers some very important questions about tax policy, it also leaves some specifics unanswered. Following are some of the major questions that remain:
So far, very few local governments have moved to place existing taxes on local ballots. Many local officials are waiting to see if further legal action or legislation clarifies their responsibilities.
The League of California Cities and the California State Association of Counties have sponsored legislation, SB 1590 by Senator Jack O'Connell, which would apply the Guardino decision prospectively only. This would allow local governments to continue collecting any tax enacted prior to December 14, 1995. It would eliminate the possibility of refunds, because any tax enacted before that date would be deemed valid.
There are doubts about whether SB 1590 would withstand court challenge, because it can be argued that it changes the provisions of an initiative by changing its effective date. The California Constitution prohibits changing an initiative unless the initiative statute allows for legislative changes or the voters are allowed to approve or reject the change. Proposition 62 specifically disallowed any changes to its provisions by the Legislature.
Senator Quentin Kopp asked Legislative Counsel Bion Gregory whether the Legislature could change the effective date of Proposition 62. Legislative Counsel's official response states that the Legislature could not make such a change without voter approval of the statute. (The relevant portion of that opinion is reproduced in this document.)
Local government advocates' response to the opinion is that they are not trying to amend the effective date; that they are simply implementing a court decision in an orderly manner. As precedent, they cite Forster Shipbuilding Co. v. Los Angeles, a 1960 case in which the state Supreme Court declared that the Legislature could apply court decisions prospectively. Specifically, that court said, "We have hitherto recognized that the California Constitution permits an appellate court to apply an overruling decision prospectively only... the Legislature is no less competent than the court to evaluate the hardships involved and decide whether considerations of fairness and public policy warrant the granting of relief."
This argument may be flawed, however, and Forster may be irrelevant to this case. Forster did not deal with a voter-approved initiative statute. The logical extension of the Forster precedent to this case would suggest that the voters, not the Legislature, could decide whether to apply Guardino prospectively, since the voters were the legislative body that enacted the statutes in Proposition 62. In any event, the fact that Guardino deals with a voter-approved initiative adds a whole new dimension that Forster did not address, possibly making the Forster decision irrelevant.
SB 1590 passed Senate Local Government Committee on April 10. It is likely that it will pass the Senate but will face more difficult hearings in the Assembly.
Absent legislative action, the courts will probably have the most influence on local governments' compliance with Proposition 62. Several cases have been filed by taxpayers to require cities to stop collecting taxes that did not receive voter approval. These include suits in Hawthorne, Pinole, La Habra and San Francisco. The Hawthorne case involves a request for refunds on past collections, while the Pinole and La Habra suits do not. The San Francisco case involves a charter city, and the trial court in that case has already ruled against the taxpayer, saying Proposition 62 does not apply to charter cities.
When San Diego County lost the Rider case, the court required refunds of the taxes that had been collected. The Legislature adopted a method for providing the refunds through two methods:
1.) Individual taxpayers who had records and claims over a certain amount could claim direct refunds.
2.) The base sales tax rate was reduced for a time to provide general payback to the entire community.
Whether the Rider situation serves as a model for implementing Guardino is open to question. There are significant differences between the two cases. Foremost, Rider involved a tax that was challenged at an early date, and the revenues from the tax were escrowed in anticipation of a possible refund. In addition, state statutes required refunding of invalid sales taxes, and new statutes that followed Rider provided the specific mechanisms for implementing those refunds.
Guardino, however, involves hundreds of local jurisdictions, many taxes that were not challenged, and funds that probably have all been spent. And because there is no state statute requiring refunds of invalid utility user, business license and similar taxes, much of this will depend on local ordinances. According to the League of California Cities, many local tax ordinances do include refund procedures, but some do not.
If refunds are provided to taxpayers, state statutes of limitations will probably prevent reaching back more than three years. The law is not clear on this subject, but according to the league, a local tax can be challenged and potentially ruled invalid within three years of enactment, but claims for refunds may only be valid within one year of the payment of the tax. Cities cite Volkswagen Pacific, Inc. v. City of Los Angeles a 1972 case in which the state Supreme Court ruled that a one-year claim period of the Tort Claims Act applied to a challenged tax.
The league also notes that local ordinances that limit the time allowed for refund claims will likely control if the Tort Claims Act does not. For that reason, it has advised cities to consider amending their ordinances to provide for a one-year limit on refund claims (the minimum allowed by state law.)
Proposition 62 provided a remedy for taxes that violate its provisions. The measure states that any local government imposing a noncomplying tax shall lose property tax revenue equal to the amount of the invalid tax collections. The league and others have argued that this remedy is exclusive and prohibits any other remedy, such as refunds. This issue can probably be resolved only through litigation.
If any taxpayers do win refunds in the courts, those refunds are likely to be provided only to each taxpayer who sues. In a 1992 case, Woosley v. State of California, the state Supreme Court said that class action claims against taxes are not allowed unless a statute authorizes such a claim. Lacking any state statute on most local taxes, the courts may refer to local ordinances to see if they authorize class action claims for refund.
The Legislature could pass a statute requiring refunds or some other form of compensating tax relief, as it did after the Rider decision in San Diego. Absent legislative action, any refunds will probably be obtained only for each specific taxpayer who wins a lawsuit against a local government.
Charter cities derive special powers from the state Constitution, allowing them "home rule" over municipal affairs, including taxation. Generally, state statute cannot limit a charter city's taxing authority unless the state can show a "statewide concern" in controlling that power. Even then, the California Supreme Court has said that such a statute must be "narrowly tailored to limit incursion into legitimate municipal interests." (Johnson v. Bradley (1992).)
Taxpayers may convince the courts that allowing voter approval of taxes is a statewide concern, but so far, they have not fared well. A San Francisco case on this subject was recently decided by the trial court in favor of the city (San Francisco Gun Exchange v. San Francisco).
A different argument may carry some weight with the courts. The remedy of reducing a local government's property tax allocation by the amount of noncomplying tax revenue may be enforceable against charter cities even if they can't actually be prevented from imposing unvoted taxes. The Constitution grants the Legislature power to allocate property tax revenues among the jurisdictions within each county, and Proposition 62's enforcement mechanism may be viewed as simply another element in the formula for allocating property tax revenues. Those allocations apply to charter cities and all local governments.
A provision very similar to Proposition 62's remedy had been used by the Legislature to prevent local governments, including charter cities, from increasing property tax rates in the wake of the state Supreme Court's 1982 decision in Carman v. Alvord. The Carman decision allowed property tax rate increases to fund pension obligations that existed prior to passage of Proposition 13. The Legislature prevented additional Carman overrides by requiring a reduction of property tax allocations for any local government that tried to increase its property tax rate for a Carman obligation.
Cal-Tax is opposed to SB 1590 (see the text of the Cal-Tax position letter on this page). Through discussions with the Cal-Tax Executive Committee and Board of Directors, the following policy has been adopted:
The California Taxpayers' Association opposes SB 1590, which would attempt to allow local governments to continue collecting taxes that are invalid under the provisions of Proposition 62.
Taxpayers demand a voice. Proposition 62 was approved by 58% of the voters in 1986. Public sentiment on this matter could not be more clear voters demand to be consulted on local tax increases. Cal-Tax feels strongly that all local taxes imposed without voter approval since 1986 should be placed on local ballots by November 1996. SB 1590 would sidestep voters, denying them a right that is long overdue.
Indeed, SB 1590 may be unconstitutional because it attempts to modify the effective date of an initiative without taking the proposed change back to the voters.
Government should play by the same rules it imposes on taxpayers. This bill would establish a double-standard for the retroactive application of court decisions on taxes. When a taxpayer loses a case at the Supreme Court, the taxpayer owes retroactive taxes, even if the taxpayer won in the lower courts and relied on those precedents. The Barclays case (Barclays Bank International Ltd. v. Franchise Tax Board) is a good example when the U.S. Supreme Court agreed with the state that California's method of taxing foreign businesses was constitutional, those companies that had relied on a lower court ruling were subject to retroactive tax bills. If SB 1590 is enacted, the state would in effect declare that retroactivity is fine when it applies to taxpayers but not when it applies to government. Evidently, California's cities and counties do not want to play by the same rules imposed on taxpayers.
Refunds can serve an important purpose. SB 1590 would deny taxpayers the right to claim refunds for improperly imposed taxes. Cal-Tax recognizes the plight of many local governments that were hit hard by the early 1990s recession and property tax shifts, but granting amnesty to local governments for illegal tax actions is not the answer. Such a policy could violate taxpayers' rights, particularly when a large refund may be claimed.
Refunds are one method to deter questionable tax policies. Allowing local governments to face no consequence when their taxes are found invalid encourages more attempts in the future to "push the envelope" with new, expansive tax policies that are harmful to California's business climate and quality of life.
What is good faith? Local government leaders have declared that they acted in "good faith," believing their tax increases were legal. Yet they knew the will of the people and went against it by imposing hundreds of non-voted tax increases. Although some argued that the court decisions on Proposition 62 precluded them from allowing votes on local taxes, they still could have placed advisory measures on their ballots. Deliberately ignoring the public's will does not sound like "good faith." Cities and counties should not be rewarded for those actions.
Opinion #7226 April 3, 1996
Requested by Senator Quentin Kopp:
Question No. 2
Would an amendment of the operative date of Proposition 62 require approval by the voters?
Opinion No. 2
An amendment of the operative date of Proposition 62 would require approval by the voters.
Analysis No. 2
An initiative statute takes effect the day after the election at which it is approved by the voters, unless the measure provides otherwise (Sec. 10, Art. II, Cal. Const.). Thus, Proposition 62 became effective on November 5, 1986, and applies to all taxes imposed on or after that date. However, that measure, by its express terms, also applies to any tax imposed by a local government or district on or after August 1, 1985, and requires that any tax imposed after that date but before the effective date of the measure (November 5, 1986) be approved by a majority vote within 2 years of the effective date (subd. (B), Sec. 53727, Gov. C.). Any local government or district that fails to seek or obtain that majority voter approval is required to cease to impose the tax on and after November 15, 1988 (Ibid.).
A statute that would change the operative date of Proposition 62, including a change in those provisions that apply the measure retroactively to taxes imposed on or after August 1, 1985, would constitute an amendment of the initiative statute.
As indicated in the discussion in Analysis No. 1, Proposition 62 may be amended to change its operative date as it applies to the majority vote requirement for general taxes by a statute that is enacted by a majority vote of each house of the Legislature and approved by a majority vote of the voters. However, a statutory change in the operative date of Proposition 62 could not be made applicable to the two-thirds vote requirement for special taxes, because the operative date of that vote requirement is also governed by Section 4 of Article XIII A of the California Constitution.
In any event, we conclude that any amendment of the operative date of Proposition 62 would require approval by the voters.