Deal Could End State Siphoning of Local Taxes

May 10, 2004

Los Angeles Times

The governor might agree to ban the shifting of property levies from cities and counties to the state -- after two years.

By Sue Fox
Times Staff Writer

May 8, 2004

SACRAMENTO — Since 1992, state lawmakers have taken more than $33 billion in property taxes away from local governments, using the money instead to support public schools.

Local officials, who call that practice "tax jacking," have repeatedly voiced outrage and filed lawsuits accusing state leaders of endangering local services.

But now they think they might be able to cut a deal with Gov. Arnold Schwarzenegger — a deal some think would be their best opportunity in decades to regain a measure of control over their finances.

Before 1978, local governments relied heavily on property taxes. When voters capped those taxes with Proposition 13, state lawmakers provided billions of surplus dollars to help cities and counties cushion the blow.

Then, during a recession in the early 1990s, the state began siphoning away that money to meet its obligation to public schools. This year, local governments will transfer more than $5 billion — about one-sixth of total property tax revenue — to schools.

The annual transfers gnawed away at money that otherwise would have paid for police patrols, jails, healthcare, road maintenance, parks and libraries. The tax shift affects California cities, special districts and redevelopment agencies, but counties bear most of the burden.

And local governments, particularly cities, became reliant on generating sales tax revenue they could keep for themselves.

The potential compromise with Schwarzenegger would allow the state to continue taking property tax money — but only for the next two years. After that, the practice would be prohibited under a proposed amendment to the state Constitution.

The deal, which would be part of Schwarzenegger's budget and require approval by the Legislature, would reshape how local government is financed in California.

For the new governor, the deal would buy time and money as he labored to close an estimated $14-billion budget shortfall. For local governments, the short-term sacrifice — they face their own difficult budget cuts too — could yield long-term protection. And both parties also would avoid a contentious, costly campaign over a November ballot measure that local officials have been pressing to end the tax transfers immediately.

Under the plan, in 2006 the state would have to stop taking local money and start paying back about $1 billion owed for state-ordered programs, such as mental health services for severely emotionally disabled children. The proposal also would give local governments a greater share of property taxes to replace revenue lost last fall when the governor reduced the state vehicle license fee.

But the $2.6 billion taken from local governments would never be repaid. In the near term, counties, cities, special districts and redevelopment agencies across California probably would have to reduce services or raise fees as a result. Many local governments have already been forced to cut law enforcement and other services to meet their own budgets.

In Los Angeles County, whose 10 million residents make it the state's largest local jurisdiction, officials remain wary of a deal still in the discussion stages. Supervisor Zev Yaroslavsky said he wants to see the proposed alternative constitutional amendment and other elements of the plan in writing to make sure they offer "airtight" protections.

"There is no trust, and for good reason," said Yaroslavsky, who has served as a Los Angeles city councilman or county supervisor for almost 30 years. "Anybody who believes you can trust the state to pay you back believes in the Tooth Fairy."

And in the California Legislature, some lawmakers object that the agreement would do little to discourage cities from trying to generate new sales tax revenues by building big-box retail stores.

"My view is that, if we're going to grant constitutional protection to cities and counties — which will last 20 or 30 years before anyone looks at this again — we better get it right," said Assembly Budget Committee Chairman Darrell Steinberg (D-Sacramento). "I'm working hard to make sure there is real reform."

Steinberg wants to change the tax structure so local governments could keep more property tax and less sales tax.

He said that would encourage cities and counties to approve more housing — which is sorely needed throughout the state — instead of big-box stores that generate sales taxes.

In January, when Schwarzenegger proposed taking an additional $1.3 billion per year in property taxes, local governments were primed to fight back. They have since collected 1.1 million signatures to place their measure on the November ballot, which would prevent the state from diverting local tax dollars without a vote of the people. If it passed, the state would have to return the money it takes from local governments in coming years.

But in recent weeks, counties and cities also began making headway on another track, meeting privately with the governor's staff to bargain.

"We made it clear that if local governments had alternatives, we were more than willing to work with them," said H.D. Palmer, deputy director of the Department of Finance and Schwarzenegger's budget spokesman.

So, the administration began a series of closed-door meetings with the California State Assn. of Counties, the League of California Cities and other local government groups.

The deal they are considering includes "a guarantee that the governor would support a [different] constitutional amendment, saying we would not use local governments as a rainy-day fund," Palmer said.

But for the next two years, the cash-starved state would again raid the piggy bank.

Counties, cities and special districts would altogether lose $350 million more per year in property taxes; redevelopment agencies would lose $250 million.

In exchange, Schwarzenegger would back the alternative ballot measure asking voters to amend the Constitution so the state could not take property or sales taxes from local governments again.

"It would accomplish our No. 1 strategic goal, which is to prevent the state from ever again — after two years — taking local governments' revenue," said Chris McKenzie, executive director of the League of California Cities. "We're pleased the governor is interested in helping the state kick its bad habit."

The governor is expected to unveil the proposal in his revised 2004-05 budget, due to be released in a few days. The budget then will go to the Legislature.

Times staff writer Evan Halper contributed to this report.