Drafting a Revenue ProposalMarch 1, 2011

For Discussion Purposes Only

The Evidence is in…Making Government Make Sense: A More Rational Structure for State and Local Government, Legislative Analyst’s Office (1993)

The State-Local Fiscal Relationship in California: A Changing Balance of Power, Public Policy Institute of California (1999)

Reconsidering AB 8: Exploring Alternative Ways to Allocate Property Taxes, Legislative Analyst’s Office (2000)

Realignment Revisited: An Evaluation of the 1991 Experiment in State-County Relations, Legislative Analyst’s Office (2001)

Proposition 13: Some Unintended Consequences, Public Policy Institute of California (2008)

For Discussion Purposes Only

Lots of Problems with the Current Property Tax System

• Overly complex• Severely restricted local control• Lack of transparency and accountability• Archaic 1970s allocation formulas • Other unintended consequences:

– Inappropriate/excess use of redevelopment– Voter-approved “lockboxes” for local revenue– Fiscalization of land use

For Discussion Purposes Only

Similarly, Many Possible Solutions

1. Set Uniform Rates. Each jurisdiction would be allocated a property tax share based on the services it provides.

2. Local Control Over ERAF. Cities and/or counties would be given direct authority over the rate and allocation of a share of the property tax.

3. Property Taxes for Municipal Services and Schools. The allocation of every property’s tax bill would be identical—half to local municipal services and half to schools.

4. Re-Balance Tax Burden. Three local revenue sources would be changed significantly in order to provide a sales tax reduction and create local control over property tax rates.

5. Make Government Make Sense. The responsibilities of the state and local governments would be realigned to create more efficient program coordination.

For Discussion Purposes Only

But… the Path to Reform Depends on Guiding Principles

For Discussion Purposes Only

Fiscal Neutrality

Political Feasibility

Flexibility

Local Control

Statewide Equity

Taxpayer Stability

UniformityEfficiency

Where the Revenue Workgroup is Headed

For Discussion Purposes Only

Existing Property Tax AllocationFY 2007-08

Schools Counties Cities RDAs SDs TOTAL

Share 37% 27% 18% 12% 6% 100%

Revenue (billions)

$16.7 $12.2 $8.1 $5.4 $2.7 $45.2

For Discussion Purposes Only

A Simplified Tax Structure

For Discussion Purposes Only

Statewide ServicesHigher Education Court SystemPrison SystemHeath and Human ServicesStatewide InfrastructureEconomic Development(Other State Level Responsibilities)

Personal Income TaxBusiness Net Receipts Tax

Other Targeted Tax Revenues

Follow Recommendations of the Commission of the 21st Century Economy

Statewide R

evenues to Resolve Equity Issues

Regional ServicesTransportationAir QualityWater QualityFlood Protection

Business Net Receipts TaxVehicle License Taxes

User ChargesRegional Assessments

County-wide ServicesAssessor, Treasurer, Tax CollectorPublic ProtectionHealth & Human ServicesRegional ParksCounty-wide Public Works

Personal Income TaxProperty Tax

Business Net Receipts TaxUsers Charges

K-12 Education Property TaxState Backfill from General Fund Revenues to meet Serrano Requirements

Special Taxes approved by local School DistrictsMunicipal ServicesPublic Safety (Police, Sheriffs Patrol, Fire)Parks & Recreation, Public WorksPlanning

CitiesProperty Tax

Business Net Receipts TaxTransient Occupancy Tax

User Charges

CountiesProperty Tax

Business Net Receipts Transient Occupancy Tax

User Charges

Special DistrictsProperty TaxUser Charges

Special Taxes/Assessments

Proposed by Tim Youmans, Economic and Planning Systems

Property Tax Reallocation

For Discussion Purposes Only

Existing AB 8 AllocationsProposed AB 8 Allocations

Preliminary - Needs Refinement Comments

State

To Resolve Redistribution Inequities

10%

State will use share of property tax to resolve issues of inequity and special circumstances.

Schools

Range of Property Tax

45% to 78%

K-12 Schools

Range of Property Tax

30%

State will use State Income Tax and other General Fund Revenues to pay for K-12 Costs above the Property Tax Allocation.

Cities

Range of Property Tax

3% to 49%

Cities

Range of Property Tax

20% to 30% depending on range of

services provided.

Cities will received significant share of property tax for municipal services.Sales tax will be reduced so that attracing major shopping centers is no longer an incentive.Share of property tax will depend on services provided by City versus Special Districts serving City.

Counties

Range of Property Tax

3% to 33%

Counties

Range of Property Tax

20% to 30% depending on range of

services provided.

Counties will receive significant share of property tax for municipal services and County-wide services.Sales tax will be slightly reduced. Sales taxes will be targeted for County-wide services.Share of property tax will depend on services provided by City versus Special Districts providing municipal services

Special Districts /Other

Range of Property Tax

1% to 31%

Special Districts /Other

Range of Property Tax

1% to 10%

Special Districts will receive allocations of property tax depending on the nature of their services. Park & Rec Districts will receive a smaller share than Fire Districts.

Proposed by Tim Youmans, Economic and Planning Systems

Sales and Use Tax Reallocation

For Discussion Purposes Only

5%

7%

6%

1%

1%0.5%

0.5%0.25% 0.25% 0.25%

Current Option 1 Option 2

$40 billion in FY 2008-09

ERBs

Local Public Safety

1991 Realignment

Regional Share

Bradley-Burns

General Fund

Options & Variations• Reallocation of growth vs. base revenues• Regional share of SUT for regional economic development,

infrastructure, and UC/CSU• Community Charter as option for local PT allocation• Weighted Student Formula for K-12 finance• Fiscal Neutrality• Broaden SUT to services and reduce rate• Assess business property at market value and offset fiscal impact

with equivalent reduction in SUT• Set uniform property tax shares among cities, counties, and schools

based on services provided (not level of government):• Revise statutes governing “change of ownership” for business

properties that currently avoid reassessment• Repeal earmarking of other funds as appropriate (e.g., Prop 63)

For Discussion Purposes Only

Other Factors to Consider

• Proposed tax extensions• Potential elimination of redevelopment

agencies

For Discussion Purposes Only