State High Court Exempts S & Ls From City Taxes : Finance: Ruling means a $200-million setback for Los Angeles, which must repay money collected from business license levies since 1982.

In a $200-million setback to the city of Los Angeles, the California Supreme Court held Monday that municipalities may not impose business license taxes on savings and loan associations and similar financial institutions.

The court unanimously struck down a tax collected by the city since 1982, ruling that the levy improperly conflicted with a 1979 state statute barring such taxes on non-bank financial corporations.

The justices rejected contentions by Los Angeles and 24 other California municipalities that “home-rule” cities chartered by the state Constitution were free to impose the tax, despite the state law to the contrary.

The court, in an opinion by Justice Armand Arabian, said that in some circumstances, aspects of local taxation extend beyond municipal borders and become “a matter of statewide concern,” warranting state legislative action.

The ruling came in a far-reaching challenge to municipal taxing authority by California Federal Savings & Loan, joined by 70 other financial institutions. The decision provided a welcome victory to the financially beleaguered savings and loan industry--but also came as a costly blow to hard-pressed California cities.

Richard Dawson, Los Angeles assistant city attorney, said the ruling would cost the city “in the area of $200 million” in refunds and represented a substantial setback to the ability of cities such as Los Angeles to raise needed revenue.

“The whole basis of home rule is to allow charter cities to determine what level of police, fire and other services they are going to need to take care of their growth,” Dawson said. “But if you can’t independently raise revenue, you’re really not independent.”

In San Francisco, another city that had imposed the business tax at issue, officials had estimated they would be forced to refund $22 million if the high court ruled for the S&Ls.;

Attorneys for savings and loans were jubilant. “The case is one which is of monumental importance,” said Martin S. Schwartz of Los Angeles, a lawyer for CalFed. The ruling gives the state government strong power to restrict local governments from collecting taxes, he said.

Schwartz said the savings and loans stood to collect the highest amount of tax refunds ever awarded against a city on a local tax issue. In some cases, he said, the refunds could enable institutions “in some financial distress” to meet increased reserve requirements imposed by regulators.

Aaron M. Peck, another CalFed attorney, said the justices’ ruling “vindicates the principle that state general law prevails over local law on matters of statewide concern.”

While Los Angeles and San Francisco were among relatively few cities imposing the tax, a ruling for the city would have invited other municipalities to follow suit, Peck said. “They would have all jumped on the bandwagon and imposed the tax,” he said.

Charter cities have enjoyed home-rule powers over municipal affairs since the turn of the century in California. But as the high court noted, the precise scope of such authority has been at issue in scores of cases over the decades.

The case before the justices arose from a law passed by the Legislature in 1979 exempting savings and loans and other non-bank institutions from local business license taxes--a protection already granted to commercial banks under the state Constitution. Savings and loans, like banks, were subject to a state net earnings tax in lieu of other taxes.

The city of Los Angeles, asserting that its municipal power to raise revenue prevailed over the state law, continued to impose its local tax on the S&Ls.; CalFed, along with scores of other institutions, sued the city, seeking refunds.

During trial in Los Angeles Superior Court, city officials presented data showing that in the 1985-86 budget year, the business tax amounted to $186 million of the city’s $2.1 billion in total revenues. About $17 million came that year from business taxes paid by savings and loans and other non-bank financial corporations.

The trial court in 1987 upheld the challenge to the tax, holding that state law must prevail. Two years later, however, a state Court of Appeal reversed that ruling, saying the Legislature had gone too far in trying to regulate the municipal affairs of the cities.

In Monday’s ruling, however, the state high court held that the state law was a valid attempt to bring uniformity to the taxation of banks and other financial firms such as savings and loans.

Arabian noted that in recent years, savings institutions have increasingly resembled banks, competing for deposits and offering similar services. Both are subject to state and federal regulations. In the light of that trend, the Legislature could properly seek to ensure “competitive parity” between banks and S&Ls; and promote a comparable tax burden between the two, Arabian wrote.