Tax Reform Push Gains Momentum in Crisis

As California struggles with a historic budget shortfall, a growing number of lawmakers are hoping the crisis finally nudges the Legislature into untangling a state tax system that they argue shortchanges many large counties, including Los Angeles, Orange and San Diego.

In past years, calls to reform the state’s complex web of property and sales taxes, fees and other special assessments encountered strong opposition, mostly from Northern California where many local governments stood to lose revenue.

But this is not a normal year. With the state facing a shortfall of up to $35 billion over the next 18 months, and counties expecting major cuts in state funding, tax reform is drawing support from Orange County republicans like Supervisor Chris Norby and Los Angeles Democrats like City Councilman-elect Antonio Villaraigosa.

“This [state budget] deficit requires us to think out of the box,” said Villaraigosa, former speaker of the state Assembly. “This is not a Republican-versus-a-Democratic issue.”

The calls for tax reform are loudest in Orange County -- which is no surprise because, despite its affluence, the county has control over the smallest slice of property taxes in the state. For 20 years, Orange County Republican legislators introduced bills to change the inequity. None made it to a floor vote, but that might change with growing bipartisan support for reform.

“In crisis, sometimes there really are opportunities to hunker down and figure out what type of structure we want in this state,” legislative analyst Elizabeth Hill said during a budget hearing in Santa Ana, declaring the system broken.

Gov. Gray Davis, in his State of the State speech, said he was committed to significant structural reform that would return stability to state and local financing. Six bills in Sacramento -- four from Orange County sponsors -- would loosen some of the strings that constrict local government spending.

“We believe the time has long past for reform,” said Pat Leary, lobbyist for the California State Assn. of Counties in Sacramento. “But the difficulty always comes down to the fact that it’s such a complex problem, it’s hard to get your arms around.”

Today, every dollar paid in property taxes is divvied up under a Byzantine formula crafted nearly a quarter-century ago. The share each county receives is based on the proportion of money spent in that county in 1979 for schools, health care and other government services.

It has provided a windfall to many Northern California counties, which, 24 years ago, generally spent more than Southern California counties.

In Los Angeles County, for example, 24 cents of every property tax dollar goes to the county to pay for programs the county administers. Schools receive 41 cents, 16 cents goes to the cities and the remaining 19 cents goes to other government agencies, including sanitation districts and community redevelopment.

The county and city of San Francisco, on the other hand, keep 65 cents of every property tax dollar. Twenty-nine cents goes to schools and 6 cents to other agencies. Because schools receive a guaranteed minimum each year, the state makes up the difference in counties such as San Francisco.

Norby said the system has created a skewed quest by counties and cities for sales taxes -- the only tax base they can directly affect. Because local governments get 1 cent of the sales tax, the higher the retail sales, the more money for local projects -- usually at the expense of new homes, office parks and manufacturing.

Retail is in such demand that more than $300 million in tax incentives has been offered in the last decade across California to large retailers such as Costco and Wal-Mart.

“We need to end the shameless shakedown of cities by big-box retailers, auto dealers and NFL team owners for even-greater public handouts,” Norby said at a Sacramento hearing this month on tax policy.

Norby, who spent 18 years on the Fullerton City Council, has been lobbying Sacramento for a plan in which government services and their funding would be directly linked. Local property taxes would be spent on services delivered and controlled locally.

In exchange, the state would take control of the 1-cent portion of the sales tax now going to local governments, as well as the 5 cents that goes to the state’s general fund. All of the state’s vehicle license fees also would go toward funding state responsibilities, including education.

Tax reform supporters hope their cause will be aided by a shifting environment in Sacramento created by term limits. Of 80 Assembly members, for example, 50 were city council members or county supervisors who have experience grappling with the uncertainty of state funding.

“The political dynamics have never been in place the way they are now,” said Joel Fox, former longtime president of the Howard Jarvis Taxpayers Assn. who is consulting with Norby. “I think we’ll see that the best solution is the one that bubbles up from the bottom instead of coming from the top down.”

Assemblyman John Campbell, a conservative Republican from Irvine, and Assemblyman Darrell Steinberg, a liberal Democrat from Sacramento, have joined together in sponsoring a bipartisan tax reform bill to give local governments more property taxes in exchange for the state taking back an equal amount of their share of the state sales tax.

The “Housing and Smart Growth” bill would create a “more balanced system of local government financing that would enable cities to grow in the way they choose,” Steinberg said.

A bill by Assemblyman Lou Correa (D-Anaheim) has a different approach. He wants the state to take some of the property taxes now pooled to supplement education and shift that money to counties with the smallest share of property taxes. Thus, every county would be guaranteed control over at least 15.5% of its property taxes. Sen. Tom Torlakson (D-Antioch), who heads the Senate Local Government Committee, agreed that the Legislature is under pressure to restructure government as part of devising a balanced budget. He has a bill that would bar cities from offering tax subsidies to entice retailers from another city.

But whichever solution prevails cannot come on the backs of the state’s poor, he said. He fears that, under proposals that would increase a county’s share of property taxes, counties would have no incentive to build affordable housing, because high-end homes would bring in more property tax revenue.

The most crucial element of any new plan is something that often takes time to calculate: the list of winners and losers, or those cities and counties that would keep more money in the new scheme and those that would get less.