Will New Governor Fix O.C.’s ‘Donor’ Tax Status?

The unprecedented statewide recall election will have more impact -- for better or worse -- on Orange County residents than on taxpayers elsewhere in the state. Whatever Gov.-elect Arnold Schwarzenegger and our legislators do to fix the budget, we will benefit or suffer more than others.

Why? We pay more than our fair share of the state’s bills because we get back less of our property tax money for local services than any other urban county.

The Orange County Taxpayers Assn. (OCTax) hopes the aftermath of the election will help us fix this inequity. To do that, local residents must make sure that Sacramento remembers how Orange County became the state’s most generous “donor” county.

It was the result of three events.

First, the Serrano vs. Priest court decision in 1971 required that all school districts in the state be funded equally, regardless of local property tax receipts. Serrano vs. Priest still requires the state to make up funding shortfalls in districts that allocate less than the statewide average of property tax to schools.

Then, in 1979, Sacramento passed AB 8 to “bail out” local governments after Proposition 13. It required the state to dole out tax dollars to counties based on their 1979 allocations of property taxes between schools and general government services. Orange County was more rural in 1979, so it spent more money on schools and less on general services than other counties. To our subsequent disadvantage, AB 8 made this allocation permanent, even though Orange County now is decidedly urban and suburban, with an increased need for government services.

In 1992, legislators approved the Educational Revenue Augmentation Fund (ERAF), sometimes called the “Wilson Shift.” This takes $3.5 billion per year from county and city governments and special districts statewide, including $350 million from Orange County, and gives it to the schools.

Combined, these three developments have a strong, negative impact on Orange County taxpayers.

First, to comply with AB 8, 64% of property taxes go to schools and 36% to county and city governments and special districts. These percentages are nearly reversed in some counties that receive more from Sacramento than they pay in taxes.

Second, in compliance with Serrano vs. Priest, we “donate” some of our sales, income and other taxes (via the state) to schools that are underfunded by property taxes in recipient counties such as San Francisco, Santa Clara, Los Angeles and Ventura. In other words, we pay for our own schools, then we pay part of the bill for schools in other counties!

Finally, since 1992, ERAF has shifted about $2.5 billion from Orange County governments to schools. Along with the other factors, that leaves only 5.6% of our property taxes for general county government. That’s just $46.22 per person; the average for California’s 58 counties is three times that amount.

OCTax doesn’t want to spend more on Orange County government. We are simply tired of paying the tab for other counties’ services. So how can this week’s election help Orange County taxpayers find relief from the unfair tax burden? Ironically, it may restore justice by triggering a near-crisis in our own county budget.

Schwarzenegger promises to end the car tax, which generates $4 billion per year for local governments. As a donor county that gets back less property tax funding than other counties, Orange County is heavily dependent on its $190-million share of the state car tax.

More significantly, when the county was struggling to leave Bankruptcy Court, state and county officials pledged a portion of Orange County’s share of the car tax to bankruptcy debt repayment. If the loss of the car tax is not made whole by Sacramento, the county and the state could breach their obligation to bondholders. It’s unlikely that Schwarzenegger is even aware of this commitment. State legislators probably have forgotten that they encumbered the car tax in this way. Eventually they must address the issue.

Radically new mechanisms for funding local governments will be required immediately to fill the car tax gap, and in the long run for funding normal operations. Many proposals are being drafted, such as flattening the income tax to make it less volatile (something OCTax would support), widening the sales tax (OCTax would oppose), removing some Proposition 13 protections on commercial real estate (oppose) and swapping a portion of local sales taxes for a fairer share of property taxes (possibly support, depending on the details).

County and city governments and special districts provide useful services that ordinary taxpayers don’t mind paying for: police and fire protection, parks, libraries, streets, streetlights, sidewalks, water, sewers, jails, juvenile halls and trash collection.

Orange County and its cities need not only reliable funding; they also deserve funding that is equitable compared to other municipalities in the state. The inevitable new approaches to local-government funding, brought into play after the recall election, may be our opportunity to obtain property-tax equity.

As Schwarzenegger and the Legislature work to find solutions, OCTax will work with elected officials to ensure that whatever plans they adopt include necessary relief for Orange County taxpayers who carry the unwanted burden of being the state’s most generous donor county.

Reed L. Royalty is president of the Orange County Taxpayers Assn.