Panel considers giving up property tax portion

The Costa Mesa Charter Committee on Wednesday asked city staff for more information on a seemingly radical idea: the city forfeiting its share of property taxes.

Committee member Hank Panian’s suggestion for the city’s charter, as it takes shape, aims to address the inequality created since the passage of Proposition 13 in 1978. Under the measure, property tax is assessed based upon when a property was acquired, benefiting longtime homeowners. Property is reassessed to full market value only when sold.

Panian proposed that the city could, over a 20-year period, phase out and eventually give up its small percentage of the property taxes collected, which nonetheless will amount next year to nearly one-fourth of the general fund. The remaining amount from residential and commercial properties in Costa Mesa would be distributed as usual, to various agencies including the school district.

This, Panian suggests, might help even out the taxpaying playing field.

Last fiscal year, Costa Mesa collected $21.5 million in property taxes. Officials expect a slightly higher amount in the coming year: $22.2 million, amounting to about 22% of the entire general fund.

Some committee members expressed enthusiasm for the idea; others were skeptical or against it. Nearly all wanted to know more and directed city staff to provide additional information.

"I'm somewhat surprised," Panian said of his colleagues' interest. "I expected people to be resistant, more resistant than what was expressed. I really appreciate the analysis you folks had."

Committee member Ron Amburgey called the idea "brilliant."

"We're thinking outside the box a little bit," he said. "I think it's great that you proposed it. I really like the concept of making things more fair for the younger people."

Committee member Mary Ann O'Connell said she wasn't so sure. Costa Mesa relies on a hearty but volatile sales tax base — the city's single-largest source of income, she said.

Losing the property tax, and therefore having less financial diversification, is "putting most of your eggs in a sales-tax basket, which did not do well in the last recession," O'Connell said.

Committee member Gene Hutchins, who also serves on the Pension Oversight Committee, said the city's dangerously unfunded pension liability makes Panian's idea fiscally unfeasible.

"Unfortunately, the city has a financial problem right now that would make it very, very tough to try and reduce its income," Hutchins said.

Interim Finance Director Stephen Dunivent said sales and property taxes combined amount to 73% of Costa Mesa's total funding. Removing the property tax would certainly increase the city's financial risks, he said.

He projected that if Costa Mesa lost its property tax revenue today, it would create any one of the following shortfalls: an elimination of the Fire Department, 60% of the Police Department or 30% of city staff, or roughly 140 positions.

"I say that just to show you the magnitude of what would be required to remove this element of city funding," Dunivent said.

Panian said Dunivent's projections didn't include his 20-year phase-out model, meaning, if implemented, Costa Mesa wouldn't immediately lose all of its property-tax revenue and be susceptible to such cuts.

Panian pointed to the Mesa Water District, where he served as a board member. Decades ago, the independent district phased out its collection and reliance on property taxes. It now is primarily funded by ratepayers.

He said to make up for the property tax loss, sales tax and advertising revenue boosts could do the trick, as would increasing the rental fees on city-owned properties.

"I understand fully the risk that's involved," Panian said.

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