Commissioner Szalay suggested that additional consideration should be given to a "layered cake" concept, noting that property taxes should finance more local services. Commissioner Whiteside acknowledged that the caucus recommendations did not focus on that. Commissioner Maltbie added that revenue allocation schemes could include jobs/housing balance as an incentive for a local jurisdiction to get more revenues.

Commission consultant Fred Silva opined that sharing resources either locally or regionally for specific purposes suggests a need for locally or regionally-levied revenues. Commissioner Whiteside said that the caucus discussion had not been about regionalism but, rather, about creating a pool of revenues that regions would decide how to distribute. Commissioner Allgood asked who the arbiter would be for how, when and why the money would be distributed.

Commissioner McPeak stated that the caucus had decided that the Speaker’s Commission was not the appropriate vehicle to make smart growth a dominant principle. She went on to note that the focus on a regional plan and an infrastructure plan provided ideal vehicles for the inclusion of smart growth principles. Commissioner Szalay added that the caucus had not decided on how to distribute the regional pots of money, feeling that this should be the purview of the regions themselves.

Mr. Silva mentioned that two key policy points could be accomplished at the same time: the need to increase property tax revenues so that services could be improved and the need to reduce the adverse effects of local over-dependence on sales taxes. He pointed to the sales tax rate, suggesting that a piece of it might be taken either to pool it and distribute it over a larger region, or to swap some of it with the State.

Commissioner Hauck noted that the SMART task force report factored in about $250 million of State monies to make its swap feasible. He predicted this was politically unworkable, while retaining the feeling that some sort of swap is necessary and potentially enactable.

Commission consultant from the California Research Bureau Dean Misczynski noted that revenue from the property tax tends to grow faster than revenue from the sales tax. Any swap based on percentages would end up bringing larger and larger dollar amounts from the State to the locals over time. He suggested that a $250 million swap could end up bringing as much as $500 million to the locals after five years. Commissioner Hauck replied that shifting riskier revenues to the State makes sense because the State has a broader revenue base. He also reminded the Commission that there is no public support for raising taxes.

Commissioner Nathanson opined that the Commission appeared to be achieving substantial consensus on the ideas of a swap and the pooling of growth. Commissioner McPeak noted that her Bay Area Council looks at sharing growth in both property and sales taxes based on how communities are accommodating housing. She also said there is no justification for raising taxes if government cannot convince the public it knows what to do with what revenues it already has. Accountability is a key element and she would later offer that the greatest accountability occurs when those raising the revenues are the ones spending it. She also suggested improving accountability by focusing on outcomes (as in the provision of services more efficiently).

Ms. McPeak went on to note that, in terms of revenue neutrality, she was more concerned that the public stay neutral than that State and local governments stay neutral. She suggested that, if more revenues stay at the local level, they could take over programs from the State.

Commission consultant Marianne O’Malley of the Legislative Analyst’s Office opined that some so-called "dumb growth" decisions are a result of the under-pricing of infrastructure and water in addition to the influence of local dependence on sales taxes. Several Commissioners agreed with this.

Commissioner Stenbakken asked how the revenues coming to, or kept by, the locals in the swap would be administered. Mr. Silva replied that, to keep the local finance base as broadly based as possible, half the tax revenues would have to be kept local. Growth of that half could also be distributed on a regional basis. He suggested that the State could have to backfill up to $2 billion for schools. Mr. Stenbakken replied that having the taxes locally levied is an important principle.

Consistent with his past comments, Commissioner King reinforced Ms. O’Malley’s comment regarding the pricing of certain resources influencing local growth decisions. He said he supported some moderate adjustments, along with capturing sales taxes from e-commerce and broadening the sales tax to include services. Mr. Silva opined that taxing services will be politically difficult. Regarding e-commerce, he noted that the State already taxes mail order, but that the federal government is blocking the broad taxing of e-commerce. He said the State legislature has passed a resolution supporting the federal position. Commissioner King said the Commission might want to consider urging the legislature to change its position.

Commissioner Scott offered his support for Commissioner King’s comments. He added that, given a choice, the public might want to raise the property tax in exchange for a reduction in another tax because of the former’s deductibility from the income tax. Mr. Silva eventually replied that such a swap could lead to eventual increases in the income tax. When several Commissioners asked why, Ms. O’Malley noted that the income tax is very sensitive to the economy and to demands on the revenues it creates. The more uses for those revenues, the more pressure there would be to increase it to keep the cash-flow viable.

Commissioner McPeak also supported Ms. O’Malley’s comments, pointing to transportation and housing pricing being lynchpins in the whole smart growth concept. If housing is not built, then consumers do not have a chance to buy it close to work, and if long commutes remain relatively affordable, these commuters will have less impetus to push for more housing closer in. Commissioner Allgood noted that some of the pricing issues related to the public’s social desires, such as detached single-family homes and sport utility vehicles, and that fiscal policy is unlikely to address problems caused by such desires. He also cautioned against fixating on pricing issues to the detriment of the California’s low income residents.

Commissioner Hauck stated that it is unrealistic to pursue a sales tax rate reduction by broadening what it applies to. It would be more realistic to use it to offset other reductions in revenues.

Commissioner Maltbie brought up the previously mentioned "layered cake," asking whether sales taxes could be offset with income taxes. Mr. Silva responded that the State is the best place to levy the income tax and that using it to offset sales taxes is the functional equivalent of a General Fund appropriation.

Responding to earlier comments about building in incentives for housing, Commissioner Pérez mentioned Commissioner Harrington’s interest in creating property tax incentives for manufacturing uses.

Mr. Silva opined that the property tax was definitely the best tax to use for any swap. Commissioner Szalay added that such an arrangement should be Constitutionally-protected, not a State subvention that could be repeatedly altered by the legislature. He also offered that non-designated Vehicle License Fee (VLF) revenues could be swapped for income tax revenues. Mr. Silva reminded everybody that there is currently an ongoing push to eliminate the VLF.

Commissioner Scott, looking at growth-related decision making, noted that other kinds of biases sometimes also play a role. He pointed to the difficulty Los Angeles’ South Central and Crenshaw communities have had attracting supermarkets, shopping centers and movie theaters. He attributed some of this to an outright bias that was supplanting rational decision making, since enterprises such as the Magic Johnson Theaters and a Lucky supermarket in Crenshaw have been very successful since they opened.

Commissioner Whiteside pointed to the need for revenue neutrality. She then said that, if the State wants to reduce the VLF, it should do so on its own nickel, not that of local government. Mr. Silva acknowledged the validity of that point, noting that the State could replace its current discretionary VLF backfill with a dedicated revenue.

Referring back to the income tax discussion, Mr. Misczynski opined that a rationale for including it in a swap is that the locals probably want a faster growing revenue source. Commissioner Szalay pointed to a potential connection to job growth. Misczynski said the connection was weak. Commissioner King noted that the current trend is that the State will take a larger share of overall revenues via the income tax while the locals keep the shrinking sales and gas tax revenues. Mr. Misczynski said that legislators appear to be comfortable with local government funding being reduced in favor of school funding.

Commissioner Hauck brought up the issue of how to distribute locally retained revenues. He noted that the Constitutional Revision Commission had recommended that each county would create an allocation board of some sort.

Commissioner Allgood said that having the State set the income tax rate removes local control and asked how stagnating locales could be revitalized. Commissioner Maltbie noted that local government does not even set tax rates for property taxes or sales taxes, so perhaps that is not the prime indicator of whether local control exists in this context.

Commissioner Whiteside noted that the state of Minnesota had undertaken an effort to reduce the revenue disparity between its richest and poorest communities in recent years. It reduced the ratio favoring wealthy communities from 12:1 down to 4:1. By comparison, California’s highest ratio is 50:1 and climbing.

Mr. Brownstein asked if the Commission was assuming there should not be an increased shift from the State to the locals. He noted that revenue neutrality doesn’t necessarily increase certainty. Rather, it offers a new kind of uncertainty and creates new winners and losers. He also reminded everyone that erasing the disincentives for housing had not been attended to.

Mr. Misczynski stated that the proposed swap does succeed in rewarding local governments. He suggested that big cities would find their position improved while about 60 cities would find that their projected increases in revenues would be tempered.

Ms. O’Malley summarized a different approach she called "Buying Down the Property Tax," noting that it shifting property taxes, providing enhanced local control and proposed to "do no harm" to Proposition 13. The concept would reduce the ERAF rate by $.10, reducing the property tax rate to .9%. Cities would then be authorized to increase their rate to get the overall rate back to 1%.

Commissioner Szalay noted that this would place locals in the position of raising property taxes. O’Malley said that it is a way to bring back local control. Commissioner King noted that the Buy Down presumed a loss of revenue on the State’s part. O’Malley acknowledged that possibility but said it could also be swapped. King then noted that some areas have Special Districts providing services that cities provide elsewhere, and cities in those areas would receive a windfall of revenue with no service mandate attached. He also noted that a 15-year phase-in would reduce the negative impacts.

Commissioner Scott commented that the Buy Down appeared to be an ingenious mechanism to allow new use of the property tax at the local level. But he felt it would eventually necessitate a State tax increase to cover the ERAF loss. Ms. O’Malley commented that a reallocation of ERAF wouldn’t directly impact schools because the State is likely to backfill the losses.

Mr. Silva then described briefly a three-part proposal for the commissioners to discuss:

1. Swap one-half of sales tax receipts with an equivalent amount of property tax receipts within each city or or unincorporated county area.
2. Pool a portion of the growth of the remaining one-half of sales tax receipts within each county (in the absence of some other kind of regional jurisdiction).

Commissioner Nathanson asked why it was important to include the location of residents and employment in point #3. Mr. Silva suggested this would provide a simpler incentive for employment growth than trying to allocate property tax revenues with a bias toward employment sites.

Commissioner Allgood asked about allocating income tax revenues based on job creation and property taxes based on housing. Silva replied that point #1 essentially does the same thing.

Commissioner Whiteside mentioned that the cost of services outpaces the revenue generated from housing and wondered how this would incentivize manufacturing uses. Commissioner Pérez opined that doing the latter is very important.

Commissioner Morrison, reinforced by Mr. Misczynski, suggested that placing all of the increment in the un-swapped sales tax revenue stream into the countywide pool would be an even more effective deterrent to land-use fiscalization. Mr. Silva replied that he felt that the influence of fiscalization could be diminished but probably not eliminated.

Commissioner Stenbakken pushed for a "stabilization element," such as placing reforms in the State Constitution. He also asked about governance issues in fringe areas, such as annexations, new incorporations and the like. He then raised the question about using reforms to reverse decisions made locally.

Referring to the Constitutional Amendment idea, Commissioner Nathanson asked what the parameters of such a protection would be. Mr. Miscyznski said it should be kept simple, possibly resembling Proposition 98. It could guarantee each city at least a certain percentage of the increment going into the county pool. Ms. O’Malley opined that that would essentially update and "flash freeze" a new version of AB 8, the legislation that specified what levels of revenue cities would get from the State after the passage of Proposition 13.

Commissioner Scott presented the contents of a memo submitted by Commissioner Joel Fox who could not attend this meeting. Fox’s comments:

POLITICAL LANDSCAPE

It seems to me that there is no great demand from the general public to make any radical changes to the tax system. I see very little indication in focus groups or polls that there is a desire for change. This becomes important when any required constitutional change is presented to the voters. Our discussions come on the heels of reports that most local governments are running surpluses; San Francisco’s budget has increased 33% in just 4 years.

I believe the taxpayers of California would accept some changes to the current system that they do not view as radical changes or alter the way their tax money is collected. Reassigning both responsibilities and revenues to different governments is possible. Objections may arise from those in government who are directly affected by these changes, but not so much from the public.

PRINCIPLE OBJECTIVE: RETURN PROPERTY TAX CONTROL TO LOCAL GOVERNMENTS

Plan A:

To satisfy schools, keep the property tax portions of the pie between local government and schools equal to what they are today. All property tax revenue, whether spent by schools or local governments should come with no strings attached from the state. This discretionary ability to spend money by city councils, boards of supervisors, or school boards should bring particular scrutiny to these bodies from the voters and prevent the excuse of passing the buck to the state.

Property tax reallocation formulas must be reviewed as this change is contemplated.

Plan B:

As an alternative, transfer local sales tax revenue to the state and turn over school property taxes to local government. (There may need to be an adjustment due to the amount of dollars.)
One advantage this plan has is that the state will be better positioned to deal with tax changes that I believe inevitably will come as e-commerce grows.

I believe the tax system will have to be reevaluated if e-commerce lives up to the potential that has been assigned it by visionaries. I do not think we are there yet, but perhaps soon. If taxes are levied on e-commerce, and retail sales taxes are altered because of e-commerce, I believe the state will be in charge of these taxes. This model is akin to the state, instead of local government, overseeing taxes on telephone and telegraph services at the beginning of this century. By assigning sales taxes to the state now the system can be more readily adjusted to changes forced by the changing economy.

Funding schools from the state is not new. The sales tax was created in the 1930s to help fund schools when the burden of the Depression got too much for property taxpayers.

The issues raised by the Serrano case have not gone away. Consider recent developments in school funding in New Hampshire and school construction in Arizona in which Serrano type arguments have found favor with the courts.

OTHER ISSUES WORTHY OF CONSIDERATION

Split Roll

The business community through leading associations such as the California Business Roundtable, the state Chamber of Commerce, and the California Manufacturer’s Association have all argued that more tax revenue is needed for infrastructure. Specifically, they all have endorsed reducing the two-thirds vote for school construction and transportation. As the head of a regional business association recently put it, "Our CEOs see it as an investment, not a tax."

Perhaps we should offer this investment opportunity to the business community through a split property tax roll if business insists more revenue is needed. The increased taxes could be earmarked for education and transportation, although I am not a big fan of earmarking. The big problem with a split roll is that it could hurt the small businesses, which are so important to the economy. Perhaps some safety can be fashioned to protect them.

Tax Deductibility

While business can deduct this property tax increase from federal taxes, those savings can multiply, we are told, if we emphasize income tax over other taxes. Senator Peace spoke to the Commission on this issue.

One paper I have seen argues that consolidating sales tax into personal and corporate income taxes, i.e. eliminating the sales tax and raising the income tax an equivalent amount, could produce a small revenue increase for the state and large taxpayer savings because of federal tax deductions. The figures were in the order of a $2-billion tax savings to California taxpayers over one year growing to $20-billion over eight years. On the other hand, I have been told that the income tax rates would have to be too high (politically) to accommodate the sales tax consolidation. I would like to get a sense from the consultants if such a plan would work.

REGIONAL GOVERNMENT

There has been strong support from many in the commission for regional governments. My greatest concern about regional government is that most models anticipate a new layer of government, with taxing powers, and no direct accountability to the people. Some regional systems like the Los Angeles area MTA is made up of a board of elected officials appointed from various jurisdictions. Yet, if the people are disgruntled with the actions of the board, they have no direct recourse in dealing with that board. An example, citizens of Torrance who contribute more to the MTA than any city outside of Los Angeles have no representatives on the board. In the case of the MTA, the only way to control mismanagement was to use the initiative process, which was done.

Regional governments may be acceptable if the voters of the region directly elect the board members, but even then I think voters would protest a new layer of government without perhaps eliminating some of the thousands of governments that already exist.

FINALLY
I think you know my position on the two-thirds vote.


Commissioner Stenbakken then volunteered to bring to the Commission information on a collaborative decision making process adopted by the State of Washington. Commissioner Maltbie commented that a way to "sweeten the pot" for locals would be to link their decisions to obtaining extra State infrastructure funds. David Hunter, covering the meeting for Commissioner Gary Hunt of Orange County, expressed a concern about the State imposing smart growth principles on local governments.

The Commissioners then commented on the state of the 3-point proposal before them. Commissioners Arteaga, Scott, Pérez, Allgood, McPeak and Abel expressed positive reactions with little comment. Mr. Brownstein felt that more should go into the county/regional revenue pool and that housing needed to be mentioned. Commissioner Whiteside urged that the proposals be relatively consistent with other proposals or very deliberately different. Commissioner Nathanson lauded the proposals for not calling a lot of attention to themselves, though he felt the Commission needs to know more bout the impact of putting more dollars into the pool. He also expressed interest in Commissioner Maltbie’s comment about linking to infrastructure funds. Commissioner Szalay felt there were unanswered questions about allocations and suggested thinking in terms of fiscal incentives. Commissioner King called for an equity component.

Commissioner McPeak then mentioned that there is no incentive included to generate more manufacturing/industrial uses and asked why communities are not doing that. Commissioner Pérez underscored that, suggesting that perhaps some income tax revenues could be employed to incentivize M uses.

Mr. Silva then reviewed a memo submitted by Commissioner King. It included a number of concepts for discussion:

1. Broaden application of sales tax: first priority is to apply to catalog and Internet transactions; second priority is to apply to services (with decrease in overall rate).
2. Special taxes require 50% vote; general taxes 2/3 vote.
3. General obligation bonds – reduce requirement from 2/3 to 60%.
4. Index gasoline taxes and/or impose a mileage-based user fee.
5. Establish a definition of threshold equity for cities. Such a definition would specify that every city should receive at least a certain percentage of the average state allocated revenues on a per capita and/or number of housing units basis. The State would fill in the difference for any city (and possibly county) less than the threshold. For instance, if the threshold was established at 80% and any city got less than 80% of the statewide average (per capital or per housing unit) from the State-allocated revenues including property tax, sales tax (including Prop. 172 sales tax) and the VLF, the State would fill in the difference between that and 80%. The property tax allocation would have to take into account the same services funded by the property tax – even if some cities received this service from a special district.
6. Eliminate all property taxes that fund services for which user fees are commonly charged, such as water, sewer and refuse. Allocate that property tax to local taxing agencies.
7. Require local government to establish a process for establishing performance measurement and performance standards.
8. Separate the counties’ "urban services role" from the "countywide service role" by requiring separate county budgets and the allocation of costs and revenues to these respective functions.

Commissioner Hauck then briefly discussed the Governor’s Infrastructure Task Force, upon which he sits. He noted that the Task Force spent some months identifying priorities but is just now getting down to the difficult work of figuring out an approach to financing and coordinating decision making. He noted that the State Infrastructure Bank now has some $500 million in it and could be a major resource for local jurisdictions. Commissioner Allgood mentioned that Treasurer Phil Angelides had laid out some infrastructure decision making criteria during his appearance two meetings ago. Commissioner Hauck opined that the Infrastructure Bank already had criteria similar to those promulgated by Mr. Angelides.

Mr. Silva wrapped up the discussion by noting that the 3-point proposal would be fleshed out for the next meeting, with details and supporting data made available. He suggested that the Commission be prepared to go over an expanded version of the options matrix (discussed at Meeting #7).

4. Public Testimony:

First up was Bob Richardson of the Executive office of the County of Orange. He noted that Orange County (OC) has changed considerably in the last 25 years, now having a much larger and more diverse population. Population has doubled, but the level of discretionary dollars in the county budget remains close to that of counties with half the population.

Mr. Richardson went on to bring up the concepts of per capita services and income measures, saying that OC is not afraid of performance measures and of being held to account. He also noted that 40% of the county’s population is either over 60 years old or under 18.

Commissioner Abel asked what OC had learned from its infamous bankruptcy experience. Richardson replied that three things had become clear: the county needed certainty of revenue, centralized authority and performance measures for departments and agencies.

Next to speak was Jean Askham of the League of Women Voters and the Fullerton Observer newspaper. She noted that she had once been on a county commission in New York state that had dealt with fiscal issues. She noted that it was difficult to reach consensus and even more difficult to sell ideas to the public. Communities that stand to lose revenue from a proposal will resist if they cannot see how they would benefit from the change.

Ms. Askham added that basing allocations on per capita considerations is too simple an approach because it ignores the daytime population of many locales with lots of employers. She also cautioned against putting too much stock in the fear of voters rejecting tax increases and over-emphasizing the revenue-neutrality of proposals. "’Tax’ is not a four-letter word," she concluded.

Finally, Marie Whaling, of the Fullerton Committee of Correspondence, spoke. She said that no one had mentioned workers in the discussion but that they were the ones who lost power through taxation. She went on to caution against touching the property tax formula in Proposition 13. She noted, however, that, while it keeps her in the home she owns, her children end up paying high property taxes for homes they have purchased more recently.

Ms. Whaling said that she is concerned with Redevelopment being used wrongly, sharing the opinion of Councilman Norby. She also suggested that state, county and city governments need to stop wasting the money taxpayers give them. The wastage makes the public more distrustful.

Commission chair Abel asked if it mattered to Ms. Whaling where decisions are made. She suggested that each level of government should have control within its borders of the money it generates. In other words, federal revenues should be spent on federal issues, state revenues on state issues, and so on.

City of Fullerton Mayor Jan Flory also attended the meeting but arrived too late to testify.

Commission Chair Abel reminded the Commission that the next meeting was scheduled for Wednesday, September 22 in the East Bay Area. The meeting was then adjourned at approximately 2:30 p.m.