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December 8, 2017

I attempt a principled defense of the House approach to SALT repeal

(Spoiler Alert: I fail)

By Darien Shanske

[Cross-posted from Medium.]

The tax reform plan that just passed the House of Representatives repeals the SALT deduction, except for $10,000 in property taxes. The Senate plan would repeal the deduction outright, though there appears to be a chance that the final Senate bill will move closer to the House position. Numerous commentators have weighed in on both plans and, in general, the consensus is that neither plan is very well conceived. There are at least three main lines of criticism, all of which I largely agree with. First, per Daniel Hemel (and many others), on basic income tax principles there is a sound argument that some portion of the deduction should be maintained for individuals because these taxes do not pay for personal consumption, and so the Senate plan simply fails on that ground. There is also a good argument that the deduction is justified for businesses, though note that retaining the deduction for businesses but eliminating it for individuals leads to incentives for individuals to take the SALT deduction at the business level. Perhaps, as David Kamin explains, this problem has now been addressed, though, as he also notes, the current legislation does not take into account numerous possible responses by the states to eliminating the individual deduction.

Second, as to which set of taxes - state or local - have the better claim to be retained as a deduction on income tax principle, the better argument is for state income taxes and not property taxes, which are typically local. This is because, as Gladriel Shobe has argued here and here, there is a stronger argument that local property taxes are prices paid to consume local amenities rather than state level taxes. The House proposal therefore gets matters backwards from an income tax principle (and distributive) perspective.

A third important critique is to note that eliminating the deduction, when combined with other aspects of the Republican plans, amounts to a tax increase specifically targeted to certain parts of the country. This is just not good for our polity.

But can anything positive be said about this? I can almost make an argument in favor of the House approach as to the property tax. That I can't in the end illustrates, in yet another way, the incoherence and meanness of these proposals. Back in 2012, I argued that there was a good argument for the federal government to repeal the SALT deduction except for the property tax component. My argument was not based on income tax principles, but on the proper role of the central government in a federation. One of those roles is maintaining stability and generally optimizing the revenue system of all of the component governments. It is axiomatic that the property tax is a relatively efficient tax that should be assigned to local governments to finance local public goods. The forty years since California's Proposition 13 has also made it clear that states and localities were reducing their reliance on the property tax - in part because of the liquidity problems commonly associated with the tax. There was therefore, I thought, a good argument that the federal government should intervene to make the property tax relatively cheaper so as to nudge its continued - or even increased - use.

The current House proposal bears some resemblance to what I had in mind and yet I still think the House proposal is not a good idea. Why? For one thing, from the perspective of 2017 I realize that my argument missed at least two big points. First, my underlying assumption was that the federal government would be continuing to carry out another of its key roles - redistribution. Eliminating the SALT deduction in order, in part, to pay for the ACA, or at least prevent cuts to the ACA and other social insurance programs, seemed reasonable distribution-wise in 2012. Indeed, I argued that encouraging the use of the relatively stable property tax actually benefits the less well-off precisely because, as David Gamage has shown, they are the ones most likely to suffer from sharp state and local budget cuts during a recession.

By contrast, in the current context, the proposal is to eliminate or reduce the SALT deduction as part of a spectacularly regressive tax reform proposal that is part of a still broader attempt to sharply reduce the role of the federal government in taking care of the less fortunate. Making it more difficult for the states to care of the very people that the federal government is abandoning - or trying to abandon through, for instance, dismantling the ACA - is deeply wrong. (If we were in the midst of a deep recession, then there would be an independent argument for a fiscal stimulus, but this is not the case.)

In 2012, I also underestimated state resilience (not everyone did). Back then it seemed that California, for example, would not, as a matter of politics, increase its state-level income and sales taxes and, even it could, I didn't think enough could be raised to right the ship. But California did raise its income tax twice, and in a progressive way, and the state currently has built up a significant rainy day fund. Without doubt, California still has fiscal challenges and it would be much better for the state to rely more on the property tax, but I was wrong to think that this was the only way forward. In short, I overestimated the problem to which my proposal was a solution.

In any event, if the House plan were serious about reviving the property tax on fiscal federalism grounds, it would not proceed by means of preserving the deduction in the way that it does, especially in the context of a plan that also doubles the standard deduction. As an itemized deduction that is only worth anything beyond the new larger standard deduction, there is unlikely to be much shift in state or local political economy under the House plan. A way to achieve such a shift would be to make a portion of the property tax an above-the-line deduction, as it was briefly in 2008-09. Though still problematic for the reasons noted at the outset, that would at least represent a coherent - and less regressive - choice to advance a policy goal through advantaging the property tax. Needless to say, I do not expect this to happen.

 

December 8, 2017

Another way states can counter a partial repeal of the SALT deduction

(This expedient could possibly even improve state public finance in the long term.)

By Darien Shanske

[Cross-posted from Medium.]

There have been numerous important discussions of how states might respond to the repeal of the SALT deduction. David Kamin lists some of them here; he also notes that these possible (likely?) responses should be taken into account by the JCT because they will reduce the revenue gains that the federal government is expecting.

I should like to sketch out one additional state response. Suppose the House approach to the SALT deduction were to become law. This means that the deduction would be eliminated except for $10,000 in property taxes. A certain group of taxpayers will now find themselves with less than $10,000 in property taxes to deduct, but lots of state income taxes that they can no longer deduct. To be specific, suppose a taxpayer has $5,000 in property taxes that they can still deduct, but $8,000 in income taxes that they cannot. If $5,000 of the income tax liability could be shifted into the property tax then the taxpayer (and the state) would not be leaving a deduction on the table. This could be done, of course, just by increasing property taxes and reducing income taxes. As it turns out, even if increasing property taxes is on balance a good idea, it is one that is highly fraught politically and has big implications for state-local relations. Also, as the current experience with drive-by tax reform is continually illustrating, major changes to tax systems should not be done quickly. See here for some of the issues raised by a shift to property taxes.

But a state with an income tax need not engage in a prolonged debate about increasing its property tax in order to maximize the value of the SALT deduction for its citizens. In broad strokes, all a state needs to do is formally increase its property taxes so that citizens can get the maximum deduction, but then in effect hold taxpayers harmless by means of the state's income tax.

Here is what this might look like a little more specifically. The state can authorize its localities to impose a special property tax supplement up to $10,000 so as to assure all taxpayers maximize their SALT deduction (if they end up itemizing). Next, the state creates a generous property tax circuit breaker in its income tax. The circuit breaker could work like this: to the extent the property tax burden as a percentage of a taxpayer's income is greater than it was in 2017 - and that increase is a result of a special supplemental property tax - then that additional property tax is forgiven. To be sure, there would be many details to work out (such as coordinating the timing of local property tax collection with the state income tax), but I think the mechanism is sound. An additional refinement could be to make certain that some small portion of the new property tax is in fact collected by the locality so that the whole structure is respected.

I should add that I believe that states (really localities) should increase their use of the property tax in general and that generous circuit breakers are an important way to make this possible. See my argument here. One would hope that the fact that this self-help proposal for the states is also a reasonable idea on its own would make it more attractive.

 

November 30, 2017

Some Thoughts on California's Fiscal Constitution

by Darien Shanske

[Cross-posted from SCOCAblog.]

The California Supreme Court currently has at least two cases relating to California's fiscal constitution on its current docket;[1] two were decided this summer.[2] The phrase "fiscal constitution" is a term of art that designates all the many provisions of the constitution that dictate how governments can raise and spend money. The fiscal constitution of the federal government is very sparse. The fiscal constitution of the state of California is enormously lengthy and complicated. Many of its provisions date to 1879 and are contained in the thirty-six sections of Article XIII, but also see the twenty-three sections of Article XVI. Proposition 13-the proposition that limited property taxes and made numerous other changes-added Article XIIIA. Proposition 4, passed in 1979 in order to advance the "spirit of Proposition 13," added Article XIIIB. Proposition 218, passed by the voters in 1996 and also seeking to backstop Prop 13, added Articles XIIIC and XIIID. Proposition 26, passed by the voters in 2010, and also meant to backstop Proposition 13, amended Articles XIIIA and XIIIC.

Given the volume, complexity and relative recentness of some of these propositions, it is certain that the California Supreme Court will grapple with many more cases involving California's fiscal constitution. These cases are enormously consequential, as they directly implicate how California and its local governments can fund not only basic governmental services, but also price the use of natural resources, such as water. Despite the importance of the topic, there has not been much scholarly attention devoted to how to interpret state fiscal constitutions (and, yes, other states do have law similar to those in California, though none so far as I know has a set of overlapping laws quite so challenging). A lot has been written about whether the provisions are wise policy and/or achieve their goals, but these valuable normative and empirical discussions are of little use when it comes to giving direction to courts grappling with what the provisions before them mean.

This neglect would perhaps be justified if there were no broader perspective to be taken on these provisions. It could be that each court in each state is on its own to do the best job it can given using a combination of the usual exegetical tools-some mixture of text, history, and purpose. In an article forthcoming in the Rutgers University Law Review, I argue that such an ad hoc approach is not justified.[3] In the rest of this post, I will briefly summarize my argument and add some specific reasons why California's fiscal constitution should be approached in the manner I sketch out.

The specific issue I consider is the distinction between taxes and fees. The fiscal constitutions of California, like that of many states, limit the ability of governments to raise taxes. These same constitutions typically do not impose similar limits on the ability of governments to impose a fee, say a building permit fee. But what if a locality chose to levy a gigantic building permit fee and used the proceeds to fund general services? Such a fee would-and should-be considered a "hidden tax" and thus subject to the same limitations as ordinary taxes.

But how high is too high when it comes to fees? In many cases-say fees for water use-the fees must be set high enough to fund major capital expenditures or there will not be a water system to provide water. And do we think higher fees for excessive use of water should be construed to be a constitutional problem? This seems indicated by these provisions because the marginal cost of the additional water is no higher for an excessive user. Yet if tiered pricing meant to encourage conservation is a problem, then there might not be any water left in the water system. What about basic service for poorer users at a discount; does not the provision of such a service mean that other ratepayers are paying too much? But if poorer users would not use the service at all if charged market rates, why might it not be perfectly rational to charge them less if the marginal cost of the additional services was very low? Do we think that airplane passengers who pay full price are subsidizing a customer who pays less for an empty seat on a plane that is about to leave?

Courts are not well situated to answer these questions, but in some states[4]-not yet California[5]-the courts seem to have taken the position that the constitutional distinction between taxes and fees leaves them no choice but to undertake searching substantive review of the fees set by state and local governments. But there is another-better-way, namely for courts primarily to engage in procedural review of the ratemaking process. Such review has real teeth and is well within judicial competence. Most importantly, as I argue, requiring such review is actually a better interpretation of these fiscal provisions.

In general, procedural review is a better interpretation of the provisions of state fiscal constitutions because such review was the norm of the preexisting common law of public finance. In fact, modern administrative law, with its emphasis on procedural review, largely grew out of a critical response to the U.S. Supreme Court's undertaking substantive review of rates set by an expert agency.

Courts properly presume that preexisting common law was known to the proponents of a proposition; courts also presume that terms that had a meaning under the preexisting common law retain that meaning when they become codified unless there is some explicit evidence to the contrary. These presumptions-canons-are proper because assuming knowledge of the preexisting law is consistent with the rule of law value of predictability.

California's fiscal constitution is particularly amenable to a procedural interpretation for several reasons. First, the California courts regularly apply the relevant canons of interpretation, such as that proponents are presumed to have knowledge of the law.[6] Second, the key provisions of California's fiscal constitution explicitly embrace whole phrases of the preexisting common law.[7] Third, California's fiscal constitution manifests a great deal of explicit concern with following proper procedures.[8] This includes shifting the burden of proof to the government.[9]

To be sure, it could be that California's fiscal constitution imposes lengthy procedures, a burden shift, and heightened substantive review. But there is no explicit evidence of such and thus I argue that the application of appropriate canons and analytic superiority should move the court to a procedural interpretation.

As the cases come down, I plan to check back in and offer some assessments of where we are and where we might go.

[1] City of San Buenaventura v. United Water Conservation Dist., (2015)185 Cal. Rptr. 3d 207, review granted and opinion superseded June 24, 2015; Citizens for Fair REU Rates v. City of Redding, (2015) 233 Cal. App. 4th 402, review granted and opinion superseded Apr. 29, 2015.

[2] California Cannabis Coalition v. City of Upland, (2017) 3 Cal. 5th 924; Jacks v. City of Santa Barbara, (2017) 3 Cal. 5th 248.

[3] Shanske, Darien, Interpreting State Fiscal Constitutions: A Modest Proposal (June 19, 2017). Rutgers L. Rev., forthcoming. Available at SSRN: https://ssrn.com/abstract=2989313.

[4] Yes I am looking at you Michigan and Missouri. See Zweig v. Metro. St. Louis Sewer Dist., (2013) 412 S.W.3d 223; Bolt v. City of Lansing, (1998) 587 N.W.2d 264.

[5] More or less. See Silicon Valley Taxpayers Ass'n, Inc. v. Santa Clara Cty. Open Space Auth., (2008) 187 P.3d 37 (imposing a de novo standard of review).

[6] In re Harris, (1989) 775 P.2d 1057, 1060 (en banc) ("[T]he voters who enact [an initiative] may be deemed to be aware of the judicial construction of the law that served as its source.").

[7] See the emphasis on "reasonableness" in Cal. Const. art. XIIIC § 1(e).

[8] See e.g., Cal. Const., art. XIIID, § 6.

[9] See, e.g., Cal. Const., art. XIIIC, § 1(e) (flush language).

 

October 16, 2017

Opinion Analysis: California Cannabis Coalition v. City of Upland

By David A. Carrillo & Darien Shanske

[Cross-posted from SCOCAblog]

This is a preview of a forthcoming article, California Constitutional Law: Interpreting Restrictions on the Initiative Power (2017) 51 U.C. Davis L. Rev. Online 65, David A. Carrillo and Darien Shanske. Reprinted by permission.

Overview

On August 28, 2017 the California Supreme Court decided California Cannabis Coal. v. City of Upland, (Aug. 28, 2017, S234148) ___Cal.4th___ . Justice Cuéllar wrote the opinion, joined by the Chief Justice and Justices Werdegar, Chin, and Corrigan. Justice Kruger wrote separately to concur in part and dissent in part; Justice Liu joined that opinion.

The basic facts of the case are these.[1] A local initiative in the city of Upland proposed to require marijuana dispensaries pay a city fee. The proponents wanted the initiative to be considered by voters at a special election. The city concluded that because the fee would exceed the actual costs, it constituted a general tax. To the city, this meant that the initiative could not be voted on during a special election; instead, under California constitution Article XIII C, section 2 the measure had to be submitted to the voters at the next general election. This provision of the constitution clearly requires that all (general) tax increases imposed by a local government be submitted to the voters at a general election.[2] So if a city council (like Upland’s) proposes a tax increase, then it must follow the Proposition 218 rule and wait for the next general election. The question posed by this case was whether this rule also applies to general tax measures put on the ballot by the voters. The court decided that this provision does not restrain voter initiatives. Therefore, if the voters propose the increase of a general tax, then a vote on the tax can occur at a special election.

Analysis

Debating the definition of “government” is unproductive.

The key question confronting the court was whether the phrase “no local government may impose . . .” also served to impose a limit on the voters of a local government acting through the initiative process. The majority thought that this phrase did not include the electorate; the dissent thought that it did. Though both sides made reasonable points, we think that the arguments based on the language of the provision are so evenly balanced that the heavy lifting is done by the majority’s presumption in favor of liberally construing the initiative power. The majority candidly says as much.[3] Indeed, the majority explains that when it comes to limiting the electorate’s initiative power, it will apply a “clear statement rule.” That is, unless the voters clearly intend to limit the initiative power, the court will not find that they did.

There is a strong case for this clear statement rule.

The dissent cogently asks what the majority’s basis is for applying a clear statement rule and making it a rule for future cases.[4] After all, a judicially crafted clear statement rule hamstrings a legislative body and hands power to judges to decide what is “clear enough.” A clear statement rule is particularly troublesome to the extent the drafters of legislation did not know their work would be evaluated on that standard.

The majority’s response is that a presumption in favor of the initiative power is not new. In 1991 the court applied that principle in a case involving Article XIII A, section 3 (added by Proposition 13), which at the time provided that “any changes in State taxes enacted for the purpose of increasing revenues . . . must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature . . . .”[5] The court applied the presumption and found it did not apply to the electorate.

Only five years later, Proposition 218 aimed to clarify the interpretation of another section in the same article: Article XIII A, section 4 (added by Proposition 13), which reads: “Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district.” It should be unsurprising that the court again applied the presumption in favor of the initiative in interpreting Proposition 218’s clarification of Article XIII A, section 4. In this context it is especially apt to charge the proponents[6] with knowledge of the law,[7] including knowledge of this presumption.

But this argument only goes so far if a presumption in favor of the initiative power is misguided. Consider the U.S. Supreme Court’s widely-criticized federal preemption clear statement rule. That rule is a restriction on federal power, imposed on federalism grounds. If Congress does not clearly preempt a state law, then the state law stands. Yet there is a good argument that after the Fourteenth Amendment’s adoption there is no good ground for tipping the scale in favor of state versus federal power. Another criticism is that federalism values, appealing as they are, should not receive special judicial solace at the cost of protecting individual rights, as often ends up being the case.[8] The fact that the federal clear statement rule is long established and fairly applied is no response to such points.

We considered whether a deeper justification exists for a presumption in favor of broadly construing the initiative power as a matter of California constitutional law. We think there is such an argument, as follows.

An initiative constitutional amendment that purported to prevent future electorates from undoing a past act, or otherwise placed substantive limits on the future electorate’s legislative power, would be invalid as a revision. The California electorate’s initiative power is a structural part of the state’s constitutional system. California’s constitution can be changed, of course, but structural changes are labeled “revisions” and revisions cannot be accomplished by means of the ordinary voter initiative. A revision requires a supermajority of the legislature and a majority vote of the electorate.[9] Consider also the fact that the initiative was created via the revision process. How the initiative power got into the constitution is not determinative, but it is suggestive.[10] If altering the state government to add the initiative was a revision, and if the litmus test for a revision is whether it changes the nature of the state government, then reducing or removing the initiative power is also a revision. As an extreme example, if the electorate by initiative constitutional amendment attempted to assume all taxing power, or claimed to renounce any taxing power, either act would be an invalid revision.

Thus, if Proposition 218 significantly impairs the electorate’s right of initiative, then it should be invalid to that extent because the initiative can only be substantively curtailed by a revision. The court has justified this rule on the principle that, although the state constitution is binding on future legislatures and electorates alike, the electorate cannot restrict its own future initiative power through the initiative process.[11] Only the legislature plus the electorate could do that with a revision.[12]

An initiative constitutional amendment that purports to prevent future electorates from undoing a past act, or otherwise placed substantive limits on the future electorate’s legislative power, would also be invalid as a separation of powers violation. Using the example above again, if the electorate by initiative constitutional amendment attempted to assume all taxing power, or claimed to forfeit any taxing power, either act would violate the separation of powers because the initiative is a core electorate legislative power, which cannot be substantively limited or reassigned.[13] The electorate cannot self-harm, just as the legislature cannot over-delegate, reduce, or give away its core powers.[14]

How does one know if a change is structural enough to become a revision, or a material enough impairment? Key questions include: Does it change the frame of government?[15] Does it substantively reduce the electorate’s legislative power?[16] Obviously the electorate (by initiative constitutional amendment) can prescribe substantive and procedural limits on the other branches of California government.[17] But the present electorate cannot by initiative constitutional amendment reduce the amount of legislative power held by the future electorate. This does not mean that the initiative cannot be used to constrain future initiative acts at all. Proposition 13 itself is an example of setting limits on future electorates, and absent any other action the future electorate is indeed constrained by the past electorate’s action. Yet the future state electorate can always use its initiative power to undo the past electorate’s act and change the rules.

Remember that the provision in question here is a restriction placed on the local initiative power by the state electorate. The dissent argued that this fact indicates that Kennedy Wholesale was not really about protecting the initiative power because the state voters could always change the provision.[18] Leaving to one side whether this is the best reading of Kennedy Wholesale (and the majority has a potent counter), we think that this point makes the argument for applying the clear statement rule stronger in this case. As to the state electorate, their initiative power would arguably not have been overly restricted by a two-thirds rule because a majority of the electorate could change the rule. But that is not the case for the local electorate and the local initiative power. The local initiative power is also constitutionally derived.[19] Based on the argument above, it is not at all clear to us if the state electorate could constrain the use of local initiative power absent a constitutional revision. It is at least a very difficult constitutional question. Consequently, it is certainly sensible to apply a clear statement rule to avoid that question. In this context, the clear statement rule functions more like a canon of constitutional avoidance.

We should be clear that the majority opinion did not rely on the argument we just outlined in its defense of the clear statement rule, although we believe that it did gesture to it at various points in its opinion, most particularly when the court explained that: “As Ulysses once tied himself to the mast so he could resist the Sirens’ tempting song (Homer, The Odyssey, Book XII), voters too can conceivably make the clear and important choice to bind themselves by making it more difficult to enact initiatives in the future.[20] We added the italics to the “conceivably,” and we think this comment shows that the court sees that self-binding in this way poses a hard question.

The Elephant in the Room

This case is about California constitution Article XIII C, section 2(b). The celebrity of the case has to do with section 2(d), which reads: “No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote. A special tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved.”

The language concerning the election rules construed in this decision (“No local government may impose, extend, or increase any general tax unless . . .”) is identical to the language concerning the required supermajority for special tax measures (“No local government may impose, extend, or increase any special tax unless…”). This strongly suggests that the local voters can, by initiative, increase special taxes by a simple majority because the supermajority limitation does not apply to initiatives any more than the general election requirement applies to initiatives.

The majority does not comment on this implication, which is appropriate, as that issue was not before the court. Perhaps some grounds for distinction between the two provisions might be found. Indeed, there is language in the majority opinion that suggests it thinks there might be such a distinction. The court says:

That the voters explicitly imposed a procedural two-thirds vote requirement on themselves in article XIII C, section 2, subdivision (d) is evidence that they did not implicitly impose a procedural timing requirement in subdivision (b).[21]

This language can be read to suggest that there is some difference between the election timing provision and the vote threshold provision. We do not actually think that this is what this passage means. Instead, it is part of an argument in favor of the majority’s interpretation of section 2(b) and the (minor) point the majority is making is that the electorate knows how to refer to itself.[22]

Nevertheless, the implication remains and was brought up by the dissent in a footnote:

The majority opinion contains language that could be read to suggest that article XIII C, section 2(d) should be interpreted differently from section 2(b). (See maj. opn., ante, ––– Cal.Rptr.3d at ––––, ––– P.3d at –––– [noting that the enactors of Prop. 218 “explicitly imposed a procedural . . . requirement on themselves in” art. XIII C, § 2(d), which “is evidence that they did not implicitly” do so in § 2(b) ].) I see no basis for construing the two provisions differently. Sections 2(b) and 2(d) are, in all pertinent respects, indistinguishable.[23]

If we are correct that the majority did not wish to introduce a difficult-to-understand distinction in this offhand way, then why did the majority not change the language or in some other way respond to the dissent? Perhaps the majority thought its implication was clear enough and that there had to be some end to the back and forth. Perhaps the majority was not displeased with the implication the tax threshold question was arguably open for the lower courts to consider.

Implications

The public response to this decision—both pro and con—suggests that it changes the possibilities of local government finance significantly.[24] Again, the focus has been on the decision’s supposed impact on the voting threshold for special taxes. We are skeptical that the impact would be so great even if this decision does ultimately result in the supermajority rule not applying to special taxes placed on the ballot by the voters themselves.

As a matter of political economy, we do not think there is a reservoir of pent up demand for tax measures. As noted in the post previewing this case, cities and counties can already subject general taxes to a majority vote[25]—along with a non-binding advisory measure on how any revenue collected is to be spent.[26] Thus, it is not clear how important this change will be for cities and counties. School districts, for example, have already been able to fund infrastructure with a 55% voter threshold, assuming certain conditions are met.[27] So we would predict that operational school district taxes passed by majority vote will be the main source of demand for this kind of voter initiative, if it were to be possible.

Even assuming that the court’s reasoning means that the two-thirds threshold does not apply to local special tax initiatives, how this area of the law develops from here is unclear. The initiative power extends to taxation,[28] but it is also the case that the initiative power is generally interpreted to be as broad as the legislative power of the underlying local government.[29] Charter cities have the inherent power to tax and therefore, presumably, their citizens have that right as well.[30] But general law cities and counties do not have the inherent power to tax.[31] Does that mean the legislature must explicitly permit local tax initiatives in these governments?[32] School districts have no initiative power at all—at least not granted by the constitution.[33] Thus, if school districts wanted to use this ruling, must the legislature grant the school district electorates the power to impose taxes by initiative? These are hard questions.[34] We note them here not to answer them, but to indicate that many thorny legal and political questions remain whatever this decision’s applicability to the tax threshold provision.

Conclusion

The majority describes the conflict in this case as between two constitutional provisions: sections 8 and 11 of article II (the initiative power), and article XIII C (limiting local governments’ ability to impose, extend, or increase general taxes). Because the latter provision was created by the former, we think that the court found that this is not a clash of two equally-matched California constitutional doctrines. Thus, in keeping with its past practice and sound doctrinal considerations, the electorate’s initiative power prevailed.

[1] For further description of the case see: http://scocablog.com/argument-preview-california-cannabis-coalition-et-al-v-city-of-upland/.

[2] Cal. Const., art. XIIIC § 2:

(b) No local government may impose, extend, or increase any general tax unless and until that tax is submitted to the electorate and approved by a majority vote. A general tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved. The election required by this subdivision shall be consolidated with a regularly scheduled general election for members of the governing body of the local government, except in cases of emergency declared by a unanimous vote of the governing body.

(c) Any general tax imposed, extended, or increased, without voter approval, by any local government on or after January 1, 1995, and prior to the effective date of this article, shall continue to be imposed only if approved by a majority vote of the voters voting in an election on the issue of the imposition, which election shall be held within two years of the effective date of this article and in compliance with subdivision (b).

(d) No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote. A special tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved.

[3] California Cannabis Coal. v. City of Upland, 2017 WL 3706533 at *12: “Our analysis in those decisions consistently begins with the presumption that the initiative power is not constrained, then searches for clear evidence suggesting that electors could reasonably be understood to have imposed restrictions upon their constitutional power.”

[4] California Cannabis Coal. v. City of Upland, 2017 WL 3706533 at *18.

[5] Kennedy Wholesale, Inc. v. State Bd. of Equalization, (1991) 806 P.2d 1360.

[6] The Howard Jarvis Taxpayer’s Association sponsored both Propositions 13 and 218. https://www.hjta.org/about-hjta/the-history-of-hjta/.

[7] See, e.g., In re Harris, (Cal. 1989) 775 P.2d 1057, 1060 (“[T]he voters who enact [an initiative] may be deemed to be aware of the judicial construction of the law that served as its source.”).

[8] See, e.g., Eskridge & Frickey, Quasi-Constitutional Law: Clear Statement Rules As

Constitutional Lawmaking, (1992) 45 Vand. L. Rev. 593, 643-44.

[9] Or a constitutional convention. Cal. Const. art. XVIII, § 2.

[10] See Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, (Cal. 1978) 583 P.2d 1281, 1285 (“We think it significant that prior to 1962 a constitutional revision could be accomplished Only by the elaborate procedure of the convening of, and action by, a constitutional convention (art. XVIII, s 2). This fact suggests that the term ‘revision’ in section XVIII originally was intended to refer to a substantial alteration of the entire Constitution, rather than to a less extensive change in one or more of its provisions.”).

[11] Rossi v. Brown, (Cal. 1995) 889 P.2d 557, 574. (“[T]hrough exercise of the initiative power the people may bind future legislative bodies other than the people themselves”). See also Cty. of Los Angeles v. State, (Cal. 1987) 729 P.2d 202, 209 n.9 (“Whether a constitutional provision which requires a supermajority vote to enact substantive legislation, as opposed to funding the program, may be validly enacted as a Constitutional amendment rather than through revision of the Constitution is an open question.”).

[12] Cal. Const., art. XVIII, § 1, 4; 68 Hastings L. J. 731, 744.

[13] Amador Valley Joint Union High Sch. Dist., (Cal. 1978) 583 P.2d 1281, 1286 (posing as a hypothetical example of an invalid revision an initiative constitutional amendment vesting all judicial power in legislature). For an explanation of the idea that a separation of powers analysis applies to electorate legislative acts, See Carrillo, Duvernay, & Stracener, California Constitutional Law: Popular Sovereignty (2017) 68 Hastings L. J. 731.

[14] For background on the unique features of the California separation of powers doctrine, See Carrillo & Chou, California Constitutional Law: Separation of Powers (2011) 45 USF.L.Rev. 655.

[15] Professional Engineers in California Government v. Kempton, (Cal. 2007) 155 P.3d 226, 245; Amador Valley Joint Union High Sch. Dist., 583 P.2d at 1286 (does the measure “accomplish such far reaching changes in the nature of our basic governmental plan as to amount to a revision”).

[16] 68 Hastings L. J. 731, 745–46.

[17] Rossi, 889 P.2d at 574; 68 Hastings L. J. 731, 744 and 753.

[18] California Cannabis Coal. v. City of Upland, 2017 WL 3706533 at *19.

[19] Cal. Const, art. II, § 11(a): “Initiative and referendum powers may be exercised by the electors of each city or county under procedures that the Legislature shall provide. Except as provided in subdivisions (b) and (c), this section does not affect a city having a charter.”

[20] California Cannabis Coal. v. City of Upland, 2017 WL 3706533 at *1.

[21] California Cannabis Coal. v. City of Upland, 2017 WL 3706533 at *10.

[22] The opening sentence of the paragraph says as much: “Indeed, as we observed in Kennedy Wholesale, 53 Cal.3d at page 252, 279 Cal.Rptr. 325, 806 P.2d 1360, when an initiative’s intended purpose includes imposing requirements on voters, evidence of such a purpose is clear.”

[23] California Cannabis Coal. v. City of Upland, 2017 WL 3706533 at *18 n.7.

[24] See, e.g., https://calmatters.org/articles/california-taxes-two-step/ (“The ruling ‘isn’t just a small crack in the protections that voters across the state have relied on—it is a sledgehammer,’ said [Assembly Member] Baker at a press conference.”). And, in fact, Republican members of the Assembly have introduced a constitutional amendment (ACA 19) to overturn the holding of this case. http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180ACA19.

[25] Cal. Const. art. XIIIA, § 2(b).

[26] Coleman v. County of Santa Clara, (1998) 64 Cal.App.4th 662.

[27] Cal. Const. art. XIIIA, § 1(b)(3).

[28] Rossi, 889 P.2d at 563.

[29] DeVita v. Cty. of Napa, (1995) 9 Cal.4th 763, 775.

[30] California Fed. Savings & Loan Assn. v. Los Angeles, (1991) 54 Cal.3d 1.

[31] Santa Clara County Local Transportation Authority v. Guardino, (1995) 11 Cal.4th 220, 247-48.

[32] Before one assumes the answer is yes, it must be remembered that, as the majority in this case explained, “we have held that the people’s power to propose and adopt initiatives is at least as broad as the legislative power wielded by the Legislature and local governments.” California Cannabis Coal. v. City of Upland, 2017 WL 3706533 at *4 (citing cases). If the initiative power is broader, then perhaps explicit permission to place a tax measure on the ballot by initiative is not necessary.

[33] But, again, perhaps the power of initiative is so broad that this power could be found to have been reserved by the people it being explicitly granted to the electorate of a school district.

[34] Another twist. Proposition 62, approved by the voters in 1986, placed limits on local government taxing power very similar to that of Proposition 218 into California statutory law. See, e.g., Cal. Gov’t Code § 53722 (“No local government or district may impose any special tax unless and until such special tax is submitted to the electorate of the local government, or district and approved by a two-thirds vote of the voters voting in an election on the issue.”). The Legislature cannot simply repeal a statute passed by initiative. See Cal Const. art. II, § 10(c); Cal. Gov’t Code § 53729. Presumably Proposition 62 does not bar local tax initiatives any more than Proposition 218 does, but this is another issue that will need to be litigated.

May 31, 2017

Argument Preview: California Cannabis Coalition et al. v. City of Upland

(Cross-posted from SCOCAblog.)

by · May 26, 2017

The California constitution subjects tax increases proposed by a local government to vote at a general election, but does this requirement also apply to an initiative measure proposed by the people themselves? The particular provision of the California constitution at issue, Article XIIIC, section 2(b), added by Proposition 218 in 1996, does not indicate whether or not it also applies to initiative measures. The Court of Appeal decision[1] under review in this case found that this provision did not govern initiative measures. Therefore, under this reasoning, initiative measures do not need to be submitted to a vote at a general election.

Viewed from 20,000 feet, one can see there are two plausible ways to approach the absence of clear instruction as to whether initiative measures are covered by this provision. One might argue that there is a deep principle of California law that the people's power of initiative is to be jealously guarded[2] and thus the judgment of the Court of Appeal should be affirmed. On the other hand, one might argue that Proposition 218 was clearly intended to make it harder to raise taxes. And permitting votes on initiative measures to raise taxes at special elections would make it easier to raise taxes (at least assuming the limitations added by Proposition 218 are effective).

The (somewhat simplified) facts of this case seem to be as dry as the question presented, even though they involve cannabis. The California Cannabis Coalition wanted to place an initiative on the ballot at a special election. The measure arguably imposed a tax on medical marijuana dispensaries and so the City argued that the measure must be put on the ballot at a general election, per the state constitutional rule governing the imposition of taxes.

This case has been much written about in tax circles and drew multiple amicus briefs, almost all arguing that the special Proposition 218 rules should govern initiative measures. Among the amici making this argument are the strange bedfellows The California League of Cities and the California Taxpayer's Association. Indeed, the City is represented by the Howard Jarvis Taxpayer's Foundation. On the other side, the high-powered firm of Munger, Tolles & Olson wrote an amicus brief on behalf of the San Diego Chargers in support of the California Cannabis Coalition.

What then is really going on here? Proposition 218 does not just require that all measures imposing a tax be voted on at a general election. It also requires, crucially, a two-thirds supermajority for the passage of special taxes.[3] This is a high hurdle. If the strictures of Proposition 218 do not apply to initiative measures, then this is a way for the people to tax themselves with only a majority vote.  Imagine the residents of a so-called sanctuary city opting to increase their taxes to counter a loss of federal funds.

Given this broader context, it is easy to understand the interest of advocacy groups that are generally hostile to taxes. Apparently the cities are not happy about the Court of Appeal's ruling because they are worried about losing relative control; the cities will have their revenue measures limited by Proposition 218 but initiatives from the voters will not be so limited. And the Chargers, well, they are apparently interested in getting some help from the public in financing a new stadium and a lower threshold for a tax initiative measure would likely be very helpful.[4] That is, it will be easier to get a majority of San Diego residents to back a tax to help the Chargers, but much harder to get a supermajority.

As indicated, I think the text can be mustered to support either position. Furthermore, the legislative history of the ballot measure, such as it is, contains passages supporting both sides. Proposition 218 was certainly about limiting taxes, but also about limiting taxes by making sure that the voters-not just local politicians-get to vote on taxes. Therefore, the case will be decided on the basis of the background principles that the court brings to its analysis and in particular the importance of the power of the initiative.

It should be noted-though it was not by the Court of Appeal-that there is a California Supreme Court decision that is nearly exactly on point and dispositive. In 1978, Proposition 13 added the requirement that the legislature could only increase taxes with a supermajority.[5] The question then arose whether this requirement also applies to tax increases imposed by the voters. In Kennedy Wholesale,[6] the court acknowledged the broad language of that provision could also apply to initiative measures, but held the requirement did not apply to initiative measures, at least in significant part because of the background assumption about protecting the power of the initiative.[7] To be sure, this case can be distinguished on the basis of different text, different ballot history and even the difference between state and local taxation. But crafting such a distinction will be difficult. First, a different canon of interpretation imputes to the voters knowledge of the law, which would include Kennedy Wholesale. The canon is supposed to put the burden on the party seeking to change the law and thus the absence of any indication that Proposition 218 limits the power of initiative is a problem. Second, if there is an important distinction between state and local level fiscal rules, then this implicates many cases in which the courts have toggled between the two in deciphering California's fiscal constitution.

A final note about political economy. It is an empirical question how significant it would be if the California Supreme Court upheld the Court of Appeal, but there are a few points worth noting.

First, in a world in which the Court of Appeal is affirmed, there will still need to be elections about tax increases (there is an argument made by the appellants that local governments could collude with initiative proponents to get tax increases imposed without an election, but this is a red herring because local governments cannot impose taxes without a vote of the electorate). In other states with similar tax limitation measures, such as Missouri,[8] there is often just the requirement that tax increases be subject to a vote. The underlying political intuition seems to be that taxes are so inherently unpopular that forcing voters to focus on them is tantamount to limiting them. Consider what has happened at the state level since Kennedy Wholesale. The voters of California have indeed approved tax increases via a majority vote, but they have not done so often.

Second, it is true that upholding the Court of Appeal would create an asymmetry between the powers of the people and the powers of government officials. Leaving aside the possible merits of such an arrangement, it is worth noting that the California Supreme Court has already created a not-dissimilar asymmetry through its interpretation of Article XIIIC, section 3. As things currently stand, voters can reduce fees by initiative even after the government has gone through all the procedural requirements for imposing the fee that are mandated by Article XIIID, which was also added by Proposition 218.[9]

Third, it is already the case that general-purpose governments, namely cities and counties, can increase taxes with a majority vote.[10] It is also common practice for these governments to ask for non-binding guidance on how to spend the money that they raise from general tax increases.[11] Thus, it is not clear how much this decision would affect cities and counties.

Finally, the power of initiative is specifically authorized for only cities and counties in the California constitution,[12] and so this decision will have no immediate effect upon special districts, including school districts. That said, the power to impose taxes by initiative could be given to the electors of school districts.[13] Suppose that school district electors were so empowered and that tax increase measures could pass with a bare majority instead of a two-thirds supermajority, as is currently the case. But how much would this matter? School districts have had the ability to finance new capital projects through a 55% vote since 2000 (assuming certain conditions are met).[14] All of this is not to say that there would not be a significant impact should the Court of Appeal decision be affirmed-perhaps schools will find it easier to raise taxes for non-capital costs if current law were changed-only that matters should be kept in perspective.

[1] 245 Cal.App.4th 970.

[2] Kennedy Wholesale, Inc. v. State Bd. of Equalization (1991) at 250.

[3] Special taxes are defined in Article XIIIC, section 1(d) as "as any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund." The two-thirds requirement is found in Article XIIIC, section 2(d).

[4] http://www.dailybulletin.com/general-news/20160721/how-the-fate-of-the-san-diego-chargers-could-hinge-on-uplands-marijuana-battle.

[5] Cal. Const. art. XIIIA, § 3.

[6] Kennedy Wholesale, Inc. v. State Bd. of Equalization (1991) at 248-49.

[7] Id. at 253.

[8] Mo. Const. art. X, § 22(a).

[9] Bighorn-Desert View Water Agency v. Verjil (2006).

[10] Cal. Const. art. XIIIA, § 2(b).

[11] Coleman v. County of Santa Clara (1998).

[12] Cal. Const. art. II, § 11.

[13] The electors of school districts can use the power of initiative to impose term limits on board members. See Cal. Educ. Code § 35107(c).

[14] Cal. Const. art. XIIIA, § 1(b)(3).