A Progressive Parcel Tax Could Solve Cupertino’s Budget Woes

Cupertino, Calif., is a fabulously wealthy city that is facing a budget shortfall of about $15 million, which is a significant part of its $95 million general fund.

The city council is considering a variety of tax increases. None are sufficient on their own and all rely on a vote by city residents.

I offer another possible approach—a progressive parcel tax put on the ballot by city residents. This proposal is also limited in various ways but is more fair and efficient than the alternatives.

Yet how Cupertino can get out of this hole isn’t as interesting as what it reveals about California public finance. Unlike most US cities, the city council can’t simply increase the property tax, the revenue source most appropriate to pay for local services.

The property tax can’t be increased at all. All the other taxes that can be increased have their own technical requirements and limitations—and all require a vote of the electorate.

The Backstory

First we ought to consider why a $15 million budget shortfall is such an issue in a city of about 60,000 with a median household income of over $200,000 and median home price of over $2 million. Cupertino has a huge property tax base—about $27 billion. Generating an additional $15 million in property tax would require an increase of 0.056%, which shouldn’t be too heavy a lift.

But perhaps property taxes in Cupertino are already quite high? They aren’t. Cupertino does receive about $30 million a year from property taxes. For comparison, consider White Plains, N.Y., a city with about 60,000 people and a median household income of over $100,000. It has a property tax base of about $10 billion, but raises about $65 million from the property tax.

Cupertino’s small budget gap thus seems like an easy problem to fix given the size of its local property tax base and current very low rate, but it isn’t. Proposition 13, enacted in 1978, bars Cupertino from increasing its property tax. It is stuck getting roughly the share of the tax it got before the amendment, even though back then that tax rate was applied to a market value base. And Prop 13 cut property tax rates generally by about 60% (from about 2.5% to about 1%).

Cities in California have managed to keep the lights on by relying on a series of minor levies, such as transient occupancy taxes, and one major one, the local share of the sales tax. Cupertino isn’t an exception in general, but has come to rely on minor levies a bit less and on the sales tax a bit more than its neighbors. Why?

The Deal With Apple

Since 1997, as part of a deal with the city, Apple Inc. sourced all of its California sales back to Cupertino. If you bought an iPad online for delivery in San Francisco, then the local tax receipts went to Cupertino. In exchange, Apple got a rebate from the city amounting to 35% of the tax.

It was a win-win for the city and Apple at the expense of other jurisdictions in the state with stronger claims to those receipts. The state agency responsible for collecting the sales tax has taken notice, and it is the likelihood this arrangement will (properly) end that has caused the $15 million deficit.

Note that California’s current law doesn’t correctly source sales to the site of consumption—San Francisco in the example—and hopefully this will change.

Cupertino shouldn’t be singled out though. Many cities in California have made sweetheart deals with big retailers, and localities and states across the country fall over themselves in a race to the bottom to attract (at least seemingly) mobile businesses.

The battery of solutions being considered by Cupertino’s city council includes a small increase to the local sales tax rate or to the city’s transient occupancy tax, a small parcel tax, and a small tax on business operations in the city.

If the city adopted all the proposed increases, then the budget crisis would be averted and the general cost of local government would be reasonably spread, though no more reasonably—and much more baroquely—than just increasing the property tax rate a smidge.

According to the report, the rates Cupertino would need to adopt for these taxes are about the same as those currently charged by its neighbors. This makes sense considering the other cities were tasked to provide similar services without a big assist from Apple.

But thanks to Prop 13 and its progeny, all the measures require a vote by the people of Cupertino and some require a supermajority. The city doesn’t seem eager to approach voters with so many tax increase measures, which makes sense as a matter of retail politics.

Somewhat ironically, though sensibly in context, the staff report ranks a small sales tax increase as the best choice. Increasing taxes for local and regional consumers to pay for local services is defensible, but this proposal only would tax one slice of the community (consumers) for one slice of the money (about $5 million out of $15 million needed).

The city needs a tax that can apply to the broader community, either to fill the budget hole on its own or fill the hole still left by the sales tax increase. To achieve this, I propose a progressive parcel tax, with rates dependent on parcel size and residential or commercial use. Developers impose refined parcel taxes all the time in deciding how to spread costs in new developments.

This parcel tax should include a tax on units that will be allowed to be built under the rezonings Cupertino is planning to undertake to comply with state housing law. Taxing these parcels as if they’re already fully developed would be fair and efficient for several reasons, including that it would spur development of these parcels in the first place.

Given the stock of developed parcels in Cupertino and the thousands more being rezoned, a refined tax structure like this should yield the missing $10 million or $15 million efficiently and fairly. Such a tax could be passed by a simple majority if Cupertino residents were to put the measure on the ballot.

If the city adopts such an expedient, it will have contorted itself to achieve what should be easy—raising an unexceptional level of revenue for a city of exceptional wealth.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Darien Shanske is professor at the University of California at Davis School of Law.

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