Disputed California Tax Hike Ballot Measure Seen as Disruptive

Rarely do ballot initiatives involving state and local taxes garner national coverage. But the attention is warranted when California, a state widely known for its progressive approach to tax structures and strategies, is locked in fierce litigation over voter efforts to restrict this approach.

The California legislature has proposed two constitutional amendments that could expand state and local governments’ ability to respond to the evolving needs of civil services and their budgets. Meanwhile, their opponents have proposed a ballot initiative to prevent tax increases.

The dispute has ended up in the California Supreme Court, which will decide whether to permit the Taxpayer Protection and Government Accountability Act to appear on the November 2024 Ballot. If the measure passes, new threshold requirements would apply retroactively to new taxes or tax increases adopted as of Jan. 1, 2022. Oral arguments are expected in March.

The court faces two legal questions. One, does the measure revise or amend the California Constitution? Two, if passed, would the measure impair essential government functions?

If it would fundamentally change the California Constitution, it would be ruled unconstitutional and stricken from the ballot. If the court rules otherwise, the measure will appear on the ballot, provided it doesn’t impair essential government functions.

Tax professionals, of all those watching this case, should be the most tuned-in to the proceedings. The outcome of this case, and of the November ballot, could have huge impacts on their work and clients.

Controversy

The measure would complicate efforts of state and local governments to increase tax rates by two routes. If the state legislature wished to raise a state tax rate, it would require a two-thirds vote in the legislature plus a majority vote on the ballot. If a municipality sought to increase a special tax by citizen initiative, the voter threshold required would grow from a simple majority to a two-thirds majority.

Advocacy groups such as the California League of Cities and eight Democratic city mayors have filed amicus letters supporting Gov. Gavin Newsom’s (D) action. These opponents have argued that the measure includes “vague provisions, unlawful revisions to the state constitution” and has the “potential to ‘disable fiscal planning’ by local governments.”

Amendments and revisions differ dramatically under the California Constitution and have distinct ratification procedures. Amendments merely amend a specific section of the state constitution, whereas revisions fundamentally change such a section. Unlike amendments, which voters can propose via ballot initiatives, constitutional revisions can only be proposed by the legislature.

Opponents argue that the measure contains impermissible constitutional revisions. If it passed, they claim, courts would strike it down during subsequent legal challenges. Thus, the court should conduct a pre-ballot review.

Opponents also say the measure would fundamentally disrupt how the state and localities impose taxes, affecting generated tax revenue. Such disruption, it is argued, would create chaos and influence the many services taxpayers rely upon.

By contrast, the measure’s supporters have called Newsom’s challenge a “blatantly undemocratic attempt to disenfranchise voters by removing a voter-qualified initiative from the ballot.” They maintain that the proposed changes are constitutional amendments, not revisions, giving the people the right to vote to ratify them under California law.

Counterattacks

The California state legislature has simultaneously gone on the offensive as this legal battle brews. Lawmakers have passed two tax-related measures that will appear on the ballot for voter approval.

The first, ACA-1, reduces the approval threshold for certain local taxes from the traditional two-thirds majority to 55%. The second, ACA-13, makes raising approval thresholds far more difficult.

Specifically, if a taxpayer initiative seeks to increase the approval threshold required for a new tax or tax increase, that ballot initiative would need to pass by the identical proposed new approval rate. For example, if a ballot measure seeks to require a 55% approval rate on tax increases, that measure would need to pass by 55%.

ACA-1 would ensure that infrastructure-related local bonds and special taxes remain flexible and “easy” to pass for local governments. By lowering the approval threshold, supporters argue that local governments can more effectively respond to the evolving needs of their communities. Opponents have raised concerns about stripping California taxpayers of their Proposition 13 protections against raising property taxes.

ACA-13, which has frustrated supporters of the Taxpayer Protection and Government Accountability Act, is a more direct attack on the measure. If ACA-13 is approved, the measure must then pass by a two-thirds majority to be ratified. Because ACA-13 applies exclusively to publicly initiated ballot measures, ACA-1, which was proposed by the legislature, would only require a simple majority of votes to pass.

Outlook

California courts, including the California Supreme Court, are no strangers to contentious legal battles, especially regarding state and local taxes. We expect to see the court’s ruling on this matter sometime before June 2024, when ballot measures must be finalized.

While tax clients may not care about the distinctions between state constitutional amendments and revisions, they will undoubtedly care if a new or increased tax becomes harder for legislatures to implement. Furthermore, if they were subject to one of the many tax increases implemented by the California legislature or a local municipality following Jan. 1, 2022, the prospect of a refund for such taxes will undoubtedly pique their interest.

ACA-1 and ACA-13 will appear regardless of the outcome of this case, making the measure’s potential appearance on the ballot even more exciting—at least for us in the tax world.

Law student Jesse Feinstein, a state and local tax project assistant at HMB, contributed to this article.

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

Jordan M. Goodman is partner in HMB’s state and local tax group and focuses his practice on resolving complex SALT controversies.

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