Parcel tax

Origination

Parcel taxes originated in response to California's Proposition 13 (1978), a state initiative constitutional amendment approved by California voters in June 1978. Proposition 13 limited the property tax rate based on the assessed value of real estate to 1% per year. However, a parcel tax circumvents the property tax rate limits of Proposition 13 because it is a flat tax on each parcel of real property and does not vary according to the assessed value of the property. As a result, a parcel tax does not violate the ad valorem property tax rate limits of Proposition 13.

Mello-Roos Taxes

Mello-Roos taxes are a species of parcel tax levied under the Mello-Roos Community Facilities Act of 1982. Mello-Roos taxes are levied to pay for various local government services and infrastructure. The use of Mello-Roos taxes has been controversial in many local governments in California, especially for homeowners who have to pay such taxes in addition to the basic 1% property tax rate under Proposition 13.

Two-Thirds Voter Approval Required

Simple majority vote parcel taxes were found unconstitutional under the uniformity of property taxation provision of the California Constitution. To the extent parcel taxes are legally authorized and allowed by law, Proposition 218 (1996) ("Right to Vote on Taxes Act") requires every parcel tax be levied as a special tax (a tax legally dedicated for specific purposes) subject to two-thirds voter approval.

Statutory Limitations – Uniformity Requirement

The legal authority to levy a parcel tax comes from California state statutes which usually include additional restrictions and limitations on the ability of a local government to levy a parcel tax. The requirement that many parcel taxes apply uniformly to all taxpayers or all real property within a local government is a direct result of statutory restrictions imposed by the California Legislature and not as a result of any requirements under the California Constitution, including Proposition 13. There has been significant political opposition to easing the statutory uniformity requirement for parcel taxes, especially from the business community which would incur a significant increased (but generally more equitable) property tax burden if the uniformity requirement were eased by the California Legislature.

Major Fairness Issues

Due to the statutory uniformity requirement for most local government parcel taxes, major tax fairness issues arise. Parcel taxes are very regressive because they typically require owners of smaller or lower valued property to pay the same total amount as owners of larger or higher valued property, including big mansions or massive commercial office buildings. Many homeowners believe this to be very unfair.

When the Alameda Unified School District attempted to mitigate this inequity by imposing a parcel tax that would require large commercial properties to pay a larger tax amount than residential homeowners, a California appeals court declared the tax invalid. In response, the California State Senate passed a bill by Governance and Finance Chair Lois Wolk to authorize school districts to levy a higher parcel tax on commercial property, but the bill then subsequently failed to pass in an Assembly committee.

Single-Family Residential Parcels Bear Disproportionate Burden

Since in most California communities the vast majority of taxable parcels are single-family residential, the statutory uniformity requirement results in most of the tax burden for a parcel tax falling on single-family residential property owners. For example, in Los Angeles County about 79% of the taxable parcels are single-family residential parcels (including condominiums). As another example, in Santa Clara County about 88% of the taxable parcels are single-family residential parcels (including condominiums). It is for this reason local business communities are often supportive of parcel taxes because the tax burden on commercial parcels, especially large commercial parcels, is very low. Business interest groups in California such as the Bay Area Council, the Silicon Valley Leadership Group, and the Los Angeles Area Chamber of Commerce frequently support parcel taxes that disproportionately burden single-family residential parcels.

Singling Out Property Owners

Significant fairness issues associated with parcel taxes also arise concerning the appropriateness of singling out property owners to bear the additional tax burden for financing some public services and programs, especially those services and programs that provide general benefits to the community at large (other than property owners) or benefits to nonresidents of a community who may pay little or no taxes to the local government.

Tax Burden Versus Benefits

Parcel taxes also don’t legally require any relationship between the tax amount paid (or the ability to pay) and the benefits received. As a result, it is up to local voters in a parcel tax election to carefully weigh and evaluate the merits of any parcel tax proposal.

In some instances, other types of taxes may be more equitable. In other instances, other financing mechanisms may be more appropriate to finance all or part of the public services or improvements under consideration. For example, special assessments on real property are appropriately used to finance public services and improvements that specially benefit property above and beyond benefits received by the community at large. This is particularly appropriate where a small number of parcels, such as large commercial (business) parcels, receive special benefits not shared by the rest of the community.

Cumulative Tax Burden

Local voters must also consider the cumulative tax burden associated with a specific parcel tax proposal. Some parcel tax proposals may be relatively modest in amount but when added to the other parcel levies that already appear on the property tax bill would add to a cumulative tax burden that may already be unacceptable to many property taxpayers (especially homeowners). Furthermore, passage of a parcel tax establishes political precedent that can lead to additional and often more expensive parcel tax measures in the future by the same or other local governments in the area.

Parcel Tax Taxpayer Tool

As part of its "Taxpayer Tools" publication series, the Howard Jarvis Taxpayers Association has released a publication to assist voters and taxpayers in defeating parcel tax measures placed on the ballot by a local government in California.

K-12 School Parcel Taxes

Research has shown that California school districts able to pass parcel tax measures tend to be more prosperous and to have lower percentages of minority students than those where parcel tax measures failed, or were never proposed. For example, in Oakland, California, where 68.5% of the students qualify for free lunch programs, property owners pay a $195 annual parcel tax while in its enclave Piedmont, where 0.3% of students qualify for free lunch programs, owners pay at minimum a $1,200 annual parcel tax. Over 80% of school districts with voter-approved parcel taxes are in the relatively wealthy San Francisco Bay Area.

The preceding also raises significant school funding equity issues under the California Supreme Court Serrano decisions. The Serrano cases did not specifically address the legality of K-12 public education parcel taxes because such taxes did not exist at that time.

Parcel Tax Reduction or Repeal Using Proposition 218

Proposition 218 (1996) ("Right to Vote on Taxes Act") constitutionally reserves to local voters the right to use the initiative power to reduce or repeal any local tax, assessment, fee or charge, including provision for a significantly reduced petition signature requirement to qualify a measure on the ballot. A local initiative under Proposition 218 can target for reduction or repeal local government parcel taxes, especially in situations where major tax fairness issues are present in a particular community.

A local initiative under Proposition 218 could also be pursued as a tie-in initiative that would tie the continued imposition of a parcel tax to satisfaction of specified conditions. For example, a local initiative could attach an annual matching contribution condition whereby a parcel tax would be reduced or repealed if the specified annual matching contribution condition is not satisfied. A matching contribution condition is intended to leverage additional financial support as well as to demonstrate a strong financial commitment to the purposes for which the parcel tax is imposed, especially from those interests who promoted the parcel tax. Matching contributions typically come from the private sector in the form of voluntary payments such as from the local business community. This approach is particularly appropriate in places like Los Angeles County and the Silicon Valley where the local business community tends to be big supporters of tax increases that disproportionately burden ordinary taxpayers, such as parcel taxes, but generally opposes tax increases on the business community for the same public purposes.