Looming Local Taxes Could Force Many Employers to Close Forever

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By CalTax Policy and Communications Associate Dustin Weatherby

Californians rejected 142 of 237 local tax and bond measures on the March ballot. Normally, this would suggest that voters are signaling that taxes are too high, giving pause to local leaders contemplating tax hikes this fall.

However, everything has changed. With the COVID-19 global pandemic’s impact on business and employment, many local governments are contemplating higher taxes to address their fiscal challenges.

Rather than enjoying the continued record economic expansion and growing tax bases, cities, counties, schools, fire districts and other special districts throughout California will be facing dire budget challenges, and many have announced they are exploring the possibility of putting tax increases on the November ballot.

While voters historically support their local governments when asked to raise revenue, the March election raised questions about whether voters can afford higher taxes when their own household budgets are taking a hit. This strain on household budgets has only increased in the weeks since that election, which was held prior to the statewide stay-at-home order.

Since 2008, voters around California approved 2,249 of the 3,142 tax and bond measures on local ballots, according to data compiled by the California Taxpayers Association. That is on top of the statewide tax and bond measures that provide money for schools, climate protection programs and other worthy causes.

In total, voters approved $4.54 billion in annual local taxes and $124.3 billion in local bonds during this period – and these figures only include data from elections where local governments provided the voters with a transparent estimate of how much additional funding they would be raising.

With the pandemic’s full economic impact yet to be fully understood, it would be easy to think that because of all the new tax revenue approved by voters in recent years, local governments are well-positioned to weather a fiscal storm. Unfortunately, this isn’t necessarily true.

The League of California Cities says “revenue growth from the improved economy has been absorbed by pension costs.” The group reported that pension costs will increase more than 50 percent by fiscal year 2024-25, reaching “unsustainable levels.”

The California Public Employees’ Retirement System (CalPERS) was only 71 percent funded for fiscal year 2018-19, with $372.6 billion in the fund – far short of the estimated fully funded level of $524.7 billion. Collectively, schools and local jurisdictions paid $8.9 billion in contributions while the state contributed another $6.7 billion, for a total of $15.6 billion in taxpayer contributions annually.

When the fund loses money, local governments are required to contribute more. With the market crash from the COVID-19 economic shutdown, the fund dropped to $339 billion, down to approximately 60 percent funded, meaning the system needs approximately $200 billion more to fully fund pensions.

With increased pension payment on the horizon, and the League of California Cities estimating cities will lose $7 billion in general fund tax revenue over the next two fiscal years due to the COVID-19 recession, tough choices will have to be made.

The Legislature is considering proposals to lower the two-thirds vote threshold for special taxes, with the goal of making it easier for local governments to pass taxes in addition to taxing soda, nicotine and even jobs. On top of that, special interests are backing an initiative that would undo many protections provided by Proposition 13, increasing property taxes through frequent reassessment of commercial and industrial properties. Those tax increases will be passed on through higher consumer costs and rent increases that disproportionately harm small businesses, especially those owned by women and minorities.

With thousands of businesses forced to close their doors and some local jurisdictions threatening fines and jail time for businesses that don’t shutter – and unemployment reaching 25 percent as millions of Californians lose their jobs – now is not the time to make California even less affordable for the very people and businesses hit hardest by the pandemic.

Higher local taxes could mean that for the most vulnerable employers and workers, California never reopens.