November 18, 2016

Special taxes and California's housing crisis

By Damien M. Schiff Senior Attorney

Yesterday, we filed our petition for review in Building Industry Association – Bay Area v. City of San Ramon, a challenge to a landowner-vote-approved tax pursuant to the Mello-Roos Act. Under the Act, taxes that are approved by a community facilities district created by landowner vote, and that will be used to pay for municipal services, can only be used to pay for services that are “in addition to” pre-existing services and that do not “supplant” those pre-existing services. The city’s tax, however, will be used to pay merely for the cost of meeting an increased demand for existing services. In other words, future residents of the city’s community facilities district who will pay the tax will receive no additional service. Instead, they will receive the same menu of standard municipal services that all city residents receive, even those who do not pay the special tax (which can cost from about $450 to $750 per year). Last month, the California Court of Appeal upheld the city’s tax, reasoning that the city provides an “additional” service merely by meeting increased demand for pre-existing services. Our petition for review argues that this interpretation essentially eliminates an important safeguard against tax abuse.

Also, our petition asks the high court to review the court of appeal’s affirmance of the city’s tax levying ordinance. The ordinance provides that, if the special tax is repealed by initiative or other action participated in by the tax-paying residents, the city not only will stop providing the facilities and services paid for by the tax, but also will shift the financial burden of providing those facilities and services—including, presumably, any bonded debt—to the tax-paying property owners. Our petition argues that this enforcement scheme is unconstitutionally retaliatory against the exercise of property owners’ rights to initiative and judicial redress of grievances.

At the policy level, our petition contends that the court of appeal’s decision threatens to exacerbate the state’s housing crisis. Allowing local governments to levy significant taxes without obtaining residents’ voter approval inevitably adds to the cost of housing. Moreover, the city’s special tax program focuses on new development that will not “pay for itself” through the normal property tax system, which is based mainly on the assessed value of the property. Naturally, projects geared toward lower-income families will be precisely the ones most likely to be subject to the city’s tax, making such projects even less attractive to build.

The state supreme court likely will decide whether to hear the case some time early next year.

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