News & Insights

How to Increase California Taxes

Tax Development Jul 10, 2020

The California Court of Appeals ruled in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C.Over the years, Californians have passed legislation that requires a two-thirds majority vote to enact tax increases. Proposition 13 enacted in 1978, proposition 218 enacted in 1996, and most recently Proposition 26 enacted in 2010 all require a two-thirds majority for the Legislature or local governmental agencies to increase taxes. Ironically, this supermajority constraint does not apply to citizen-initiated propositions in general elections.

The California Court of Appeals determined in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C 1 that the majority rule contained in the voter initiative provision of the California Constitution2 overrides the supermajority vote requirements that were added to the California Constitution by Proposition 13 and 218. The voter initiative power was incorporated into the California Constitution in 1911. The Court noted that this power was not granted to the people but is considered a right retained by the people. In contrast, the initiatives to limit the power of government to tax, contained in Proposition 13 and Proposition 218, are restrictions on the government but do not restrict the voters.

The Court’s decision often cites the California Supreme Court’s decision in Kennedy Wholesale, Inc. v. State Board of Equalization3 (“Kennedy Wholesale”). Kennedy Wholesale was a constitutional challenge to an increase in state tobacco taxes under the 1988 initiative Proposition 99. In that case, the plaintiff, a tobacco distributor, challenged the tax increase based on the change to the California Constitution pursuant to 1978’s Proposition 13.4 That change required a two-thirds majority vote of the Legislature to enact any tax increases. The Kennedy Wholesale court emphasized that when provisions are in conflict, it is the court’s obligation to harmonize the provisions, if possible. It noted that the “law shuns repeals by implication.”5

With those principles in mind, the Appellate Court found that the supermajority, two-thirds, restrictions that limit tax increases do not apply to voter-initiated tax increases. Thus, the court affirmed the trial court’s opinion and upheld Proposition C, “Additional Business Taxes to Fund Homeless Services.” It is likely this case will be appealed to the California Supreme Court. In addition, two other cases are pending challenging voter initiatives to increase taxes. City and County of San Francisco v. All Persons Interested in the Matter of Proposition G and City and County of San Francisco v. All Persons Interested in the Matter of Proposition C. The first is a case that deals with a parcel tax to fund increases in teacher salaries for the San Francisco Unified School district. The second case involves a gross receipts tax on commercial rents. Both of these cases are before the California Court of Appeals.

1 City and County of San Francisco v. All Persons Interested in the Matter of Proposition C, Court of Appeals, First Appellate District, Division Four, A158645, June 3, 2020.
2 California Constitution, Article II, Section 1.
3 Kennedy Wholesale, Inc. v. State Board of Equalization, 53 Cal. 3d 245 (1991).
4 California Constitution, Article XIII A, Section 3.
5 Kennedy Wholesale, supra, 53 Cal. 3d, p. 249.

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Mark L. Nachbar
Principal
Ryan
213.627.1719
mark.nachbar@ryan.com

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