One of the most frequently asked questions from property tax clients is “How can the City generate more property tax revenue?” The conversation usually starts as an inquiry about how they can receive a larger share of the 1% property tax revenue allowed by Proposition 13 than they currently receive. Unfortunately, the portions of this 1% property tax received by a city/special district cannot be altered and were set based on the property taxes the city/special district received in the three years prior to Proposition 13 in 1978. In simple terms, if the city/ special district was receiving 15% of the total tax rate prior to 1978, they received a 15% share of the 1% revenue after implementation of the Proposition 13 1% tax rate.
Cities not levying a tax rate prior to 1978 (or that were levying a very small tax rate) received some relief in the late 1980’s when Tax Equity Allocation (TEA) legislation allowed them to receive 7% of the revenue generated in their city. City revenue shares were eroded in 1993 and 1994 by the Education Revenue Augmentation Fund (ERAF) legislation that diverted a portion of city revenues to fund schools. There is no reason to believe that ERAF is going to be eliminated now or in the future, so what are the options for a city that needs to generate more property tax revenue?
Note: The following options all require voter approval.
Option #1: Parcel Tax or Direct Assessment
A parcel tax cannot be value-based (an Ad Valorem tax), but instead is levied based on the characteristics of a parcel or a flat assessment per parcel. Such taxes are often levied under the Mello-Roos Act and can include those under formation of a community facilities district (CFD). There are two types of parcel taxes: specific purpose and general purpose. A parcel tax levied on parcels within a jurisdiction for a specific purpose (public safety, parks and recreation or library services, for example) requires approval from 2/3 of voters casting ballots in the election. Further, an assessment on any given parcel must be in proportion to the special benefit conferred on that parcel. Thus, the benefit to be received by each parcel within the designated area being taxed must be considered.
A parcel tax proposed for a general purpose requires a simple majority of voters. Most of the parcel taxes currently taken to voters are for a specific purpose under the assumption that it is easier to receive voter support when the voters know and approve of the uses to which the new revenue is being put.
Option #2: General Obligation Bonded Debt
General obligation bond measures may be passed to pay for bonded debt with a property tax debt override tax rate that is above the 1% general rate. Once approved, bonds are issued and the debt service on the bonds is repaid from the revenue generated by the tax levied by the city. These bonds are often for equipment or infrastructure. The 2/3 vote threshold is in play because the bonds are issued to fund specific projects. The flow chart below can help navigate the voter requirements of various tax types.
Option #3: Property Transfer Tax
A Transfer Tax is a tax levied on transfers of property and is a certain rate charged per $1,000 of transferred value. Most cities receive a Documentary Transfer Tax (DTT) of $0.55 per $1,000 of transferred value. This is half of the $1.10/$1,000 of transferred value charged on behalf of each county. Only charter cities have the ability to levy a Property Transfer Tax rate of their own. If a charter city receives voter approval to levy its own Property Transfer Tax rate, the county will receive the entire county rate of $1.10/$1,000 of transferred value. The percentage of voters required to pass the tax depends on whether the revenue will be used for a general purpose (simple majority) or specific purpose (2/3 of vote required). Charter cities have had good success getting these types of taxes passed in recent years.
Again, these options all require voter approval. Each jurisdiction must assess their voting public and decide if a tax is palatable enough to pass. It is common for cities to mount campaigns to educate voters on the benefits of proposed new revenues and the possibly imposed costs to the city if these added revenues are not approved. If your agency would like assistance estimating what a parcel or real estate transfer tax would generate or whether rates would be reasonable for residents, please contact Nichole Cone at ncone@hdlccpropertytax.com.