Tuesday, November 20, 2012
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S.C. Rules for Cities in Tax Collection Dispute With County
By a MetNews Staff Writer
Los Angeles County wrongfully withheld millions of dollars of local tax revenue from cities, the California Supreme Court ruled yesterday.
In a unanimous decision, the court affirmed a ruling by this district’s Court of Appeal in favor of 47 cities who sued in 2008. The cities claimed that the county—which is required to collect local property taxes and disburse the revenues to cities, special districts, schools, and other entities—violated statutory requirements.
Some of these property taxes are to be allocated to each county’s Educational Revenue Augmentation Fund, a state-created fund that reallocates portions of local property tax revenue to fulfill the state’s constitutional obligation to fund education at specified levels.
In order to cover the costs of administering the property tax system, counties are authorized by statute to impose on each city or other entity within its borders an administration fee based on a proportional amount of the property tax revenue allocated to the city or other entity. Revenues allocated to the ERAF are, however, exempt from this fee.
In 2004, in order to fund various gaps in the state budget, the California legislature enacted two measures that diverted local property tax revenues that would normally have been deposited into ERAF.
‘Triple Flip’
One of those measures was Revenue and Taxation Code Sec. 97.68, which enacted a so-called “Triple Flip” in response to voter approval of Proposition 57, also known as the California Economic Recovery Bond Act. That measure allowed the state to sell up to $15 billion in bonds to close its budget deficit.
In the first “flip,” 0.25 percent of local sales and use tax revenues are diverted to the state for bond repayment.
In the second “flip,” the lost local sales and use tax revenues are replaced by property tax revenue that would have been placed in the county ERAF but are instead set aside in a Sales and Use Tax Compensation Fund established in each county’s treasury.
In the final “flip,” any shortfall to schools caused by the reduction of funds to the county ERAF is compensated out of the state’s general fund.
The second measure, Sec. 97.70, became known as the “VLF Swap.” It diverted property tax revenue to a Vehicle License Fee Property Tax Compensation Fund. This diverted property tax revenue which otherwise would have been allocated to each county’s ERAF, was to each city in lieu of revenue they would otherwise have lost when lawmakers reduced the vehicle license fee from 2 percent to 0.65 percent of a vehicle’s market value.
After the enactment of these measures, the county included in its calculations of the administration fee to be imposed on its cities and entities the tax revenue which had been earmarked for the ERAF but was diverted by the 2004 measures.
ERAF Funds
Beginning in fiscal year 2006-2007, Los Angeles stopped treating the property tax revenues diverted by the Triple Flip and VLF Swap as ERAF funds exempt from the property tax administration fee. As a result, the county withheld from the plaintiff cities an additional $4.8 million as property tax administration fees for fiscal year 2006-2007 and an additional $5.3 million for fiscal year 2007-2008, even though its actual annual cost of administering the Triple Flip and VLF Swap for all 47 cities was approximately $35,000.
The cities argued to the court that the county was authorized to charge only the $35,000 actual annual cost of administering the Triple Flip and VLF Swap
The high court, in its opinion yesterday by Chief Justice Tani Cantil-Sakauye, agreed with the Court of Appeal, saying:
“[The] [c]ounty should be no better, or worse, off in recouping its costs of property tax administration as a result of the adjustments required by those 2004 budgetary measures… A contrary interpretation of the relevant statutes would permit the statewide multimillion-dollar annual shift of property tax revenues from the cities to the counties and would run afoul of the implementing statutes for the Triple Flip and VLF Swap...”
Michael G. Colantuono of Colantuono & Levin argued the case on behalf of plaintiffs. Scott D. Bertzyk of Greenberg Traurig argued on behalf of defendants.
The case is City of Alhambra v. County of Los Angeles, S185457
Copyright 2012, Metropolitan News Company