State Has No Claim on Local Property Taxes : Taxes: The state Constitution and precedent back up L.A. County’s right to the $2.6 billion sought in the ’93 budget.

There is a constitutional crisis pending that will be played out Thursday in the state Court of Appeal and probably no more than a handful of people know about it. That is the day when the court will hear oral arguments in a case brought by the County of Los Angeles against the State of California. The issue is whether the Legislature can expropriate $2.6 billion of local property taxes to fund schools.

The California Constitution and the long history of taxation in this state make it clear that the answer must be “no.”

Although the Legislature is usually regarded as supreme in the field of taxation, its power is subject to restraints found in the Constitution.

* The Constitution contemplates that property taxes will be used for local government purposes only. In 1905, the Legislature created a Revenue and Taxation Commission to study the tax laws. This commission concluded that the state should no longer tax real property (as it was doing at the time), that real property taxes should be reserved for local governments and, if necessary, for schools. In 1910, the Constitution was amended to provide that certain taxes would be reserved to the state and property taxes would be reserved to local government. The 1910 amendment also provided that in cases of necessity, the state itself could impose a property tax. The state has never done so. In 1920, a constitutional provision was added to allow school districts to require their county board of supervisors to impose a property tax to cover the cost of schools.

Thus, before Proposition 13, the Constitution authorized three different property taxes: one for local government, one for schools and one for state purposes, which was never exercised.

In 1978, Proposition 13 limited the property tax to 1% of market value, promptly cutting total property taxes almost in half. In the following year and a half, two significant events occurred: The state took over the responsibility for funding about 70% of the cost of schools and the people enacted another constitutional amendment (the “Spirit of 13”) that required the state to finance any new or expanded programs mandated by the state on local government. Thereafter, if the state wanted to compel counties to use additional property taxes for schools, the state would have to reimburse the counties.

In the 1993 budget, the state did order the counties to use additional property taxes for schools but did not reimburse them. Therefore, the budget must be unconstitutional.

* The Constitution provides that the Legislature may authorize local governments to impose taxes for local purposes only. The Legislature may not authorize local governments to impose a tax for state purposes. The Legislature itself must impose those taxes. There is no question that schools are a “state” purpose.

Since the Legislature cannot authorize local governments to impose a tax for state purposes, it follows that the Legislature cannot take the taxes raised by local governments for state purposes.

* The crux of the problem with this year’s budget is found in Article XVI, Section 8, commonly know as “Proposition 98.” Adopted in 1988, Proposition 98 requires an ever-increasing amount of money to be allocated to public schools. Proposition 98 contains three different “tests” to determine the amount of funding for public schools; whichever test produces the most money for schools is the test that must be adopted.

The question is: What is the source for that funding? State revenues or revenues from local government?

The language of Proposition 98 begins as follows: “From all state revenues, there shall first be set apart the moneys (for schools).” Section (b) states: “The moneys to be applied by the state for the support of school districts (shall be the greater of the three tests).”

It appears that the source of additional funds for schools was intended to be state revenues. The 1993 Budget Act takes $2.6 billion from local revenues to fund schools, and therefore is unconstitutional.

Initially, in the L.A. County case, the court must determine if this is a “political question” in which the court should not get involved or a “constitutional” issue that the court cannot avoid. If the latter, it must then decide which side will prevail. If it decides in favor of local government, don’t stand near a fan in Sacramento.