Guest Commentary: City Should Take an Analytical Approach to Next Tax Measure

By Dan Carson

The city’s $49 per parcel tax for parks, which has been approved by voters four times since 1998, expires once again in June 2018 unless extended by the City Council and voters.  The City Council has queued up an early discussion for March 7 to “consider all options” for renewal including the possibility of an increase in the amount of the tax to help fix parks and other city infrastructure.

In January, the Finance and Budget Commission, of which I am vice chair, made clear it was not endorsing a tax increase at this time but spotlighted five key issues the council should examine before getting mired in the details of any tax measure. The full version of the commission’s position statement can be found here, but our main points are these:

1. An analytical assessment of the city’s overall General Fund condition should be the primary factor used to determine the size of a new tax proposal.

Both a commission subcommittee and a consultant retained by city staff are currently developing long-term revenue and expenditure projections intended to recognize now-unfunded liabilities for employee compensation and infrastructure costs and to identify the funding gap that remains.

The revenue and cost assumptions incorporated into these projections should be realistic. Any analysis should also account for the additional revenues the city could receive from economic development efforts, potential financial help from UC Davis to mitigate the impacts of the new long-range campus plan, cost savings from making city government more efficient, and non-tax revenues from the lease or sale of surplus city assets. New taxes should be the last resort to fill any remaining funding gap.

Public opinion surveys may eventually be warranted to determine what Davis citizens would support at the ballot box. But the process should start with an analysis of revenue needs, not what the public is willing to vote for.

2. A well-crafted tax package could help balance the risk of voter rejection of a new parcel tax against the opportunity to more fully meet the city’s critical infrastructure needs.

The council has voiced continued interest in renewing and increasing, for one public purpose or another, the existing parcel tax.  However, such a parcel tax would be subject to two-thirds voter approval. However, while 2014 poll data suggested would such a measure would only have 58% voter support and fail. If such a parcel tax measure lost, it would not only prevent a tax increase from taking effect – it would also cause the loss of the $1.4 million annually now collected for parks.

However, a tax on sugary beverages, an option offered in the past by public health advocates, could be crafted as a general tax measure requiring a majority vote.  If placed on the same ballot alongside a parcel tax increase, it would provide a sort of fiscal insurance policy.  The beverage tax measure, which is far more likely to pass, could partly offset the loss of revenue if a measure increasing the parcel tax failed. If both measures passed, the city would maximize its opportunity to fix its infrastructure.

Whatever approach the council chooses, city policymakers should consider a tax package that balances the opportunities for gaining needed revenue for infrastructure against the risks that voters will reject a parcel tax increase.

3. Any tax package should be accompanied by council actions providing reasonable assurances to voters that the new revenues would be spent as proposed.

One option here is the adoption of “maintenance of effort” language requiring that new taxes earmarked for, say, fixing roads not allow a redirection of resources now budgeted for this purpose. (In other words, no “bait and switches” allowed.) The council could adopt a written plan detailing for voters how tax proceeds would be used, and require formal annual review afterward to make sure that spending promises were kept. Also, this tax measure, like prior ones, could be limited in duration to allow tighter control by the voters.

4. A tax package could be crafted in a way that provides fairer taxation of the Davis community. 

The parcel tax ordinance could be changed to increase tax fairness. For example, if a property owner has four units on a parcel, he or she currently pays the same $49 tax as a single-family homeowner with just one unit. The current parcel tax structure similarly provides a tax advantage to larger commercial and industrial property owners to the disadvantage of small business property owners. Policymakers could revise the parcel tax ordinance to increase the revenue received by the city while simultaneously making the overall tax more fair.

More basic changes are also possible. State law appears to allow other forms of property-related special taxes that would be fairer to many taxpayers than the simple per-parcel tax basis now used by the City of Davis.  Other California agencies apportion taxes based on the square footage of lots and linear street frontage, for example. A revised tax structure could address the longstanding concern in Davis is that owner of large luxury homes pay the same $49 levy as owners of smaller homes.

In apportioning taxes, city policymakers should think about how the proceeds of a tax increase would be used. For example, if a new tax measure were dedicated to streets and roads, shifting to a new tax structure like linear frontage could be equitable. While local businesses might bear larger parcel tax costs under such an approach, the road improvements made possible with these new resources would be of substantial benefit to commerce.

5. A tax package could ensure that revenues from a new tax measure grow in keeping with inflation in infrastructure costs by including provisions that automatically adjust tax rates for inflation.

The current parcel tax amount remains unchanged over time. A new park maintenance tax could be modified to allow the amount of the tax to be adjusted each year in keeping with growth in city infrastructure costs. However, such a change could also bring objections that the tax would become more burdensome.

To sum up, the overall approach the City Council of conducting an early and deliberate review of the city’s 2018 tax options is commendable. It will give council members a chance to delve deeply into tax policy, consider fresh options, and build community consensus for whatever approach it ultimately chooses.

Dan Carson worked for 17 years in the Legislative Analyst’s Office, a nonpartisan fiscal and policy adviser to the California Legislature, retiring in 2012 as deputy legislative analyst.