SR-100-002 (15)
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Mike_D user 2 45 2003-03-17T23:13:00Z 2003-03-18T17:50:00Z 2003-03-18T17:50:00Z 3 646 3687 City Of Santa Monica 30 7
Council Meeting: March 25, 2003
Santa Monica, CA
TO:
Mayor and City Council
FROM:
City Staff
SUBJECT:
Recommendation for Inclusion of Santa Monica in AB 1412 which Seeks State Legislative Authority to Allow City Voters to Increase the City’s Sales Tax Rate, and Advocate for Passage
of the Bill
Introduction
This report recommends that the City Council authorize City staff to seek inclusion of the City of Santa Monica in AB 1412.
This bill seeks State legislative authority to allow local voters to increase a city’s Sales tax rate .25% or .50%.
This action simply makes it possible to more closely examine the implications of a local Sales tax rate increase.
It does not commit the City Council to this course of action.
Upon obtaining State legislative approval, the City Council could then determine if the revenue measure was prudent and should be submitted to the City’s voters.
Background
On February 25, 2003, in conjunction with the Mid Year Budget Report, staff
advised Council that due to a continued deterioration of economic factors the projected General Fund budget deficits for FY 2003/04 and 2004/05 had increased to $ 11.2 M and $ 21.3
M, respectively.
If not corrected by increasing on going revenues and/or reducing on going expenditures, these deficits would increase to almost $ 30.0 M by FY 2007/08.
These projected budget deficits do not include additional possible City revenue losses due to adverse State action associated with closing the State’s massive budget deficit for FY
2003/04 and/or adverse economic impacts due to a possible war with Iraq.
On January 14, 2003, the Council directed staff to develop a Proposed Budget for the next two years that maintains the City’s fiscal integrity and to consider revenue-raising strategies
that are fair and not unduly burdensome to small businesses.
Following this direction, staff has identified an additional revenue increase strategy.
Under the provisions of the State Transactions and Use Tax law, it is possible for the voters of a local government to increase the local Sales Tax rate by .25% or .50% applied to
all applicable sales transactions occurring within its jurisdictional limits.
The first step in the process to increase a local Sales Tax rate is action by the State legislature to grant the City specific authority to do so.
Assembly Bill 1412 has recently been introduced to authorize 32 cities, including the cities of Los Angeles, West Hollywood and Beverly Hills, to increase their local Sales Tax rates.
The City of Santa Monica can be added to AB 1412 through coordination with the author and Assembly member Fran Pavley.
Though the bill is a convenient vehicle for the first step to a Sales Tax rate increase, it is not certain that it will pass.
If State legal authority is granted, the City must then submit the matter to the City’s voters at a regularly scheduled general election.
A majority vote would be required if the increased tax would be used to balance the City’s General Fund budget.
A two-thirds vote would be required if the proceeds of the tax increase were earmarked for a specific use.
Budget and Fiscal Impact
Increasing the local Sales Tax rate by .25% to 8.50% would add $ .25/ $ 100 sale and would generate about $ 5.7 M of additional annual revenue, based on projected sales tax revenue
for FY 2003-04.
Increasing the Sales Tax rate by .50% to 8.75% would add $ .50/ $ 100 sale and generate about $ 11.4 M of additional annual revenue.
The magnitude of the rate increase is relatively small and would affect all sales transactions equally.
A portion of the sales transactions occurring within the City’s boundaries would be paid by visitors and shoppers who do not live in the City, but who use City services when in the
City.
It is not possible to accurately estimate what portion of in-City purchases are made by residents versus people who do not reside within the City.
If the City’s Sales Tax rate was increased and the Sales Tax rates in surrounding cities were not increased, there may be some degree of economic incentive for visitors and shoppers
to shift their purchases to locations outside of the City.
It is not possible to accurately estimate the degree of this possible shift.
Recommendation
It is recommended that the City Council authorize City staff to seek inclusion of the City of Santa Monica in AB 1412 and advocate for its passage.
Prepared by: Mike Dennis, Director of Finance