A Proposal to Increase California School District Autonomy and Funding Through Parcel and Mello-roos Tax Reforms

• Jurisdiction: California,United States
• Author: By Darien Shanske & Saba S. Shatara
• Citation: Vol. 28 No. 1
• Publication year: 2019

A Proposal to Increase California School District Autonomy and Funding Through Parcel and Mello-Roos Tax Reforms

By Darien Shanske¹ & Saba S. Shatara²

EXECUTIVE SUMMARY

This proposal provides a path for the California Legislature to address two interconnected problems. First, California's current tax system makes it difficult for local voters to increase local taxes used for school operations. The Legislature may seek to empower local voters to address this issue directly. Second, due to the new cap on the State and Local Tax ("SALT") deduction at the federal level, any attempt to mitigate this first issue through the imposition of new local taxes may increase the tax liability for some of the same taxpayers who will be paying more in federal taxes because of the cap.

California's property tax limit (Proposition 13) does not permit local voters to override its property tax limit to increase funding for school operations. California Government Code Section 50079 provides some relief in that any school district may impose a parcel tax within the district. As a matter of California constitutional law, a parcel tax is a type of "special tax." As a matter of statutory law, parcel taxes are "taxes that apply uniformly to all taxpayers or all real property within the school district." In Borikas v. Alameda Unified Sch. Dist., 214 Cal. App. 4th 135 (2013), the Court determined that "uniform" in this context meant that school districts cannot apply differentiated rates of parcel tax dependent on the size or type of parcel.

Should the Legislature determine that changes in this statute (and another similar tax statute) are necessary to enhance local control and, likely, raise additional local funds for public education, the following paper discusses proposals to accomplish such actions.

With respect to the potential impact of the federal cap on the SALT deduction, this proposal puts forth a partial income tax credit to be offered by the state. This credit is likely to be most attractive to those taxpayers particularly impacted by the SALT cap. Finally, we will explain how the proposals can be designed so as to address equity concerns, given that not all districts will likely be able to take advantage of the new funding authority equally.

I. INTRODUCTION

California's system for financing public education is a very complicated patchwork and one that has limitations across multiple dimensions. Furthermore, California's public school system is highly decentralized. This creates higher costs, and yet school districts are not empowered to make the kind of crucial decisions that could address these costs.

II. PRIMARY PROBLEM: ACHIEVING MORE LOCAL CONTROL OF FINANCING FOR SCHOOL DISTRICT OPERATIONS

California aspires to provide a high-level of funding to K-14 education; an aspiration to be in the top 10 states in terms of funding is written into the Constitution.³ However, even after years of funding increases, California's per pupil funding is still below the national average.⁴ Given that this is where California educational funding has arrived at after a long economic expansion, the California Legislature may wish to consider alternative revenue streams.

Furthermore, California's government structure contains manifold commitments to the value of local autonomy. Indeed, many scholars have endorsed the value of "subsidiarity"—the principal that social and political issues should be dealt with at the most immediate level that is consistent with their resolution. Further, California believes in the benefits of local control, as may be seen by its institution of over 1,000 school districts. Indeed, this is the whole premise of the shift to the Local Control Funding Formula. Thus, even if an increase in local control over taxes raised no additional revenue, the Legislature

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many feel that taking this action is in line with California's ideals and goals for greater decision-making power to be shifted to those who have the most at stake and the most knowledge of what is needed.

A. Proposition 13 as a Method of Funding California Schools

In 1978, California's Proposition 13 set a cap on property tax rates of one percent, as well as on the increase in property tax rates of two percent, and provided no means for a local community to override the property tax rate cap.⁵ In short, Proposition 13 reduced the property tax dramatically (the previous average rate was two and one half percent of current value)⁶ while providing no method for increasing funding to schools in districts where the voters were willing to spend more. The effects of this loss of local control would be mitigated if school districts could be made whole through other means. This could also assist the state with its goal of raising sufficient supplementary revenue to place California on par with an average spending state.⁷

Other states provide alternative models for preserving local control and capping property taxes. Consider Massachusetts's Prop 2 ½, which was inspired by Proposition 13. Prop 2 ½ has a higher rate of cap of two and one half percent, a higher inflation cap two and one half percent, but still permits local overrides with a majority vote.⁸ Thus, Prop 2 ½ imposes limits on the property tax while providing a safety valve which simultaneously providing for local control.

While Proposition 13 has occasionally been amended to permit overrides of its tax rate cap, this has only been for capital projects. For instance, in 1986 (Prop 46), the voters permitted a two thirds supermajority of those voting in a local election to increase property tax in order to reduce California debt.⁹ In 2000 (Prop 39), the voters permitted school districts to approve debt for capital projects with only a fifty five percent, subject to certain conditions.¹⁰ The primary condition is that the expected increase in local taxes not be higher than a certain percentage amounts. The reduction in vote threshold has been associated with a dramatic increase in approved local school bond measures.¹¹

B. The Parcel Tax as a Partial Remedy

As Proposition 13 only caps property taxes, school districts have used parcel taxes as the primary method to raise additional funding for operations. Should the Legislature be so inclined, the following provides a brief description of California's parcel tax, the current constraints on use of the parcel tax to increase funding to school districts, efforts to address those changes, and a proposal for maximizing the benefit of the parcel tax for use by school districts.

1. The Parcel Tax: Background

Proposition 13 only caps property taxes; it subjects "special taxes" to a supermajority vote.¹² Parcel taxes are a kind of special tax. The authority for school districts to impose parcel taxes is set by statute. The current statute specifies that:

Subject to Section 4 of Article XIII A of the California Constitution, any school district may impose qualified special taxes within the district pursuant to the procedures established in Article 3.5 (commencing with Section 50075) and any other applicable procedures provided by law . . . As used in this section, "qualified special taxes" means special taxes that apply uniformly to all taxpayers or all real property within the school district . . .¹³

A parcel tax is not considered a property tax under Proposition 13 because it is not a tax based on the value of the property. Though a parcel tax cannot be levied on the basis of value, as this would render the tax a "property tax" under Proposition 13 and hence capped,¹⁴ there is no constitutional barrier to levying a special tax on the basis...