The 5 Supermajority Tax Challenges Facing California

(This article originally was published by Law360 on July 22, 2019.)

On July 5, the San Francisco Superior Court issued a pair of rulings in favor of the city and county of San Francisco, finding that two local special taxes introduced by voter initiatives were valid even though they passed with a simple majority vote and not a two-thirds supermajority vote.

These taxes are jointly projected to raise as much as $500 million in annual tax revenue for the city to fund special homelessness and childcare initiatives. These are the first decisions in a wave of closely watched litigation challenges in California following the California Supreme Court’s August 2017 opinion in Cannabis Coalition v. City of Upland.1

The Upland case sparked debate calling into question whether the longstanding requirement in the California Constitution that local special taxes must be passed with a two-thirds supermajority vote apply to local special taxes introduced by voter initiative like measures introduced by a mayor or local board of supervisors.

In February we analyzed the Upland decision, the over 40-year history of California’s two-thirds supermajority voting requirement for passing local special taxes, and an introduction to the first five post-Upland litigation challenges, including the two city actions at issue in the July 5 rulings. This article provides an update on the status of these five supermajority tax challenges.

Proposition C (San Francisco Nov. 6, 2018, Ballot)
The San Francisco Gross Receipts Tax for Homelessness Services Initiative passed with a 61.34% vote.

This initiative authorizes a gross receipts tax on businesses’ San Francisco gross receipts above $50 million at rates between 0.175% to 0.69% depending on the business activity type, or an annual homelessness administrative office tax on businesses with administrative offices in San Francisco, at least $1 billion in gross receipts, and at least 1,000 employees nationwide at a rate of 1.5% of payroll expenses.

Revenue received by this tax would fund the Our City, Our Home Fund, and be used for specified purposes dedicated to combating homelessness in San Francisco.

On Jan. 28, the city and county of San Francisco filed a complaint for validation2 with the San Francisco Superior Court seeking to validate the tax.3

In one of the July 5 rulings, the San Francisco Superior Court issued a 13-page decision that relied heavily on the Upland opinion and concluded that neither the California Constitution nor the San Francisco City Charter mandated a supermajority vote for the valid passage of a tax introduced by voter initiative.4

The court reasoned that California Constitution Article 13 C, Section 2(b), addressed in Upland, “employ[ed] parallel and nearly identical language” to Article 13 C, Section 2(d), that was also added in 1996 by voter initiative Proposition 218. Article 13 C, Section 2(d) provides: “No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote.”5

Specifically, the court stated that “[c]ritically, they share the common term ‘local government,’ which the Supreme Court [in Upland] squarely held is not ‘broad enough to include the electorate.’”6 The court then asserted “the balance of the Court’s reasoning in [Upland] applies equally here, and supports the same conclusion.”7

The court also directly addressed the following quote from Upland, which many believe was an express acknowledgement by the California Supreme Court that the voters who introduced and passed Proposition 218 intentionally imposed a procedural supermajority voting requirement on themselves in all circumstances, including local special tax measures introduced by voter initiative:

When an initiative’s intended purpose includes imposing requirements on voters, evidence of such purpose is clear. In [Article 13 C, Section 2(d)], for example, the enactor adopted a requirement providing that, before a local government can impose, extend, or increase any special tax, voters must approve the tax by a two-thirds vote. That constitutes a higher vote requirement than would otherwise apply. That the voters explicitly imposed a procedural two-thirds vote requirement on themselves in [Article 13 C, Section 2(d)] is evidence that they did not implicitly impose a procedural timing requirement in subdivision (b).8

The court called this quote “ambiguous dictum” at best, and stated “this language appears to imply that the voters imposed the two-thirds voting requirement on themselves only with respect to taxes placed on the ballot by local government (e.g., in San Francisco, by the Mayor or the Board of Supervisors).”9

The court dispensed with the rest of the arguments made in opposition to the city, including arguments pertaining to:

  • Another constitutional provision (Article 13 A, Section 4 — Proposition 13), which the court reasoned “does not apply to taxes by voter initiative” in a similar manner to Article 13 C, Section 2(d);
  • The San Francisco Charter, which the court stated is readily dismissed because there was no clear indication that a two-thirds supermajority voting requirement placed on the Board of Supervisors was also intended to apply to the electorate;
  • The prevailing understanding for decades—including in two Court of Appeal opinions from 1987 and 1993—that the two-thirds supermajority requirement applied to all local special taxes, which the court ultimately concluded were inapplicable because they did not directly address the subject issue, and “[i]n any event, of course, both cases long predated the Supreme Court’s 2017 decision in Upland”; and
  • The fact both Propositions 13 and 218 were themselves adopted under the exercise of initiative power, requiring strict enforcement of the two-thirds requirement to advance the goal of protecting voters’ initiative rights, which the court stated “actually undercuts rather than advances Defendants’ position” because no “use of clear and unambiguous language” was used regarding the application of the requirement to the initiative power.10

The next step for this dispute is an appeal to the California Court of Appeal for the First District.11 In terms of timing, a notice of appeal is anticipated to be filed with the trial court by defendants within 60 days of the July 5 order.12

Proposition C (San Francisco June 5, 2018, Ballot)
The Universal Childcare for San Francisco Families Initiative passed with a 50.87% vote.

This initiative authorizes a gross receipts tax on the lease of commercial property for landlords with annual gross receipts over $1 million. The tax imposes a 1% rate on gross receipts for warehouse space and 3.5% on gross receipts for other commercial properties to fund childcare and early education programs.

In August 2018, an action was filed with the San Francisco Superior Court to invalidate this tax by, among others, the Howard Jarvis Taxpayers Association.

In this second July 5 ruling, the same San Francisco Superior Court held in favor of the city, again relying heavily on Upland.13 About half of the decision addressed arguments identical to or similar to those addressed in the other action.

The court then spent the balance of the decision addressing and rejecting an argument that the tax at issue was not a true citizens’ initiative, but rather an act of gamesmanship perpetuated by the San Francisco Board of Supervisors and the initiative’s proponent, Supervisor Norman Yee, to sidestep the two-thirds supermajority voting requirement.14

Facts supporting this argument include the Board of Supervisors previously considering a closely similar if not identical initiative, Yee being the initiative’s proponent, and Yee’s purported use of his position and resources as a supervisor to place the initiative on the ballot.15

The court rejected this argument in a relatively aggressive fashion, calling it “legally and factually meritless,” with no supporting pertinent authority, and even included a footnote disapproving of the plaintiffs’ “attacking the motives and good faith of Supervisor Yee and the entire Board of Supervisors,” while characterizing their arguments as “intemperate political rhetoric, which has no place in contested litigation involving important issues. A lawsuit is not an election campaign.”16 The court summarized:

That the proponent of Proposition C happened to be a member of the San Francisco Board of Supervisors, Supervisor Norman Yee, or that he allegedly used his title or City resources to advance the initiative, does not somehow transform a citizens’ initiative into a legislative petition. Nor does the fact that other members of the Board of Supervisors had previously considered a similar proposed legislative initiative, or that they expressed their support for Proposition C by signing the proponent’s argument in the Voter Information Pamphlet.17

While rejecting this argument, the court also addressed the Supreme Court’s discussion in Upland of a hypothetical situation in which a city council “could conceivably collude with a public employee union to place a levy on the ballot as a means of raising revenue for a goal supported by both,” and then adopt the ordinance without submitting it to the voters.18 The court swiftly discarded the discussion because it was “not what occurred here and because the [Supreme Court in Upland] declined to address how it would decide the issue.”19

The next step for this dispute is also an appeal to the California Court of Appeal for the First District, and a notice of appeal has already been filed.

Proposition G (San Francisco June 5, 2018, Ballot)
A school parcel tax initiative also passed on the city’s June 2018 Ballot, with a 60.76% vote.

This initiative authorizes an annual parcel tax of $298 per parcel of taxable real property in the city for 20 years to fund the San Francisco Unified School District’s educators’ salaries, staffing, professional development, technology, charter schools and oversight of funding.

In September 2018, the city and county of San Francisco filed a complaint for validation of the tax with the San Francisco Superior Court.

The same trial court that issued the July 5 pair of rulings is set to hear a dispositive motion in this matter on Aug. 16.

Oakland’s Measure AA
Oakland, California’s Measure AA is a parcel tax increase to fund early childhood education programs, and passed with a 62.47% vote in November 2018. The tax imposes a $198 tax per parcel for 30 years. A group including homeowners and landlords filed suit on Feb. 1 in the California Superior Court of Alameda County, arguing the certification of Measure AA by Oakland was illegal.

On April 16, the Oakland City Council voted 5-2 against collecting the Measure AA tax in the first year, 2019.

The litigation is not set for trial and no dispositive motions are currently pending. The next hearing on the court docket is a case management conference scheduled for Aug. 9.

Fresno’s Measure P
Fresno, California’s Measure P is a 0.375% sales tax increase for 30 years to fund city parks, recreation, streets and arts. It passed with a 52.17% vote, but the city determined that because it was a special tax, it did not pass. The nonprofit Fresno Building Healthy Communities filed suit against the city on Feb. 1 in the Superior Court of Fresno, arguing a two-thirds supermajority vote was not required. The Fresno City Attorney filed suit on the same day seeking a determination on the correct vote requirement for the measure.

The plaintiffs have filed a dispositive motion that is set to be heard by the California Superior Court of Fresno on Aug. 6.

If one thing is certain about these challenges and their relatively swift continuous developments, this saga is sure to continue, likely leading to the Upland sequel from the California Supreme Court in due time.

1 Upland (2017) 3 Cal.5th 924.

2 Statutory guidance on validation actions can be found at California Code of Civil Procedure §§ 860, et seq.

3 San Francisco Controller Ben Rosenfield has frozen revenues received from this tax as a result of the legal dispute regarding the vote requirement for the measure’s passage. In response, and in an effort to be able to appropriate and spend these tax revenues as soon as possible, Mayor London Breed and Supervisor Vallie Brown introduced an ordinance adding two provisions to San Francisco’s Business and Tax Regulations Code, providing for an effective 10% tax credit in exchange for either a taxpayer’s irrevocable gift to the Our City, Our Home Fund, or a taxpayer’s irrevocable agreement not to seek refunds of the amounts remitted on the tax in the event it is later invalidated.

4 July 5 Order on Cross-Motions for Judgment on the Pleadings in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C on the November 6, 2018 San Francisco Ballot.

5 Id., p. 7.

6 Id.

7 Id.

8 Upland, at 943. Citations omitted.

9 July 5 Order on Cross-Motions for Judgment on the Pleadings in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C on the November 6, 2018 San Francisco Ballot, supra, p. 9.

10 Id., pp. 9-13.

11 The California Courts of Appeal are divided into six appellate districts, based on geography. The Upland opinion went through the Fourth District California Court of Appeal before reaching the California Supreme Court.

12 After the notice of appeal is filed with the trial court, it will be sent to the Court of Appeal, and the court reporter will prepare the transcript for appeal. Once the record on file is complete, briefing between the parties and potential amici curiae will likely take place over the course of the following three to six months. Then oral argument will be scheduled, followed by the hearing and then the issuance of the opinion. All said, the appellate process typically takes between several months and a few years, though this particular appeal may be on the more expedited side as it is entitled to calendar preference.

13 July 5 Order on Cross-Motions for Summary Judgment in Howard Jarvis Taxpayers Association, et al., v. City and County of San Francisco and All Persons Interested in the Matter of Proposition C of the June 5, 2018 San Francisco Ballot.

14 Id., pp. 9-15.

15 Id., p. 9.

16 Id., p. 9, p. 11, fn. 5.

17 Id., p. 11.

18 Id., p. 14, fn. 7; Upland, 3 Cal.5th at 947.

19 July 5 Order on Cross-Motions for Summary Judgment in Howard Jarvis Taxpayers Association, et al., v. City and County of San Francisco and All Persons Interested in the Matter of Proposition C of the June 5, 2018 San Francisco Ballot, supra, p. 14, fn. 7.