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Cash-Starved State Should Resist Dining on City Taxes

A new governor would change the political calculus in Sacramento, which may or may not benefit Orange County taxpayers.

August 24, 2003|Steven B. Frates | Steven B. Frates is a fellow at the Rose Institute of State and Local Government at Claremont McKenna College.

One of the more interesting aspects of the current recall election is that it helped force the Legislature and Gov. Gray Davis into ginning up something in the way of a state budget. Unfortunately, the budget is built on assumptions of dubious plausibility, such as the vehicle license tax and projected revenue from sales and income taxes.

What does this mean for Orange County cities? It means that it is quite likely that the Legislature could once again try to balance its budget on the backs of cities and counties.

Of course, if Davis is recalled, this situation could change rapidly, depending on who replaces him.

A new governor would change the political calculus in Sacramento, which may or may not benefit Orange County taxpayers.

In any case, the current state budget may need substantial revisions in the coming year.

When the Legislature and former Gov. Pete Wilson faced a financial crunch in the early 1990s, their solution was to strip property tax revenue from cities and counties and give that money primarily to school districts.

Cities responded by striving to develop a larger sales tax base and by charging fees for more municipal services.

How vulnerable are Orange County cities to raids on property tax and sales tax revenue?

The answer is that it varies tremendously from city to city. A couple of Orange County cities still have a healthy property tax base. As recently as fiscal year 1999-2000 (the most recent year for which comprehensive data are available statewide), Newport Beach and Laguna Beach were both getting a little more than $300 per capita in property tax revenue.

San Clemente was receiving about $140 per capita, followed closely by Villa Park, Mission Viejo, Huntington Beach and Costa Mesa. At the other end of the scale, Laguna Niguel, Westminster, Stanton and Garden Grove were receiving only $30 to $50 per capita in property tax revenue.

The median per-capita property revenue in the county for fiscal year 1999-2000 was about $75.

Fullerton, Fountain Valley, La Habra, Dana Point, San Juan Capistrano, Orange and Irvine were closely clustered around this median.

Obviously, some Orange County cities would suffer more than others if the Legislature made another raid on property tax revenue. Many of the cities have been hammered so badly in previous raids, there may not be much more to squeeze from the municipal purse.

After the property tax raid of the early 1990s, cities started to aggressively encourage businesses that would generate sales tax. While there is much controversy about how redevelopment money was used (or misused) in this effort, there can be no question that many Orange County cities were strikingly successful at it.

Brea, for example, had sales tax revenue of $375 per capita in fiscal year 1999-2000. Other cities with strong sales tax revenue bases include Irvine and Costa Mesa, which both had more than $300 per capita, and Newport Beach, which had a little more than $250 per capita.

Tustin had almost as much as Newport Beach and was followed closely by Los Alamitos and Orange, which both had more than $200 per year in per capita sales tax revenue.

Fountain Valley, Buena Park, Westminster and Anaheim were all clustered around the county mean of $150 sales tax revenue per capita in 1999-2000. Dana Point, San Clemente, Yorba Linda and Seal Beach were all well below $100 in sales tax revenue per capita that year. Villa Park had about $30 per capita.

As the above data indicate, some cities have comparatively little property tax revenue but a healthy sales tax revenue stream.

Brea, Tustin (which benefits greatly from the Tustin Auto Mall and the Marketplace) and Cypress are in this category.

Other cities have strong property tax revenue but not much in the way of sales tax; Villa Park is the most notable example. Seal Beach and Yorba Linda are others.

As the above data also indicate, each Orange County city would be affected differently depending upon what the Legislature came up with next.

If, for example, the Legislature were to again aggressively go after municipal property tax revenue, the sting would be particularly painful for Laguna Beach and Villa Park, both of which, relatively speaking, do better in terms of property tax than sales tax revenue.

San Clemente, Yorba Linda and Seal Beach would, roughly speaking, also fall into this category.

If, on the other hand, the Legislature goes after municipal sales tax revenue more aggressively, the results would be particularly painful for Westminster, Laguna Niguel and Cypress. Also hurt would be Stanton, Garden Grove, Buena Park and Santa Ana.

No matter what the outcome of the gubernatorial recall election, Orange County citizens would benefit from a governor who could curb the Legislature's appetite for municipal tax revenue.

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