California Legal Revenue Limitations

FY 2022-23 Adopted Policy Budget

Public funds are highly regulated; as such, some of the major regulations that impact local revenue generation will be discussed in this section. This information serves as the background to gain understanding of how tax revenue is generated and restricted.

Proposition 13

Proposition 13, approved by voters in 1978, amended the state constitution and imposed restrictions on the collection of revenue by California’s local governments. Proposition 13 declared that the maximum amount of any ad valorem tax on real property shall not exceed 1% of the full cash value of such property. That 1% tax is collected by the counties and apportioned to the cities and special districts within each County. The only exception to the 1% limitation is for bonded indebtedness for the acquisition or improvement of real property, which must be approved by a two-thirds vote of the electorate. This exception is most commonly used when voters approve a General Obligation Bond to pay for capital improvements to infrastructure such as streets, parks, and buildings. The 2016 Oakland Measure KK Infrastructure Bond was an example of the use of this exception.

Proposition 13 also requires a two-thirds vote of the qualified electors for a City to impose special taxes. Special taxes are restricted for a specific purpose rather than a general purpose, such as a tax designated for public safety or libraries. Parcel taxes are also considered special taxes regardless of the use.

Proposition 8

Proposition 8, approved by voters in 1978, strengthened Proposition 13 and established that when property values decline due to changes in the real estate market, tax assessors are obliged to conduct "decline in value reviews" so that the tax assessed is set at a lower rate if the value of the property has declined. A lower assigned value resulting from such a review is known as a "Proposition 8 reduction.”

Proposition 218

Proposition 218, approved by voters in 1996, further restricted local government’s abilities to raise revenue. Proposition 218 states that a majority vote of the public is required to raise general purpose taxes in Charter cities such as Oakland. This law requires that any new or increased property assessments may only be levied on properties that receive a special benefit from the project rather than a general benefit to the public, and that an engineer’s report is required to ascertain the value of the special benefit. A weighted majority of property owners must approve such assessment. Proposition 218 restricts the use of property related fees so that they cannot be used to pay for a general governmental service, or a service not immediately available to the property.

Proposition 26

Proposition 26, approved by voters in 2010, defined and restricted governments’ abilities to raise revenues through fees and charges for service by defining revenues as taxes unless they met one of the criteria listed below.

A charge imposed for a specific benefit conferred or privilege granted directly to the payer that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.

A charge imposed for a specific government service or product provided directly to the payer that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.

A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.

A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.

A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.

A charge imposed as a condition of property development.

Assessments and property-related fees imposed in accordance with the provisions of Article XIII D of the California Constitution (see Proposition 218).

Under Proposition 26, the local government bears the burden of showing that the amount charged is no more than necessary to cover the reasonable costs of the activity, and allocation of the costs to the payer bears a reasonable relationship to the payer’s burdens on, or benefits received from, the activity.