California lawmakers struck a deal to pull the tax cut proposal off the ballot

from Ben ChristopherCalMatters

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A controversial tax cut measure was pulled from California’s November election in a last-minute compromise that left many legislative Democrats feeling nervous.

The sudden change in electoral fortunes came after a week of frantic backroom haggling by Gov. Gavin Newsom’s office, state legislative leaders, housing advocates, unions and business interests to convince the proposal’s sponsor to withdraw it before Thursday’s deadline.

The now-abandoned proposal to cap property taxes and make it harder for local governments to collect other revenue was sponsored by the Howard Jarvis Taxpayers Association, a longtime anti-tax advocacy group.

In exchange for withdrawing the measure, the governor’s office and legislative leaders agreed to put a different constitutional amendment on the ballot that would increase the share of votes needed to pass certain local taxes.

Democrats also agreed to repeal it another constitutional amendment from the ballot, which would make some tax-cutting measures much more difficult to pass.

John Koupal, president of the taxpayers’ association, said he was as surprised as anyone by the 11th-hour result, after issuing a statement hours earlier declaring the talks dead and vowing to take the original measure to a vote even as members of his own coalition were turning against him.

But after days of impasse, Newsom’s office “put something on the table that’s pretty nice for us,” he said. “Which surprises me.”

A spokesman for the governor’s office said the deal would free up cities and other jurisdictions to focus on priorities instead of cuts.

“By removing (the Jarvis measure), cities and counties can continue to provide the services Californians rely on, from keeping teachers in classrooms and providing a strong fire and emergency response to providing health care for children and families,” spokeswoman Tara Gallegos said.

California election law gave election sponsors until 5 p.m. Thursday to voluntarily withdraw their measures. Outlines of the new deal only emerged in the early afternoon. That gave the Legislature some time to think about the grand deal, discuss it in conference, and then push through the changes.

“Politics is about elections and we often have to navigate challenging decisions,” said an Assembly member Buffy Weeksan Oakland Democrat who introduced one of the compromise bills. “Big picture: Voting today protects vital resources for our local communities and removes the biggest threat to our cities and their fiscal health.”

The deal gave Republicans a rare opportunity to celebrate at the California Capitol. “This is a huge win for every Californian,” Bakersfield Sen. Shannon Grove it said in a statement.

Why the Democrats made a deal

The proposal was the kind of fiscal punch to keep Democrats, local governments and other left-of-center interest groups up at night.

First, it would limit local transfer taxes – real estate sales fees – to no more than 0.055% (fifty-five cents for every $1,000 of property value). Twenty-six cities, including some of the state’s largest, have fees set well above that limit, such as Los Angeles estate taxwhich funds affordable housing and tenant assistance, reaching 100 times the rate.

The proposal would also raise the vote share required for certain types of local taxes. Although many local tax measures in California require the support of two-thirds of voters, those placed on the ballot through signature campaigns to fund specific purposes need only more than 50%. Jarvis’ proposal would have repealed that rule and voided any measures passed since 2017 that did not meet the two-thirds requirement.

Instead, under Thursday’s deal, voters would consider the 50 percent rule only for local tax measures, though it would not apply retroactively.

Albeit in public voting suggests that Howard Jarvis’ proposal faces strong odds in California, with lawmakers, unions and other opponents worried that voters could be persuaded to support an anti-tax measure amid heightened concerns about affordability and the cost of living. The double tax cut would blow a multibillion-dollar hole in municipal budgets annually, but it would save local taxpayers just as much, according to estimate by the Office of the Nonpartisan Legislative Analyst.

Cities are not enthusiastic about the new deal, which would give voters a chance to end what has become a commonly used source of funding for public programs.

“At a time when cities are already struggling to maintain high quality services in the context of high inflation, skyrocketing costs for essential goods and services, federal funding cuts and stagnant sales revenue, efforts that limit the ability to raise local revenue only deepen uncertainty for local governments and the communities they serve,” Carolyn Coleman, director of the League of California Cities, said in a written statement.

However, the league said it does not yet have an official position on the new measure.

The deal also eliminated a particular tangle constitutional amendment from the ballot, which was designed to trap the Howard Jarvis Taxpayers Association by requiring any future proposal that sought to raise the voter threshold needed to pass a law (say, from 50% to two-thirds) to pass the higher threshold.

What about transfer taxes?

Left out of the compromise was anything about transfer taxes, a subject that has dominated the public debate over the proposal and provided much of the fuel for the earlier signature campaign.

On Monday, Wicks, who is aligned with the “Yes In My Backyard” movement to support the development, released Assembly Bill 736 as a possible legislative deviation. The bill would cap transfer taxes between 1.5% and 3%, depending on the type of tax. That’s well above the cap championed by Howard Jarvis, but would be a significant rate cut for a handful of high-tax municipalities like Los Angeles, Santa Monica, Culver City, San Jose and San Francisco.

For Weeks and her YIMBY allies, the bill is seen as more than just an election tool. Development groups have pointed out the high transfer taxes as one of the many obstacles to building much-needed housing.

The proposal also received the support of the California Business Roundtable, a major business coalition whose members include major real estate investors and which funded the Howard Jarvis Taxpayers Association campaign.

After funders approved a legislative compromise, it appeared possible that the taxpayers’ association might also be ready to support a lower tax cap.

The political pressure intensified further on Wednesday. As Politico first reported, executives at three major real estate investment firms said they were ready spent at least $10 million fighting the measure if Coupal did not budge.

Until the final hours, it looked like he wouldn’t.

“We’ve had a lot of partners help us qualify this initiative, but we’re the ultimate person who decides whether or not to go forward with our initiative,” John Koupal, the association’s president, told CalMatters earlier this week. “It is our intention to continue.”

Entering into a transaction that may make it difficult to collect new local taxes constitutes a a long-sought political victory for the group of taxpayers. Limiting transfer taxes does not appear to have been as high a priority. Weeks’ bill “is floating out there, which people can support or not, it’s up to them,” he said.

But the political calculus for AB 736 has changed. Even before Thursday’s deal was announced, an ideologically diverse set of interest groups had already rallied to defeat it: the California Association of Realtors, local government groups, many affordable housing developers and tenant rights advocates.

Without a proposal already hanging over their heads, lawmakers are unlikely to have much appetite to undertake such a difficult vote.

All eyes are on LA

The omission of the transfer tax comes as a disappointment to many real estate interests and development advocates, particularly in Los Angeles, which has been at the center of the statewide debate over transfer taxes this year.

As of 2023, the city has among the highest transfer taxes in California in the form of Measure ULA. That policy, backed by city voters, imposes a 4 percent sales tax on real estate sales over roughly $5 million and 5.5 percent on those just over $10 million. So far, more than 1.2 billion dollars for affordable housing, tenant assistance and eviction protection.

But despite the moniker “mansion tax,” the tax also applies to housing complexes, apartments, commercial and industrial projects. A number of academic analyzes have blamed the tax for the unusual decline in new multifamily housing construction in the city and the decline in property tax revenue. Politically, hostility to Measure ULA from Los Angeles-based real estate developers and investors ensured considerable fuel behind the measure Howard Jarvis, supporters of the proposal said.

“It’s crazy that poorly designed transfer taxes like Measure ULA are driving this effort, but ultimately Measure ULA and other measures like it will go untouched,” said Mott Smith, chairman of the Infill Builders Council and a prominent advocate for the tax change in LA.

A trade may still be on the list for Los Angeles. Earlier this month, the City Council voted to put the measure on the local ballot exempt apartments and mixed-use buildings of the higher transfer tax within 10 years of construction. That proposal is expected to get a final council vote next week.

The failure to address transfer taxes only reinforces the need for Los Angeles to act, said Leo Daub, a spokesman for Council Member Katie Yaroslavsky, who introduced the proposed change.

“If Sacramento won’t do it, then Los Angeles should,” he said.

Yue Stella Yu contributed reporting

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.