California Appellate Court Ruling on Proposition 22

A statute authorizing the transfer of sales and use tax and property tax revenues from cities is unconstitutional on its face, the California Court of Appeal found last week. In the consolidated cases of City of Bellflower v. Michael Cohen and League of California Cities* v. Michael Cohen, a unanimous court held that the plain language of Proposition 22, enacted by voters in 2010, is “framed as a complete prohibition against the Legislature taking or using local tax revenues.”

Both cases involved the dissolution of redevelopment agencies pursuant to legislation enacted in 2011 and 2012. The legislation provided that the wind-down activities of the redevelopment agencies would be carried out by “successor agencies.” The challenged statute provided that, if a successor agency did not pay certain amounts that the state Department of Finance determined should be paid to the county auditor-controller for distribution to local taxing entities, DOF could order that the city’s sales taxes could be withheld. Alternatively, the statute authorized the county auditor-controller to “reduce” the property tax allocation to the city.

At the time the cases were filed in the trial court, numerous cities had received letters from DOF threatening to withhold millions of dollars in sales and use tax if their successor agencies did not pay amounts that DOF claimed were owed.

The court said its overriding charge in interpreting constitutional provisions such as Proposition 22 is to effectuate the voters’ intent in approving the initiative. The relevant provision in Proposition 22 said that the Legislature “may not reallocate, transfer, borrow, appropriate, restrict the use of, or otherwise use the proceeds of any tax imposed or levied by a local government solely for the local government’s purpose.” Contrary to DOF’s claim, the court found no exception in that language that would allow withholding local tax revenue as a penalty. In addition, the court noted that DOF acknowledged it had other, constitutional, remedies it could exercise if it believed a city was in wrongful possession of funds.

*Best Best & Krieger represented the League of California Cities in this matter.

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