Special-Tax Approved Only by Hotel Owners Held Unlawful

by on August 10, 2014

posted in Mello Roos Act, Propositions 13/26/218, Special Taxes,

When a city proposes a special tax on only a certain class of property owners, may it allow only those who would be subject to the tax to vote on the proposed measure?  No, according to a recent court decision.

In City of San Diego v. Shapiro, the Fourth District Court of Appeal considered a challenge to a hotel tax for which only hotel property owners were allowed to vote.  The tax was intended to fund convention-center improvements the city intended to make through a community facilities district (“CFD”).  The court invalidated the election on the ground that the right to vote was improperly limited to only those property owners that were part of this entity.

Critical to the court’s reasoning was the plain language of California’s landmark tax-limitation initiatives, Propositions 13 and 218, which are both written into the California Constitution.  Noting that the former authorizes a special tax election by “qualified electors” and that the latter authorizes such a tax when approved by the “electorate,” the court held that only registered voters were entitled to vote on the proposed tax measure.  The Court found that neither initiative was ambiguous in specifying that only natural persons could vote on a special tax.

Portions of Mello-Roos Act Called into Question

For local agencies, the troublesome aspect of this decision is how the court interpreted the statutory authority the city relied on in limiting voting to hotel owners.  Under the Mello-Roos Act, when a local agency proposes to impose a special tax on a CFD, it may limit voting to landowners if the tax would not be imposed on any residential properties.  (Gov. Code, § 53326(c).)  Despite the clear authorization this provision of the Mello-Roos Act appeared to provide the city to conduct a landowner-only vote, the court concluded that the constitutional limitation that only “qualified electors” vote on special taxes still prevailed.

Are Landowner-Only Elections Lawful?

In effect, the Shapiro decision calls into question whether special taxes imposed on CFDs by landowner vote can ever be justified.  As many local agencies impose such taxes for economic development purposes—often with the full support of the affected businesses—the court’s holding could be troublesome.  An anti-tax sentiment prevails in many communities throughout the state, making it often difficult to surpass the 2/3 margin necessary to pass a special tax.  If the businesses who would exclusively bear the burden of any proposed tax do not have the say in whether a tax is approved, agencies may be forced to explore other financing mechanisms for their desired programs.

In this regard, special assessments or property-related fees, which are both authorized by Proposition 218 and do not require approval by qualified voters, may provide alternatives.  But both of these financing devices have their own limitations.

tags: Community Facilities Districts, Mello-Roos Act, Proposition 13,

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