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New Loophole May Lead to Local Tax Hikes in California

The California Supreme Court issued a ruling on August 28, 2017 in California Cannabis Coalition v. City of Upland that may have created a loophole for special interests to get around the limitations on tax increases established by Propositions 13 and 218. In the instant case, an initiative was proposed in Upland, California to repeal an ordinance banning medical marijuana dispensaries and instead allow up to three dispensaries to obtain permits, subject to an "annual Licensing and Inspection fee" totaling $75,000. Since this fee exceeds the costs incurred by the government for issuing the license, it is considered a general tax. Normally, such taxes can only be heard at general elections, but an exception was made and the initiative was voted on in a special election.

California Cannabis Coalition objected to this departure from the normal process, but the courts disagreed.

"Multiple provisions of the state Constitution explicitly constrain the power of local governments to raise taxes," Justice Mariano-Florentino Cuéllar wrote in the 5-2 majority opinion. "But we will not lightly apply such restrictions on local governments to voter initiatives, 'one of the most precious rights of our democratic process.'"

The recent decision upholds a lower court ruling that such restrictions do not apply to local tax increases initiated by citizens, which may have serious implications with regard to California tax rates. Historically, property tax increases and local government tax increases have been restricted and subject to voter approval. However, with the courts demonstrating their willingness to bypass these restrictions, we may see an uptick in ballot initiatives proposed by citizens representing special interests. The Howard Jarvis Taxpayers Association has indicated it will begin work on closing this loophole. In the meantime, keep an eye on your local ballot news!

To read the full California Supreme Court decision, click here.

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