Palo Alto is gearing up for a battle against a 2024 state ballot initiative that will make it harder for the state and local municipalities to raise taxes and fees and that could effectively overturn the two revenue measures that city voters approved just last November.

Known as the Taxpayer Protection and Government Accountability Act, the measure is being spearheaded by the California Business Roundtable, a business advocacy group. If approved by voters in November 2024, it would raise the bar for passage of new taxes at both the state and local levels and expand the definition of taxes to include revenues that are currently classified as fees and, as such, are not subject to legislative or voter approval.

State lawmakers looking to pass a new tax would need to get two-thirds approval in each house of the Legislation and a majority vote from the statewide electorate. Proposals to enact taxes would similarly need to get a council supermajority followed by a vote from the electorate.

Advocates for the new measure argue that it would add transparency to protect Californians from rising cost-of-living costs. The text of the measure states that the proposed law intends to reassert the voter's intention that "all fees and other charges are passed or rejected by the voters themselves or a government body elected by voters and not unelected and unaccountable bureaucrats."

The measure also aims to "ensure that taxpayers have the right and ability to effectively balance new or increased taxes and other charges with the rapidly increasing costs Californians are already paying for housing, food, childcare, gasoline, energy, health care, education and other basic costs of living."

But for local and state officials, the proposal from the business group threatens fiscal uncertainty. At a May 5 public hearing on the proposed city budget, Palo Alto City Manager Ed Shikada told the City Council's Finance Committee that the ballot measure could have a "significant impact on our finances, should it proceed."

That's because the measure applies retroactively to all revenue measures passed after Jan. 1, 2022. It would thus include the two measures that Palo Alto voters approved last November: Measure K, which established a business tax, and Measure L, which reaffirmed the city's historic practice of transferring funds from the gas utility to the general fund to pay for basic services.

The measure states that any tax adopted after January 2022 and that fails to meet the requirements of the initiative would be deemed void 12 months after the act's effective date unless the tax is reenacted in compliance with the new measure. These include a clearly stated duration for the tax and a statement for how the revenues would be used.

The measure would retain the current system in which special taxes (those that are directed for a specific purpose) require two-thirds vote and general taxes (those that give lawmakers broad discretion on how to spend the revenues) need a simple majority. However, those that fall in the latter camp would now need to include a phrase stating that the revenues are for "general government use."

Palo Alto's new business tax, while a general tax, included guidelines directing that the money would be spent on public safety, affordable housing and safety at rail crossings. These guidelines, however, are advisory and not legally binding. If the ballot initiative passes, Measure K would become legally dubious because the 2024 measure would, among other things, explicitly prohibit advisory measures that indicate that "the revenue from the general tax will, could, or should be used for a specific purpose."

In a report to the council last month, staff from the Administrative Services Department wrote that they believe the two measures comply with the requirements of the initiative. But if the measure passes, Measures K and L, "like many other local tax measures across the State, are subject to additional, unexpected scrutiny despite voter-approval."

Ballot measure's ripple effect

Assistant City Manager Kiely Nose indicated during the May 5 meeting of the Finance Committee that the measure would call into question not just the two recent measures but the city's entire process for setting fees and service charges.

"It would impact potentially everything from community services, development center charges for permits to impact fees and our two new revenues that are critical to maintaining the current stability," Nose said.

The council formally adopted its position on the measure last month, when it voted 6-1, with Council member Greg Tanaka dissenting, to approve a resolution committing itself to opposition. The measure, according to the resolution, "puts billions of dollars across the state currently dedicated to local services at risk and could force cuts to fire and emergency response, law enforcement, public health, parks, libraries, affordable housing, services to support homeless residents, mental health services, and more." The resolution also states that the measure would significantly "restrict the City's flexibility to recover cost for specific services and raise revenue for City services, projects and identified unfunded needs."

Palo Alto is hardly alone in raising alarms about the looming measure. Last year, as the measure was picking up signatures, a coalition of unions and government organizations, including the League of California Cities, California Professional Firefighters, SEIU California, California Alliance for Jobs, AFSCME California and the California Special Districts Association announced their strong opposition to the measure. Dozens of cities, including San Jose and Sunnyvale, have also taken formal positions against the measure.

"This far-reaching measure would significantly jeopardize cities' ability to provide services and critical infrastructure to local residents," Carolyn Coleman, executive director and CEO of League of California Cities, said in a statement. "It would impose undemocratic restrictions on local voters and local governments that could force significant cuts to vital services like fire and emergency response, infrastructure, libraries, parks, sanitation, and more."

Analysis: New taxes, higher fees less likely

An analysis by the state Legislative Analyst's Office concluded that by expanding the definition of a tax and increasing vote requirements for approving taxes, the measure would make it harder for state lawmakers to increase nearly all types of state revenues. And the new requirement for legislative approval of new fees, some of which are currently approved through an administrative process, could result in lower fee revenues.

"That lower revenue could be partially notable for some state programs largely funded by fees," legislative analyst Gabriel Petek wrote in his review.

He also concluded that the measure could lead to lower tax and fee revenues for local governments, which face greater restrictions than the state when it comes to raising revenues.

"By expanding the definition of taxes and restricting administrative changes to fees, the measure would make it somewhat harder for local governments to raise revenue," Petek wrote. "Consequently, future local tax and fee revenue could be lower than they would be otherwise."

Council member Pat Burt, who chairs the Finance Committee, said during the May 5 budget discussion that because the impacts on local services would be fairly universal to all California cities, he has "modest faith" that voters will indicate that they care about preserving these services.

"That's the thing they're most attuned to, but nobody knows what will be the outcome," Burt said.

Tanaka, who had consistently opposed the business tax, was the only council member who declined to take a position on the proposed measure. During the April discussion, he echoed the position of the California Business Roundtable that the measure would provide protection to voters at a time when costs of living are on the rise.

"With the cost of living skyrocketing, I think voters deserve the right to vote on all new taxes … especially in these days of high inflation," Tanaka said.