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On November 6, 2018, California voters approved 264 of the 390 proposed local tax and bond measures on state and local ballots. One such measure was Proposition C (“Prop C”), a controversial measure on the San Francisco ballot that establishes a special tax geared toward generating revenue for the city’s homelessness crisis. Although Prop C received a majority vote, it is unclear whether this is enough to satisfy the requirements imposed by the California Constitution. Below, we highlight California constitutional constraints imposed on voter initiatives, a recent case involving these constraints, and how these constraints impact special tax ballot initiatives, like Prop C.

Authors: Shail P. Shah Mike Shaikh Priscilla Ayn Parrett Yoni Fix Rebecca G. Durham

(This is a republication of Law360’s November 26 installment of Reed Smith’s California Tax Takes monthly column.)

Constitutional constraints on voter initiatives

California voters have initiative power, which allows them to propose local measures, statutes, and amendments to the California Constitution.1 Generally this power is limited by constitutional voter requirements imposed by Proposition 13 (“Prop 13”) and Proposition 218 (“Prop 218”); however, a recent California Supreme Court decision has called these limitations into question.

In 1978, California voters passed Prop 13, which placed constitutional limits on state and local governments’ ability to increase taxes.2 Voters added more limitations in 1996 by passing Prop 218, the Right to Vote on Taxes Act. Prop 218 added Article XIII C and D to the California Constitution and sought to protect taxpayers by “limiting the methods by which local governments exact revenue from taxpayers without their consent.”3 Specifically, Prop 218 established that local governments need a majority vote to impose or increase general taxes and a two-thirds vote to impose or increase special taxes.4 A tax is “special” if “its revenue is limited to specific purposes; this is true even though there may be multiple specific purposes for which revenues may be spend,”5 and a tax is “general” “only when its revenues are placed into the general fund and are available for expenditure for any and all governmental purposes.”6

In 2010, voters passed Proposition 26 (“Prop 26”) which further limited the ability for state and local governments to circumvent the constitutional constraints imposed by Props 13 and 218. Prop 26 defines “‘tax’ for state and local purposes so that neither the Legislature nor local governments can circumvent [voter requirements] on increasing taxes by simply defining new or expanded taxes as ‘fees.’”7