Opinion ID: 1412641
Heading Depth: 2
Heading Rank: 1

Heading: Revenue Crisis

Text: The 1960's brought a revenue crisis to California cities. Factors contributing to the crisis included expanding population with increased urbanization; demand for expanded municipal services; increased cost of services resulting from inflation; and social and economic patterns of growth extending outside political boundaries. An example of the last problem was the growth of large numbers of nonresident commuters. (Januta, The Municipal Revenue Crisis: California Problems and Possibilities (1968) 56 Cal.L.Rev. 1525, 1526.) By 1965 it was evident that competition for tax dollars had increased inter-city tax conflicts. (Sato, Municipal Occupation Taxes in California: The Authority to Levy Taxes and the Burden on Intrastate Commerce (1965) 53 Cal.L.Rev. 801.) The largest source of revenue for California cities was the property tax. (Januta, supra, 56 Cal.L.Rev. at p. 1526 & fn. 6.) However, there was great dissatisfaction with the property tax. It was under attack as unfair, disruptive of economic activity, and difficult to administer. It was also thought to be reaching its economic and political limit. (Januta, supra, pp. 1528-1540.) By 1968, one solution advanced to meet California's city revenue problem was adoption of a municipal income tax. (Januta, supra, pp. 1540-1558.) Cities in other states had turned to the municipal income tax as one alternative. At that time at least 170 cities outside California were employing an income tax. ( Legislative Developments, The Limits of Municipal Income Taxation: The Response in Ohio (1970) 7 Harv.J.Legis. 271.) It had proven easy to administer and capable of raising substantial revenues. (Januta, supra, 56 Cal.L.Rev. 1525.) Why had no California City, prior to 1968, enacted a municipal income tax? The state had expressly prohibited all California cities from levying a local income tax: Notwithstanding any statute, ordinance, regulation, rule or decision to the contrary, no city, ... whether chartered or not, shall levy or collect or cause to be levied or collected any tax upon the income, or any part thereof, of any person, resident or nonresident. (Rev. & Tax. Code, § 17041.5.) The effect of this prohibition will be considered more fully in our subsequent discussion. Its existence, however, explains why California cities were deterred from enacting income tax measures prior to 1968. (Januta, supra. ) Was there any exception to this prohibition? The second paragraph of section 17041.5 contained the following provision: This section shall not be construed so as to prohibit the levy or collection of any otherwise authorized license tax upon a business measured by or according to gross receipts. (Italics added.)