Amidst today’s economic uncertainty, local jurisdictions are strained and searching for ways to bolster their revenues. A trending solution many agencies are implementing is a new district tax measure.

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Written by Ken Brown, Sales Tax Pricipal 

Amidst today’s economic uncertainty, local jurisdictions are strained and searching for ways to bolster their revenues. One trending solution is a new district tax measure, also known as a transactions and use tax (TUT) or an add-on sales tax. There are currently 417 California agencies with active district taxes, and thirty-seven were implemented this year alone. HdL has helped numerous agencies estimate, propose, implement, and report on a new district tax. I personally assisted eight agencies with estimates last quarter compared to only one in the previous two-year span! It is evident that their popularity is growing.

If your agency is considering a new district tax measure, here are the essential things to know… 

What is a District Tax? 

A district tax is similar to the normal local agency 1% Bradley-Burns sales tax, in that it is an additive sales tax, and the same goods are taxed. However, unlike the Bradley-Burns sales tax which is allocated to the jurisdiction where a sale is negotiated, a district tax is instead allocated to the location where a purchase is delivered or first put into use. This is a very important distinction because this difference may significantly impact the amount of revenue that your new district tax may generate, and it may be very different than what you intuitively expect. 

Therefore, when you are estimating the potential revenue from a new tax measure, one of the biggest mistakes you can make is to assume that the new tax revenue will be proportionately the same as your existing Bradley-Burns sales tax. It may be significantly less if your agency has high dollar order-desks or fulfillment centers or bulk fuel sales to other jurisdictions. It may also be significantly higher if your agency has few or no car dealerships. HdL can provide an estimate of what the new tax will generate to guide your planning efforts.

Provide a Range of Outcomes

District tax measures are subject to a significant amount of uncertainty in terms of the amount of revenue that they will generate because there are no records available that detail imports and exports between jurisdictions. Therefore, many assumptions must be made in generating the estimate, even more so than for a typical budget estimate. When discussing potential revenue generation of a new district tax measure with policy makers and the public, you may want to consider providing a range of possible outcomes to acknowledge this imprecision, so expectations are not set too high. For example, you may provide a range that is ten or fifteen percent lower and higher of the estimated outcome. This will also help account for potential changes in the economy. 

HdL Companies Resident vs Non-resident Analysis

Residents vs Non-Residents 

When generating an estimate, it helps to understand how much of the new tax will be paid by residents versus non-residents. Commuting employees, college students, tourists, etc. contribute to both Bradley Burns sales tax and transactions and use tax. Knowing commuter shopping and dining patterns during the day, evening, and weekend can further hone an estimate. 

HdL’s Resident/Non-Resident Analysis provides an economic overview inclusive of population, households, average household income, area employees, and daytime population. The report breaks down non-resident generated revenues for Bradley Burns sales tax and TUT across major business industry groups like autos and transportation, fuel and service stations, general consumer goods, restaurants and hotels, and more. Visit HdL’s ECONSolutions for more information. 

CDTFA Assistance

Contact the California Department of Tax and Fee Administration (CDTFA) as soon as you know that your agency is interested in pursuing a new district tax. Their Local Revenue Allocation Unit (LRAU) can… 

  • Answer questions and assist districts in the process.
  • Provide sample ordinances for a city, county, or special purpose entity (including a Transportation Authority).
  • Review the proposed ordinances from the jurisdictions prior to their approval by the local governing legislative bodies to ensure that all the statutory requirements have been met.

CDTFA Use Tax

Visit Information for Local Jurisdictions and Districts for FAQs, costs, next steps, and additional resources for your agency and business community.

Legislative Updates

Stay abreast of legislative changes that may impact your potential district tax. For example, the California Two-Thirds Legislative Vote and Voter Approval for New or Increased Taxes Initiative (#21-0042) has qualified for the 2024 ballot in California. This would amend the state constitution to require a two-thirds vote for any tax, including new or increased district taxes, adopted after January 1, 2022. Currently, only special purpose district taxes require a two-thirds vote. 

HdL Expertise

The most important step when proposing a new district tax measure is to carefully communicate to your community the need for the additional revenue, how the new tax money will be used, and the specific ways in which it will be safeguarded. Transparency is key. The more answers and data you have, the more transparent you can be with your residents. HdL can provide answers, reports, experience, and insight to help. 

 

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