Cupertino, a high-wealth city located in California, is currently faced with a budget shortfall amounting to approximately $15 million, which is a significant portion of its $95 million general fund. The city council is mulling over various tax hikes though none seems adequate on their own and all demand a vote by city residents.
An alternative solution has been proposed – a progressive parcel tax levied by city residents. Although this proposal has its limitations, it is characterized as being more equitable and efficient than other alternatives on the table. Importantly, Cupertino’s budget woes expose the complex inner workings of California public finance.
In stark contrast to most US cities, Cupertino’s city council can’t directly augment the property tax, which is typically the most appropriate revenue source for funding local services. In fact, property taxes can’t be increased at all. All other potential tax increases come with technical requirements and constraints, importantly, all require approval from the electorate.
Admittedly, it seems perplexing that a $15 million budget shortfall poses such a significant issue for a city with about 60,000 residents, particularly given it has a median household income exceeding $200,000 and a staggering median home price of over $2 million.
The city features a hefty property tax base of roughly $27 billion. To put things in perspective, generating an extra $15 million in property tax would demand an increase of 0.056%, which shouldn’t be too excessive a burden. However, Cupertino’s property taxes aren’t particularly high. Although Cupertino annually receives about $30 million from property taxes, this figure pales in comparison to White Plains, N.Y., a city with a similar population but with only a property tax base of about $10 billion, which raises around $65 million from its property tax.
The Prop 13 regulation, passed in 1978, is the root cause behind Cupertino’s inability to raise its property taxes. Prop 13 bars the city from any tax increase and preventing it from receiving substantially more than its pre-regulation share of the tax. Today, even acquiring that pre-regulation share is virtually impossible due to Prop 13 cutting general property tax rates by about 60% (from approximately 2.5% to about 1%).
California cities have barely managed to keep their heads above water by leaning on minor levies and the local share of the sales tax. Cupertino is no exception here, although it does rely on sales tax slightly more compared to its neighboring cities.
Since 1997, as part of an agreement with Cupertino, tech giant Apple Inc. has been attributing all its California sales back to Cupertino. In return, Apple received a rebate amounting to 35% of the tax from the city. However, this arrangement is presumably coming to an end and this is chiefly contributing to the $15-million deficit.
The city council of Cupertino is considering several potential solutions to this crisis, such as a minor increase in the local sales tax rate, the city’s transient occupancy tax, a minor parcel tax, or a small tax on city-based business operations. If all these proposed tax increases were implemented, they would presumably resolve the budget crisis and distribute the general cost of governance in a reasonable manner.
To be able to fill the budget void on its own or supplement the likely increase in sales tax, the city would benefit from implementing a tax that applies across the broader community. One such tax that has been suggested is a progressive parcel tax, with rates varying depending on parcel size and whether it’s for residential or commercial use.
This article was authored by Darien Shanske, a professor at the University of California at Davis School of Law.