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Better Than Phone Tax 

Villaraigosa makes a Lazarus play to keep alive a pricey, illegal tax on residents

Wednesday, Oct 17 2007
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If you ask the voters to reinstate a tax after it’s been thrown out by the courts, it’s a new tax. But if you beat the courts to it — by convincing voters to approve a slightly lower tax before the higher one is invalidated — is it a tax “reduction”?

Yes, says Mayor Antonio Villaraigosa, who is pitching a ballot initiative that would ask voters to approve a 9 percent tax on cell-phone and land-line calls. That’s slightly lower than the 10 percent residents currently pay — an illegal tax on Los Angeles residents that Villaraigosa and the City Council never should have collected because voters did not approve it, according to recent court rulings.

If those court decisions are upheld, there’s a good chance the phone tax — one of the highest in California — will be wiped out. To keep collecting the estimated $270 million per year now reaped off Angelenos’ phone bills, officials engaged in some head-scratching tactics leading up to Tuesday’s City Council vote on the issue. That day, Villaraigosa got the unanimous vote he needed from the 15-member City Council, which placed the tax on the presidential primary ballot next February 5 by declaring an “emergency.” Between now and February, Villaraigosa and the council hope to convince voters that their phone bills should be taxed by the city.

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But the mayor faces an image problem: Only if voters are presented with his 9 percent tax before the slow-moving courts halt the probably illegal 10 percent tax can he attempt to paint his new tax as a “reduction.” If the courts wipe out the old tax before Villaraigosa gets the new one on the ballot, then it can be more easily slammed as a stiff, new phone tax.

Villaraigosa’s pollster has reportedly determined that pitching the tax as a reduction would win it more support. The mayor’s spokesman, Matt Szabo, argues that characterizing the tax as a reduction is accurate because the 10 percent rate has not yet been halted by the courts. “As it stands now, the tax is at 10 percent,” says Szabo, who insists that Villaraigosa is now giving voters “an opportunity” to reduce that rate.

Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, has another view of City Hall’s graciousness: “In any other situation, what they’re doing would be called lying,” Vosburgh says, “but in politics and government, it’s just standard operating procedure.”

Legal experts believe the tax — which the Los Angeles City Council was repeatedly warned was illegal but dramatically increased in 2003 anyway — could be invalidated by one of three lawsuits. The case that is furthest along was filed by wireless companies challenging the city’s decision to collect taxes on portions of cell-phone bills that had previously gone untaxed.

The city insisted the new tax was in response to new federal laws and was not a tax hike — which would require voter approval. Then City Hall promptly began using the tens of millions of dollars from its vast new revenue source to support an ever-expanding city budget.

A Los Angeles trial judge — and many critics — disagreed with City Hall. Then in May, a state appeals court upheld the trial judge’s decision, saying the city violated Proposition 218, California’s hard-fought 1996 constitutional amendment requiring voter approval for such tax increases.

“The Proposition 218 voters rebelled against local government taxes that are moving targets,” Justice Judith Ashmann-Gerst wrote for the unanimous three-judge panel. The lawsuit she ruled on challenged just the city’s tax on cell phones — not on land lines. But losing the cell-phone tax alone could cost the city $162 million a year, according to a memo from City Administrative Officer Karen Sisson. Other lawsuits are challenging the entire tax, which is expected to net the city $270 million this year.

Getting the replacement tax on the ballot by February — presumably before a judge has a chance to throw the tax out for good — required some special wrangling: City Hall had to once again get around Proposition 218, which requires phone taxes to appear on the ballot only during a regular municipal election. The next one of those is a very long way off for Villaraigosa — April of 2009.

Forcing cities like Los Angeles to await a general election before suggesting new taxes was designed to end cities’ common and clever practice of proposing new taxes during special elections — events in which cities found it easy to turn out special-interest groups to approve taxes on the wider population.

There is, however, an “emergency” exception. If the City Council votes unanimously that an emergency exists, the city can put the tax on the ballot before 2009. Villaraigosa said dire consequences would occur if the tax were allowed to lapse, including a possible halt to the buildup of the police department and other cuts. “There would be draconian cuts, massive cuts to critical services,” Szabo claims.

The taxpayers association, which drafted Proposition 218 and wrote the language about “emergencies,” says a city’s desire to avoid budget trims is not the “emergency” that exception was meant for. “We were thinking, perhaps naively, in terms of an earthquake or a flood or a natural disaster,” Vosburgh says.

Leading up to Tuesday’s unanimous vote, some council members were not convinced there was an emergency. When the council voted October 3 to write up ballot language asking voters to back the replacement tax, councilmen Dennis Zine and Greig Smith voted against it. Had either one voted “no” on Tuesday, the tax would not have made the ballot. Zine, a former cop and one of only a handful of fiscal watchdogs on the council, said he dropped his opposition a few days before. “I told them if there was an emergency, demonstrate that, and they said they would.” It will cost the city more than $5 million to put the measure before voters, according to City Clerk Frank Martinez.

With the issue heading for the ballot, Jon Coupal, an attorney and president of the Howard Jarvis Taxpayers Association, said the group may sue. Coupal says while courts tend to defer to elected bodies when they declare an emergency, those bodies do not get a free pass.

“Words in statutes and words in the Constitution are usually accorded their normal, regular meaning, and the word ‘emergency’ generally connotes some kind of immediate crisis,” Coupal says. “I guess the issue we have is whether overspending and mismanagement are the kinds of things that would rise to the level of ‘emergency’ as that word is commonly understood by the normal Californian. I would think not.”

FROM THE ALARM Villaraigosa is displaying about losing the phone-tax money, City Hall observers might think this year’s courtroom defeat caught him by surprise. It didn’t. A judge first ruled that the wireless tax violated Proposition 218 in July 2005. Villaraigosa’s proposed budget for the 2007-’08 fiscal year ignored that nearly 2-year-old warning shot from the court, and assumed that the tax would continue to be collected.

On May 9, the appeals court upheld the 2005 ruling against the city. Yet 12 days later, the City Council passed a budget ignoring that second court ruling as well. The paperwork supporting Villaraigosa’s current-year budget, prepared by Sisson’s office, plainly states that the mayor chose not to create a budget that anticipated a defeat in court: “No adjustment is made for challenges facing collection of utility users’ tax on telephones.”

Szabo says Villaraigosa didn’t plan for the court defeats because he was committed to increasing the city’s reserve fund and reducing the city’s deficit.

Vosburgh says the citywide vote in February could backfire, turning into a referendum on mediocre city services in a time of rapidly increasing city spending. That might stoke the anger of residents who feel that tax hikes go toward lining the pockets of city workers and subsidizing big developers, rather than improving local services.

“There are certainly a lot of people in the public who feel we pay a great deal in city fees and services and .?.?. we’re getting so little in return,” Vosburgh said.

Of 149 California cities that have such a tax — many do not — only Culver City and Seal Beach, at 11 percent, have a higher tax rate than L.A.’s. But even if the tax is “reduced” to 9 percent, Angelenos would still pay more than residents of all but nine California cities.

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