Thursday, February 21, 2008

Portion of city's tax revenues at risk


Unless the City of Santa Barbara updates a decades-old utility tax to reflect changing federal legislation, the city could be facing a major pothole in the road, literally.
Due to a change in federal tax laws, a significant portion of tax revenue that funds streets maintenance — as well as the police and fire departments, parks maintenance, recreation activities and other services — is in jeopardy of being lost.

“It is a sizeable chunk of money,” city finance director Robert Peirson told city leaders at a Thursday work session on the issue.
As a 6 percent tax levied on services including water, electricity, gas, trash, cable television and telecommunications, the city’s utility users tax (UUT) poured a total of $13.1 million into city coffers last year. Approximately $3.88 million of those funds are at risk due to recent changes made by the Internal Revenue Service to the federal excise tax.
In mid-2006, the IRS decided to exempt long-distance, cellular and other forms of telecommunication from taxation after facing numerous related lawsuits.
The telecommunications portion of the city’s UUT ordinance, which dates back to 1970, is linked to the federal excise tax — a move made in the 70s by numerous cities to make administrative work easier for the major telephone company at the time. Now cities are facing lawsuits as they try to update their ordinances to reflect the IRS changes.
Currently, five lawsuits are pending against UUTs statewide, alleging cities are no longer allowed to collect funds from long-distance calls and cell phone use. Other cities are scrambling to bring their tax language up to date before those cases reach an appellate decision, which could nullify UUTs statewide.
“It is safe to say there is a very significant risk,” said Don Maynor, an attorney and UUT expert.
Losing revenues from cellular service alone would cost Santa Barbara $2.3 million. Essentially 80 percent of the funds collected for telecommunications would be gone overnight, Maynor said.
That spells trouble for the city’s general and streets fund, which are already feeling the squeeze of state budget cutbacks. The telecommunications portion of the UUT represents 2 percent of total general fund revenues and 14 percent of streets fund revenues.
“Fourteen percent is a huge piece of our streets fund and it would have a major impact on our ability to maintain and repair our streets at the level that frankly we are used to,” Peirson said.
Making a 2 percent cut to services supported by the general fund would also be a major issue, especially in the face of the state budget crisis.
“It wouldn’t be painless,” Peirson said.
Due to Proposition 218, the city must put any changes to its tax ordinance to a vote of the people, rather than simply bringing it up to date. City leaders must now decide which ballot to place the measure on and how to frame the revisions.
By placing it on the next general election ballot, in November 2009, the city would only need a simple majority in order for the measure to pass. By holding a special election, the measure would need a two-thirds majority approval.
The third option, and the one city leaders appeared to be leaning toward, is to declare a fiscal emergency and place it on the upcoming presidential ballot in November as a general tax measure, which would require a simple majority to pass.
“We are on the verge of a fiscal emergency given the budget figures,” Councilmember Das Williams said. “…My gut would be to address it sooner than later.”
Declaring a fiscal emergency requires a unanimous vote of the City Council.
Another decision for the council to make is whether to reduce the tax percentage as a result of increased revenues. By adopting a modern communications tax ordinance with technology-neutral definitions, the city would draw from an expanded base of services.
“It really relates to the fact that technology has changed over the years,” Maynor said.
New technologies such as high-speed data links, Voice over Internet Protocol (VoIP), and broadband television services are not covered by Santa Barbara’s dated tax ordinance. While those services wouldn’t generate tax revenues as significant as those from long-distance calls and cell phones, they are likely to grow as technology continues to advance and people move away from landline telephone service. It also levels the playing field for telecommunications companies, Peirson noted.
Reducing the tax percentage to reflect expanded revenue sources would allow the city to keep the same amount of funds flowing into the city pocketbook while increasing the chances of getting the measure passed.
The City of Compton, for example, passed a revised ordinance that included a reduced tax with 90 percent voter approval. Los Angeles passed a similar ordinance with 66 percent of the vote. In contrast, Pasadena passed its ordinance by 58 percent, despite keeping the tax unchanged.
Waiting for the outcome of pending lawsuits on UUTs, possibly risking the loss of those revenues and having to draft a new tax ordinance, is not a wise move, Maynor said.
“If you lose the tax … and you want to get it back, it’s very tough to do,” he said.
Councilmember Iya Falcone also stressed the need to be clear with voters about the potential consequences of losing the UUT.
“There is an awful lot of area here that is ripe and rife with room for misinterpretation,” she said. “…This is a convoluted issue with a lot of players.”
To that end, Peirson made a point to emphasize that while telecommunication services provided over the Internet might fall under a revised ordinance, Internet access is not taxable under federal law.
“Our ordinance would not propose to tax Internet access,” he said.
Ultimately, city leaders agreed to send the issue to the council’s finance and ordinance committees for further review and discussion.

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