In City & County of San Francisco v. All Persons Interested in the Matter of Proposition C, Dkt. A158645 (Cal. App., June 30, 2020), the California Court of Appeal upheld Proposition C—a voter initiative that created a new local business tax in San Francisco.  The court upheld the initiative that was enacted by a simple majority of electors.  This ruling answers a question that was been heavily debated since the California Supreme Court’s decision in California Cannabis Coalition v. City of Upland, 3 Cal. 5th 924 (Cal. 2017).  That is, do special taxes proposed by voter initiative require a supermajority of voters to pass?  This decision expressly narrows the supermajority requirement to only those tax measures proposed directly by local governments and will likely trigger more tax initiatives proposed and passed by citizen groups.

Citizens’ Initiative Power

For over 100 years, the California Constitution has included “the power of the electors to propose statutes and amendments to the Constitution and to adopt or reject them.”  Cal. Const. Art. II § 8.  The Constitution provides that an initiative statute becomes effective after it is “approved by a majority of votes cast thereon[.]” Cal. Const. Art. II § 10.  Similar “majority vote” rules are found in the California Elections Code with respect to local initiatives.  See Cal. Elections Code §§ 9217 (providing that city ordinances become binding if voted on by a majority of voters) and 9122 (providing a parallel rule for county ordinances).

Thus, measures placed on the ballot via a voter initiative must generally be approved by a majority of voters in an election to become effective.  In fact, the court in Matter of Proposition C explained that “[a] defining characteristic of the initiative is the people’s power to adopt laws by majority vote.”  The court also noted that citizens’ initiative power is “one of the most precious rights of our democratic process” and that such right must be liberally construed, resolving all doubts in favor of the right.  Id. (internal citations omitted).

Taxing Measure Supermajority Rule

While, in general, initiatives must pass by a simple majority to become effective, two separate voter initiatives—Proposition 13 in 1978 and Proposition 218 in 1996—provided safeguards on new taxes by requiring certain taxing statutes and ordinances to be approved by a two-thirds supermajority in a general election.  Article XIII A of the Constitution, added by Proposition 13, provides, in relevant part, that “[a]ny change in state statute which results in any taxpayer paying a higher tax must be imposed by an act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature” and “Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district[.]”  Cal. Const. Art. XIII A §§ 3(a); 4.  Eighteen years later, Articles XIII C and XIII D were added to the Constitution by Proposition 218.  Article XIII D “further limits the authority of local governments to assess real property taxes and charges.”  See Matter of Proposition C.  Article XIII C “categorizes all local taxes as either general or special taxes” and provides that general taxes must be approved by a majority vote at a general election and special taxes must be approved by a two-thirds vote.  Id., citing Cal. Const. Art. XIII C §§ 2(a), (b), (d).

California Cannabis v. City of Upland

Prior to the California Supreme Court’s 2017 decision in Upland, it was widely understood, notwithstanding the majority vote provisions applicable to initiatives generally, that local taxing statutes were subject to the supermajority requirements prescribed in Propositions 13 and 218.  In Upland, the California Supreme Court included language that was read as creating doubt on the decades-long understanding of the local tax limitations.  In that case, the California Supreme Court did not directly address the supermajority requirement.  Instead, it expressly addressed the requirement in Proposition 218 that a general local tax measure must be presented to the electorate at a “general election.”  In particular, the narrow question presented in Upland was whether the “general election” requirement of Article XIII C, Section 2(b) applied to measures put on the ballot by voter initiative, as it does for measures introduced by government officials or, alternatively, voter initiatives could be presented at a special election.  The Supreme Court found that the general election requirement did not apply to tax measures introduced by voter initiative.

Notwithstanding the Upland Court’s narrow holding, commentators began questioning whether the supermajority requirement in Proposition 218 was likewise limited to government-proposed taxing measures.  Interestingly, the Upland Court distinguished between the general election requirement in Article XIII C, Section 2(b) and the supermajority requirement in Article XIII C, Section 2(d) in its decision by noting that voters had “explicitly imposed a procedural two-thirds vote requirement on themselves in article XIII C, section 2, subdivision (d),” leading some to conclude that the supermajority requirement would apply to voter initiatives.  However, other aspects of the Upland decision, including the Court’s arguably broader rationale that restrictions on “local government” should not be applied to the electorate, led others to conclude that Section 2(d) would likewise not apply to voter initiatives.

After the Upland decision, several citizens voter initiatives imposing local taxes were added to ballots. This included the business tax imposed by Proposition C, an Oakland parcel tax increase, a Fresno sales tax increase, a transient occupancy tax in Del Norte County, and others. Each of these voter initiatives passed by majority (but not supermajority) vote.  Thus courts began reviewing the supermajority requirement to determine if those tax measures are valid.

Matter of Proposition C

The Court of Appeal’s recent decision in Matter of Proposition C focuses on the San Francisco Homelessness Gross Receipts Tax, which was put onto the ballot by voter initiative and passed in 2018 with a 61.34% vote.  The tax  is imposed on businesses with taxable gross receipts of over $50 million and is the largest tax increase in the City’s history. It was estimated to yield $300 million annually to fund homeless services in the City.  See City & County of San Francisco, Office of Economic Analysis, Proposition C (Sept. 26, 2018).  The City and County of San Francisco filed suit against “all interested parties” to establish that Proposition C was validly enacted through the voters’ initiative power.  Three business associations, joined by several amicus curiae, answered the complaint and alleged that Proposition C was invalid because it was not passed by a supermajority vote.

The trial court found in favor of the City in July 2019, ruling that under Upland, the supermajority requirement in Article XIII C, Section 2(d) of the California Constitution did not apply to voter initiatives.  In short, the court found that Sections 2(b) and 2(d) must be interpreted consistently, and that there was no clear statement of intent in Section 2(d) to constrain the people’s initiative power.  The trial court’s decision was immediately appealed.  On June 30, 2020, the Court of Appeal upheld the decision of the trial court.  The appellate court analyzed the history of the voter initiative constitutional provisions, the later constitutional provisions constraining the state and local governments’ ability to enact new taxing statutes, and the precedential case law addressing the interplay of these provisions in detail, and came to the conclusion that the law must be interpreted broadly in favor of giving effect to the Proposition C voter initiative.  The court thus found that none of Proposition 13, Proposition 218, and the San Francisco City Charter imposed a supermajority requirement on taxing measures proposed through voter initiative.

We expect this case to be appealed to the California Supreme Court.  This case has wide implications beyond Proposition C.  The California Supreme Court may accept the case to clarify the reach of its holding in Upland.  Additionally, with cases pending in other Appellate Districts, the California Supreme Court may also review the case to prevent a potential appellate-level split in authority. In the interim, given the appellate court’s holding that local tax increases could pass by simple majority, we expect a further increase in voter initiative tax measures.

Contact the Authors: Mike Shaikh and Niki Ford