Staff Report - Sales Tax Capacity Final
PREPARED BY: STEPHEN CONWAY
FINANCE DIRECTOR
Reviewed by: Town Manager, Assistant Town Manager, and Town Attorney
110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 11/07/2017
ITEM NO: 19
ITEM NO: 11
DATE: OCTOBER 31, 2017
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: APPROVE THE RECOMMENDATION OF THE COUNCIL FINANCE COMMITTEE
TO PROCEED WITH PREPARING A BALLOT MEASURE TO PLACE A 1/8 CENT
GENERAL SALES TAX ON THE NOVEMBER 2018 BALLOT FOR LOS GATOS
PRIORITIES
RECOMMENDATION:
Approve the recommendation of the Council Finance Committee to proceed with preparing a
ballot measure to place a 1/8 cent general sales tax on the November 2018 ballot for Los Gatos
priorities and direct Staff and the Council Finance Committee to begin preparing ballot measure
language and a draft sales tax ordinance to bring back for Town Council consideration.
EXECUTIVE SUMMARY
On October 4, 2017 the Council Finance Committee discussed placing a 1/8 cent general sales
tax on the November 2018 ballot for community consideration. Because state law limits the
ability of the Town to bring a sales tax measure to voters only during Council election years, and
because of the state cap on local sales tax additions described later in this staff report, there is
a distinct possibility that other local taxing entities could take actions that would preclude the
Town’s ability to ever seek a sales tax specifically dedicated for Los Gatos purposes. As such,
staff believes it is prudent at this time for the Council to consider providing the community the
opportunity to consider a sales tax dedicated to the Town.
BACKGROUND:
State of California Sales Tax Structure
California, like the majority of states, utilizes a Sales and Use Tax (SUT). The sales tax, begun in
1933, is imposed on retailers selling tangible goods in California. The sales tax provides for
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BACKGROUND (cont’d):
certain exemptions and is not levied on food purchased as groceries or on prescription
medications, in addition to other exemptions. The use tax, begun in 1935, is imposed on the
users of a product purchased out of state but brought into California for use (such as a mail
order item from another state).
The California SUT is comprised of a standard statewide component and a local jurisdiction
component. The local jurisdiction component allows municipalities and counties, through voter
approval, to add additional district taxes. However, the combined rate of all district taxes in
any county cannot exceed 2.00%. The statewide base sales tax rate is currently 7.25% and
when combined with the 2% local cap provides a legal capacity of 9.25%. As the table below
illustrates there is currently only 0.25% of local sales tax capacity remaining.
Town of Los Gatos Current Sales Tax Rate
Remaining Local Jurisdiction Capacity 0.25%
Los Gatos Dedicated Rate: 0.00%
Current Santa Cara County Rate:* 1.75%
Total: 9.25%
Local Jurisdiction Cap 2.00%
California State-Wide Tax Rate: 7.25%
*Includes the currently approved half-cent VTA Measure B Tax Rate
Types of Local Sales Tax Initiatives
Local agencies may impose taxes, subject to voter approval, using a variety of methods.
Pursuant to Proposition 218, these taxes are classified as either "general" or "special."
Whether the ballot measure requires a simple majority (50% + 1 vote) or a super majority (two-
thirds of those voting in the affirmative) depends upon the ballot language and whether the
question is placed upon the ballot as a general tax increase or a special tax increase.
General taxes may only be put on the ballot at the same general election when the Town
Council election is held, unless the Council unanimously finds that there is an urgent need to
impose the tax measure. Upon such unanimous declaration, the general tax measure may be
put before the voters at a special election. All proceeds of a "general tax" are deposited into
the General Fund and would be available for general Town purposes. A majority vote (50% + 1)
of the electorate is required to impose, increase, or extend a general tax.
Special taxes may be placed before the electorate at any time, either during a general election
or in a special election. A special tax is a tax imposed for a specific purpose. For example, some
cities dedicate tax revenues for the payment of law enforcement or street maintenance
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BACKGROUND (Cont’d):
costs rather than using the taxes for general operations. A two-thirds majority of voters is
required to impose, increase, or extend a tax for a specific purpose. Special tax revenues must
be accounted for in a separate fund. The Measure B tax for transportation improvements is an
example of a special tax.
Town of Los Gatos Sales Tax Receipts
Like all California jurisdictions, the Town receives 1 cent of sales tax paid per dollar from the
state-wide rate on retail sales and taxable goods transacted within Los Gatos. Sales tax is the
second largest revenue source for the Town’s General Fund, accounting for 20.3% of budgeted
General Fund revenues for FY 2017/18. As the chart below illustrates, sales tax revenues for
the Town have been steadily declining since the peak in 2011. A 2013 report from the State’s
Legislative Analyst’s Office (LAO) entitled Why Have Sales Taxes Grown Slower Than the
Economy discussed how consumer spending on taxable goods has been a declining share of
income since 1980. In addition, for the second quarter of 2017, the most recent sales tax and
economic review update from MuniServices (the Town’s sales tax consultant) states that while
sales tax receipts statewide grew by 1.0%, Town of Los Gatos sales tax revenues decreased by -
3.6% over the same period.
* FY 2016/17 Actual Sales Tax includes a $900,00 final “triple-flip” true-up payment form previous fiscal years including FY2015/16.
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000
2007/08
Actuals
2008/09
Actuals
2009/10
Actuals
2010/11
Actuals
2011/12
Actuals
2012/13
Actuals
2013/14
Actuals
2014/15
Actuals
2015/16
Actuals
2016/17
Actuals*
2017/18
Adopted
Sales Tax Revenue History
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DISCUSSION:
Reduced Opportunities for a Town of Los Gatos Sales Tax Measure
Based on the current taxes imposed at the state and local level, the Town of Los Gatos can
potentially seek a quarter (0.25%) sales tax without breaching the 2% local district capacity cap.
California tax law allows tax initiatives to be placed on the ballot in one-eighth (0.125%)
increments. Signed by the Governor, Senate Bill 797 Peninsula Corridor Joint Powers Board:
Transactions and Use Tax proposes seeks a transaction and use tax of 0.125% to fund ongoing
maintenance and infrastructure for Caltrain . The proposed ballot measure applies to the
Counties of San Francisco, San Mateo, and Santa Clara. If the proposed measure is approved by
the voters it means that the combined Sales Tax rate in Los Gatos will be 9.125%. The new
combined rate, if approved, would further reduce future sales tax capacity of the Town to
0.125%. Based on a review by MuniServices, the approval of a 0.125% sales tax could provide
approximately $800,000 in additional annual revenue, while the 0.25% increase would provide
approximately $1.6 million annually.
Sales Tax Scenario Analysis
Any change in the economic environment could impact sale tax revenues. Since World War II,
the average economic expansion has lasted 58.4 months. With the current economic
expansion lasting over 100 months, MuniServices has been providing its clients with a scenario
analysis which simulates the potential impact of an average recession on sales tax receipts. The
Contraction Scenario is based on the weighted reduction in sales tax revenues in Los Gatos
during the last four recessions, since 1990. Recessions prior to the most recent Great Recession
are given greater weight, due to its abnormal severity and length in time. As the simulation
illustrates an average Los Gatos recession could potentially result in a temporary reduction in
revenues in excess of a million dollars per year.
2018/19
Forecast
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
Sales Tax $7.9 $8.1 $8.3 $8.5 $8.7
Contraction
Scenario
$7.0 $6.8 $6.7 $6.8 $7.0
Difference $(0.9) $(1.3) $(1.6) $(1.7) $(1.7)
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DISCUSSION (cont’d):
Council Finance Committee Discussion and Recommendation
At the October 9 Finance Committee meeting, public testimony by two residents indicated a
preference for a special tax for specific purposes, such as reducing the unfunded liability. One
of the resident members of the Committee also expressed a preference for a special tax and
suggested that the Town should seek a quarter cent tax increase. Other resident members
were either absent or choose not to comment on this topic.
While the Council members on the Committee expressed appreciation for the perspectives of
the other Committee members and the public, the Committee passed a motion to recommend
to the Town Council that the Town move forward with next steps towards placing an 1/8 sales
tax measure on the 2018 ballot.
CONCLUSION AND NEXT STEPS:
Based on the aforementioned diminishing opportunity to seek a local sales tax and the elastic
nature of the existing sales tax revenue, staff recommends 0.125% sales tax ballot measure. By
placing this matter on the ballot, the community will have the opportunity to consider a sales
tax dedicated solely to the Town.
In order for the Town Council and Finance Committee to have sufficient time to initiate a sales
tax ballot measure, the Council should direct staff to complete the following next steps.
Staff presents the Council Finance Committee with proposed ballot language (January)
The Council Finance Committee recommends draft language to the Town Council
(February)
Staff prepares and presents to Council the authorizing ordinance(s) and Council
Resolution for the proposed ballot measure (April)
Town Council considers a Resolution placing the revenue generating measure for the
exclusive use of the Town on the November 2018 election ballot (June)
If placed on the ballot and if over 50% of the voters approve it, the increased sales tax would go
into effect in April 2019.
COORDINATION:
This report was coordinated with the Town Manager’s Office, the Town Attorney’s Office, and
the Finance Department.
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FISCAL IMPACT:
Total election costs for the Town for three Council seats and one ballot measure are yet to be
determined, however, the cost for two seats and one ballot measure in 2016 was
approximately $120,000. In addition under the Revenue and Taxation Code section 7272, the
Board of Equalization (BOE) will bill a new special taxing jurisdiction for preparatory charges to
administer the new district tax based on actual costs after the tax has been submitted by the
various BOE units’ actual charges. The statutory maximum amount of preparatory costs shall
not exceed $175,000.