On August 28, 2017, the California Supreme Court issued a 5-2 split decision in California Cannabis Coalition v. City of Upland, S234148. The Court held that a revenue measure proposed by citizen initiative is not “imposed by local government," and does not trigger the procedural limitations of Article XIII C of the California Constitution,^[1] as a result. The Court rested its decision on both the expansive nature of the initiative power in California and the text of the California Constitution's voter-enacted restrictions on government revenue measures.

Immediate responses from many commentators reflect an expansive view of this decision, including a perception that the case could pave the way for communities to establish special taxes with majority voter approval, rather than the 2/3 required by Article XIII C, section 2. There is some ambiguity on this point, however, and an alternate reading of the case suggests a narrower impact from the decision.  Most importantly, dicta in the case arguably signals that special taxes cannot be adopted by a simple majority of the electorate, no matter the genesis of the initiative.  Future appellate decisions will have to decide which reading is correct.

Factual and Procedural Background

In September 2014, the California Cannabis Coalition (“CCC”) introduced a local ballot initiative to repeal the City of Upland’s ban on cannabis dispensaries. The initiative also aimed to establish related regulations on cannabis dispensaries and a licensing fee to cover regulatory expenses. In conformance with Elections Code section 9214, CCC qualified its initiative for a special election. The City, however, evaluated the likely cost of administering the initiative’s regulatory scheme and concluded that those costs were significantly less than the anticipated revenue from the licensing fee. The city attorney and, ultimately, city council reviewed the cost study and determined that, because revenue would exceed regulatory costs, and because the excess revenue would be diverted to the City’s general fund, the fee was a general tax subject to Article XIII C, section 2, which requires that a general tax "impose[d], extend[ed], or increase[d]" by a "local government" must be approved by a majority vote at a general election.

CCC sued for a writ of mandate to require the city clerk to place the initiative on the special election ballot. CCC argued that the fee would not be a tax because it would be imposed by voters, not a "local government." CCC also introduced evidence that the fee would not actually exceed regulatory costs, such that it would qualify as a regulatory fee, rather than a tax, under Article XIII C. The trial court rejected CCC’s arguments, finding the fee was a tax, and the initiative could only proceed in a general election.

The Fourth District Court of Appeal reversed. In fairly broad terms, the court ruled, "Taxation imposed by initiative is not taxation imposed by local government,” and the initiative could proceed at a special election as a result. (See Cal. Cannabis Coalition v. City of Upland (2017) 245 Cal.App.4th 970, citing Ponderosa Homes, Inc. v. City of San Ramon (1994) 23 Cal.App.4th 1761, 1770.)

The California Supreme Court Rules Taxes Enacted by Initiative Are Not "Imposed by Local Government" and Do Not Trigger the Procedural Protections of Article XIII C

In a 5-2 decision (Justices Kruger and Liu dissenting in part, but concurring in the judgment), the California Supreme Court affirmed the Fourth District, focusing on two central points. 

The first and arguably most significant point is the Court’s confirmation that revenue measures enacted by voter initiative are not “imposed" by "local government” and therefore do not trigger the procedural limitations of Article XIII C. That is because “the common understanding of local government does not readily lend itself to include the electorate, instead generally referring to a locality’s governing body, public officials, and bureaucracy.” That view of "local government," the Court found, was also consistent with the purposes of Article XIII C outlined in the ballot materials. “The crux of the concern repeatedly reflected in the ballot materials is with local governments and politicians –– not the electorate –– imposing taxes.” Thus, taxes and fees imposed by the electorate are not "imposed" by "local government.” To reach this conclusion, the Court also adopted the definition of the word “impose” as articulated by Ponderosa Homes, Inc. v. City of San Ramon (1994) 23 Cal.App.4th 1761, 1770 (holding "'To impose' generally means to establish or apply by authority or force...")  and Santa Clara County Local Transportation Authority v. Guardino (1995) 11 Cal.4th 220, 240. (See also League of California Cities, "Propositions 26 and 218 Implementation Guide," p. 58 (May 2017).)  “Here, ‘impose’ most plausibly means to establish or enact, and article XIII C, section 2 applies only if it is the local government doing so.” The Court, thus, rejected the City's argument that a tax, fee, or other charge is "imposed" within the meaning of Article XIII C when it is collected by local government. Thus, because the fee was not enacted by local government it was not “imposed” by local government.

The second basis the Court articulated for the result in this case is the primacy of the initiative power under California law. The Court reviewed a line of prior Supreme Court decisions establishing that the initiative power must be construed liberally in favor of its exercise. Accordingly, while voters can enact procedural limitations on the initiative power—"tying their own hands" to prevent future actions—such limitations must be expressly stated in the text of a provision or evidenced by a similarly clear, unambiguous indication of intent. In turn, finding an implied limitation, said the Court, would be inconsistent with the mandate to construe the initiative power broadly. Examining Article XIII C’s requirement that votes on general taxes occur during a general election, the Court found no such express limitation on the power of voters to enact laws by initiative. Consequently, the requirement that votes on general taxes occur during general elections does not apply to taxes proposed by initiative.

There Is Uncertainty About the Scope of This Case as Applied to Future Tax Initiatives

Without question, this case establishes that voters, acting independently, can enact new taxes by initiative at special elections. Beyond that clear holding, however, there is some ambiguity about how the Court's decision will be applied to other constitutional limitations and future revenue initiatives. Some commentators have been quick to identify this case as opening a path to significantly easier local taxation, and they may well be right. There are, however, some indications that the Court constructed its decision carefully to be narrow in application.

It Is Unclear Whether Voters Can Enact Special Taxes by Simple, Majority Vote

Most importantly, many commentators have suggested that special taxes may now be enacted by simple, majority vote if proposed by initiative, creating a loophole in Article XIII C's mandate that special taxes be approved by 2/3 of voters—a mainstay of California revenue law for two decades. (See Cal. Const., art. XIII C, § 2, subd. (d).) But, dicta in the decision may undermine that argument. In its discussion of the initiative power, the Court identifies the 2/3-vote requirement for special taxes as an example of a self-imposed, express limitation on voter authority. Consistent with the Court's discussion of voters' power to "tie their own hands," this otherwise unnecessary dictum arguably suggests voters may not be able to avoid the 2/3 requirement.

On the other hand, the Court's discussion of the 2/3-vote requirement is not a holding that binds future courts; the applicability of the 2/3-vote requirement was not at issue in this case. Moreover, there are good arguments that the Court's analysis of the "imposed by local government" language should apply in the same way to the 2/3-vote requirement and the general-election requirement. Both provisions begin with the same phrase, "no local government may impose." (Cal Const., art. XIII C, § 2, subds. (b), (d).) And if tax initiatives are not "imposed by local government," then Article XIII C is not triggered at all, and its limitations should not apply.

Which reading is the correct one will almost certainly be the subject of future litigation.

It Is Unclear How this Decision Will Affect Other Limitations on Revenue Measures Established by Articles XIII C and D

The Court also distinguished between procedural limitations and substantive limitations on legislative authority. While substantive limitations apply to initiatives, the Court found that procedural limitations do not apply unless the restriction binds voters expressly. The examples of substantive limitations the Court gave were an initiative that would have amended state redistricting laws in a manner contrary the constitution, and state-law preemption of local laws. (See American Financial Services Assn. v. City of Oakland (2005) 34 Cal.4h 1239; Legislature v. Deukmajian (1983) 34 Cal.3d 658.) Because the legislature could not have enacted those laws, says the Court, neither can voters. By contrast, procedural limitations appear to concern only the means by which laws are enacted, such as notice-and-hearing requirements or a 2/3-vote requirement in the state legislature. Accordingly, the decision should have the following impacts on the requirements in Article XIII C, section 2:

• General taxes imposed by a public agency must be approved by majority vote during a general election.
• General taxes imposed by voter initiative must be approved by majority vote in either a general or special election. (Cal. Const., art. XIII C, sec. 2, subds. (b).)

• Special taxes imposed by a public agency must be approved by a 2/3-vote in either a general or special election. (Cal. Const., art. XIII C, sec. 2, subds. (d).)
• Special taxes imposed by voter initiative may require approval by a 2/3-vote in either a general or special election. (Cal. Const., art. XIII C, sec. 2, subds. (d).)

Notably, the Court also identifies similar restrictions on revenue measures "imposed" by "local governments" in Article XIII D, which established both procedural and substantive limitations on property-related fees, charges, and assessments. Arguably, the Court's decision applies to those limitations in the same way that it does to the restrictions established by Article XIII C. Assuming so, the Court's decision could have the following impacts on the requirements in Article XIII D:

• Public agencies seeking to impose assessments on property must continue to identify properties specially benefitted by funded public improvements, provide notice to owners with a detailed protest ballot, and conduct a public hearing at which property owners may protest the assessment. (Cal. Const., art. XIII D, sec. 4, subds. (a), (c), (d), (e).)
• Voters may be able to levy an assessment by initiative by majority vote without notice or hearing.
• No assessment imposed on any parcel, either by local government or voters, may exceed the reasonable cost of the proportional special benefit conferred on that parcel. (Cal. Const., art XIII D, sec. 4, subd. (a).)

• Public agencies seeking to impose or increase property related fees and charges must continue to identify all parcels impacted by the fee or charge, calculate the fee for each parcel, provide notice to all property owners, hold a public hearing, and consider written protests. (Cal. Const., art. XIII D, § 6, subd. (a).)
• Voters may be able to impose or increase property related charges or fees by initiative without notice or hearing, and—it may go without saying—the election requirement for fees other than water, sewer, and refuse charges is likely obviated by the initiative
• The amount of a fee or charge imposed upon any parcel or person as an incident of property ownership, whether by local government or by voters, cannot exceed the proportional cost of the service attributable to the parcel. (Cal. Const., art XIII D, sec. 6, subd. (b)(3).)

The Court Appears Willing to Treat Taxes Enacted by Initiative as Taxes "Imposed by Local Government" if the Initiative Arises from Collusion Between Local Government and Initiative Proponents

Agencies should also note that the Court telegraphed its willingness to look behind a tax initiative to determine whether it was truly enacted by voters or was the product of collusion between the local agency and stakeholders as an end-run to constitutional limitations. The hypothetical scenario articulated by the Court is pretty egregious—a local government conceding to the demands of an employees' union in exchange for the union advancing a new tax initiative to fund the local agency's concessions. But the Court draws no clear line between ordinary and legitimate public outreach in support of policy goals and the kind of collusive conduct that might justify treating a tax enacted by initiative as one "imposed by local government." Thus, agencies should be cautious when working with the community to support a tax initiative.