Would Extending the Sales Tax To Services Violate Proposition 218?

As part of his plan to solve California's fiscal crisis, the Governor is proposing to extend the sales tax to services. In an article (here), the Howard Jarvis Taxpayers Association contends that this would violate Prop. 218. Here's their rationale: extending the reach of the sales tax would also increase that portion of the tax (the Bradley-Burns tax) that goes to local entities. That can't be done under Proposition 218 without a vote of each local governing body and each local electorate.
Here's the contrary argument: Prop. 218 focused exclusively on tax measures approved at the local level. But Article XIII A, Section 3--part of Proposition 13--permits the Legislature to approve tax increases--whether state or local--by a two thirds vote. If that requirement is met, the constitution is satisfied. Indeed, the central vice of HJTA's argument is that it proves too much--under it, the Legislature could never expand the list of items subject to the sales tax. That can't be right.

Here's the comeback: By its terms, Article XIII A, Section 3 covers only "changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto." The local sales tax is not a "state tax" for purposes of this provision, since the revenue goes to local governments. Indeed, according to HJTA, the Governor's sales tax proposal expressly refers to "all current applicable state and local taxes." Since even the Governor recognizes that the sales tax includes both state and local taxes, you can't use Prop. 13 to get around Prop. 218.

In response, the State would have to argue that the entire sales tax is a "state tax" for purposes of Article XIII A, Section 3, regardless of whether the money winds up going to the state or local governments. That's a better argument than you might think, because for about half a century the sales tax has been almost entirely a creature of state law. For example, in 2004 the state enacted something colloquially known as the "triple flip," by which the local sales tax was reduced by .25 percent, the state sales tax was correspondingly increased (to pay for deficit reduction bonds), and local government's loss of revenue was backfilled through the property tax. Moreover, the sales tax is administered by a state agency pursuant to uniform statewide rules. And, most importantly for this issue, the universe of transactions subject to the tax is fixed by state law (and probably has been for the last half-century, well before the passage of both Proposition 13 and Proposition 218). So the sales tax is a "state tax" for purposes of Article XIII A, Section 3 regardless of where the money goes, at least insofar as state law determines which commercial transactions are subject to the tax and which are not.

If and when the sales tax is extended (perhaps a doubtful proposition in itself), it will be interesting to see how this plays out.