Stockton Voters to Determine Sales Tax Role in Bankruptcy on Tuesday

Voters in Stockton, California, will head to the polls on Tuesday to determine if a sales tax increase should go into effect to help the city recover from bankruptcy.

Voters will have the opportunity to approve two specific measures on the ballot related to sales tax.  Measure A calls for an increase in Stockton’s sales tax from 8.25 percent to 9.00 percent.  Measure B specifies how the city must use additional revenue from the sales tax increase, with 65 percent going toward law enforcement and 35 going toward bankruptcy debt.

More than 50 percent of voters must approve a measure in order for it to pass.  If passed, the sales tax increase would raise approximately $300 million in additional revenue over the next 10 years.

Supporters and Opponents Voice Their Position on Stockton Sales Tax Increase

The Stockton city council supports the increase in sales tax.  They believe they have cut as much expense from the city’s budget as they can to be able to continue functioning and now more revenue is simply required.

“If the tax doesn’t pass, we are facing an $11 million deficit,” noted City Councilman Michael Tubbs.  “We’ve been cutting for the past four years.  What else do we have to cut?”

However, opponents of the sales tax increase say there are more expenses that the city council can cut, including the funding of public libraries.  While many residents enjoy use of the libraries, they are not part of required basic infrastructure and safety measures the city should continue funding.

“We don’t buy it,” said David Renison, a representative of the San Joaquin County Taxpayers Association.  “We think [the city council is] going to find a way.  We think that if the measure does not pass, the city will be forced to do what should have been done in the first place.”

Opponents of the sales tax increase believe additional cuts are not only necessary given Stockton’s debt level but also possible given Stockton’s bankruptcy filing.

Bankruptcy Effect on Pension Payouts May Remain Unanswered with Sales Tax Increase

Stockton filed for Chapter 9 bankruptcy in July 2012, making it the largest U.S. municipality to file for bankruptcy at the time.  The largest debt owed by the city is the pension liability payable to retirees.

Opponents of the sales tax increase believe the bankruptcy gives Stockton the flexibility to reduce pension payments to city employees, who should share the debt burden owed by the city along with current Stockton employees and residents.

It is unclear that the California state constitution would allow a municipal bankruptcy to reduce pension payments.  Legal experts believed Stockton’s bankruptcy filing would force the bankruptcy court to rule on the question about pension payments, which would establish a legal precedent on pensions for other municipalities facing bankruptcy.

However, In the event the sales tax increase passes, Stockton can likely continue to make pension payments as planned, meaning the question on how a municipal bankruptcy affects pension payments will remain unanswered for now.

Polls conducted ahead of the vote on Tuesday show that approximately 60 percent of voters are in favor of the sales tax increase.  If the measure passes, the sales tax will go into effect on April 1.

 

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.