California officials do not have the power to withhold sales or property taxes from cities as a hammer to force locals to release millions of dollars in remnant funds from the dissolution of 400 redevelopment agencies, a state appeals court has ruled.
The Third District Court of Appeal in Sacramento said Thursday the law allowing the state to retain property and sales tax money to force cities to comply with the surrender of unused redevelopment money is unconstitutional.
The law violates Proposition 22, passed by voters in 2010, which bars the state from “reallocating, transferring, or otherwise using revenues from taxes imposed or levied by local government solely for local government’s purposes.”
Under the Community Redevelopment Law, cities and other local agencies, could sponsor redevelopment projects such as low and moderate income housing, shopping centers or sports stadiums.
The state abolished the 400 agencies in 2011 and substantial funds in the agencies’ hands were turned over to cities to complete the projects and pay off debt. Any money left was supposed to go to counties to be redistributed to schools and other county programs.
But some cities balked and held on to the money, such as Bellflower. The state law anticipated the sticky fingers and allowed for withholding of sales tax or property tax revenues to the cities to prompt release of the funds. Bellflower, along with the League of California Cities, sued, claiming the withholding of tax funds was unconstitutional.
There was a wave of litigation by other cities disputing the funds to be relinquished, or disputing proposed penalties. Many have settled, the few that remained won a constitutional victory Thursday in state court.
Withholding the tax revenue is not the only way to get the cities to relinquish the remnant funds, according to the appeals court. The state could go to court for a judicial order to pay up, it said.
“Withholding local tax revenue simply is not a remedy available to the state for taking funds away from a local government entity because the voters precluded that remedy when they passed Proposition 22,” Justice George Nicholson wrote.
He was joined by Justices Vance Raye and Kathleen Butz.
It is unclear the total dollar amount remaining in dispute between the state and local governments.
Case: City of Bellflower v. Cohen, No. C075832