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Do taxes go up if an unincorporated area becomes a city?

The short answer is "no". Local revenues are derived from many sources and local taxation is complex and often misunderstood, hence a long answer is provided below. Please notice two consistent themes therein: 1) the State of California makes rules that counties and cities must carry out and 2) increases in local taxes require approval by local voters. There is no wiggle room that lets a new city avoid compliance with the state's tax rules. Creation of a new city just moves the responsibility for municipal service delivery -- as well as the existing set of tax revenues -- from the County to the new city. Very minor changes in taxation, such as imposition of a transit occupancy tax might occur, but even those changes require voter approval.

A significant share of local municipal revenues -- usually about a third of local municipal service revenues, or about a fourth if fire suppression is provided by some other entity --  is derived from taxes on property, including real estate and motor vehicles. State law (Prop13) limits real property taxes to a maximum 1% of assessed value, not including voter-approved rates to fund debt. The assessed value of property is the base year value plus the value of any improvements, plus annual inflation capped at 2% per year. The base year value is the value at the most recent sale or the 1975–76 market value. Property that declines in market value may be temporarily reassessed at the lower value. Property is reassessed to current full value upon change in ownership. State law also stipulates how these taxes are distributed to counties, cities, school districts and special districts. Counties get a share for regional services (like courts, prisons, tax collection, voter registration, etc.) AND a share for municipal services provided to unincorporated areas. If a new city is created, the county is relieved of its municipal service responsibilities for the new city's territory and the municipal services share for that territory is transferred to the new city. Real property in the new city is not reassessed until there is a sale to a new owner.

Additional taxes on real property can only be imposed per rules in the state constitution or other state laws: benefit assessments (Prop218) must correlate to specific value additions to a property owner's parcel and parcel taxes and local bonds (Prop13) require approval by a 2/3 voter majority or 55% in the case of a school bond. Such rules apply to all local jurisdictions and do not give any special privileges to a new city.

Other property taxes are derived from motor vehicle registrations. The Vehicle License Fee (VLF) is a tax imposed by the state on the ownership of a registered vehicle in place of taxing vehicles. Counties and cities receive additional property taxes to replace VLF revenue that was cut when the state permanently reduced the VLF in 2004. This property-tax-in-lieu-of-VLF grows with the change from the prior year in gross assessed valuation of taxable property in the jurisdiction. Property-tax-in-lieu-of-VLF allocations are in addition to other property taxes apportioned by the state. Every one of California's 482 cities is provided with this revenue stream, although newly-formed cities are not. State legislation is needed to remedy that problem.

The tax on retail sales is another category of consequence. The sales tax an individual pays on a purchase is collected by the state Board of Equalization and includes a 6% state sales tax, the locally levied Bradley-Burns (state law since 1956) sales tax, and several other components. The sales tax is imposed on the total retail price of any tangible personal property. State law provides a variety of exemptions to the sales tax. The statewide Bradley-Burns sales tax rate rate is 1.25%, 1% of which which is allocated by the state to counties or incorporated cities to use at their discretion, and the other 0.25% to counties to support transportation programs. Formation of a new city would result in the 1% sales tax allocation to be moved from a county to the new city. Counties and cities are also empowered by state law to increase sales taxes slightly if voters so approve. Voter approval for specific purposes has currently set sales taxes in Sacramento County at 7.75% in the cities of Citrus Heights, Elk Grove, Folsom and the unincorporated Uncity; at 8.25% in the cities of Sacramento, Galt and Rancho Cordova; and at 8.75% in the city of Isleton. Sales taxes typically account for between 33%-45% of municipal revenues, but that may be changing. The state has become concerned that e-commerce is disrupting traditional sales tax revenues and that places with warehouse and distribution centers unfairly benefit because of point-of-sale concentrations.

Other municipal revenues are derived from a variety of sources other than taxes -- things like fees for services (e.g. building permits, community center rentals, parking meters), franchise fees (e.g. cable TV, garbage), or fines and penalties. There are also a other minor tax revenues that counties and cities may, or may not, choose to impose. These include business license taxes, utility user taxes (UUT) and transit occupancy taxes. Although counties and cities may set their own business taxes, they can only only tax that portion of the business’s activities conducted within their own jurisdiction. Counties and cities also set their own UUT rates, however majority voter approval is necessary to impose or increase this tax. Local voter approval is also necessary for transit occupancy taxes imposed on hotel users.

For more information, please refer to the Institute for Local Government and the California Local Government Finance Almanac.

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Typical revenues (left) and expenditures (right) for a full-service city. For a contract city, with certain services delivered by other entities (e.g. parks&rec or fire), property tax distribution to the city is less and expenditures are less. {Source:, 2017}
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