Plotting the boundary between state and local authority

The division of government authority among federal, state, local and tribal governments is often contested. The boundaries among them are decided more often by case law than by the plainer language of constitutions, statutes, treaties and ordinances. The California Supreme Court's latest contribution to this law is City and County of San Francisco v. Regents of the University of California, 2019 DJDAR 5440 (June 20, 2019), authorizing San Francisco to compel UCSF, UC Hastings College of the Law, and CSU San Francisco to collect the city's tax on those who pay to park in university parking lots.

Tension among governments is as old as federalism and the decision cites cases back to McCulloch v. Maryland, 17 U.S. 316 (1819), which many of us remember from law school. That case struck down Maryland's effort tax the Bank of the United States ("the power to tax is the power to destroy"). Yet, interactions among various governments make it inevitable that taxes of one will affect another. State income taxes affect the cost of a federal workforce and vice versa; local business taxes affect the cost of state construction projects; Indian tribes can be compelled to collect state and local taxes on transactions with non-Indians; cities bear the economic burden of state sales taxes on their vendors; etc.

Parking taxes, as anyone who works in California's major cities knows, are a big deal. In fiscal year 2014-2015, Santa Monica and Oakland received nearly $11 million and $18 million in parking tax revenue, respectively, amounting to approximately 4% of discretionary revenues. Such taxes made up nearly 2% of the average California city's general fund. Other major recipients of such taxes include such diverse cities as Los Angeles, Pasadena, South San Francisco, Ontario, San Clemente, Berkeley, San Bruno, Inglewood, Santa Cruz, Arcadia, Malibu, Salinas, Delano and Millbrae.

The state footprint is large, too: Its facilities include the 10 UC campuses, serving approximately 283,700 students and 198,300 employees and offering 125,626 parking spaces. The CSU system includes 23 campuses hosting 478,638 students and nearly 50,000 employees. In this last fiscal year, CSU budgeted to offer 161,113 parking spaces, generating $118.1 million. The state's footprint in San Francisco, Los Angeles and Sacramento is obvious. However, its facilities are ubiquitous and include 169 field offices of the DMV and other offices in every corner of California.

The question here is general to the relationship of competing governments and specific to the market for parking in San Francisco. If the universities could refuse to collect San Francisco's parking tax, it will go uncollected. As their parking lots are open to the public, as well as students, staff, patients and guests; they gain a competitive advantage -- they can sell spaces more cheaply or set prices comparable to others and pocket the amount of tax. This distorts the market and undermines the city's ability to fund services to the universities and others -- like police, fire, streets, etc. The burden on the universities is not trivial -- they have to collect, account for, and pay the tax and maintain ticketing and accounting systems to do so. However, San Francisco offered to reimburse the universities' administrative costs, leaving them to argue for what the Supreme Court found an "absolutist view of 'hierarchical sovereignty'" under our Constitution that prevents local governments from impeding state purposes. But is giving students cheap parking (or charging market-rate parking and pocketing the tax amount) a sufficiently important "state purpose" to justify the intrusion on San Francisco? The Supreme Court unanimously answered this question, "no." (Justice Joshua Groban did not participate in the case.) "Any municipal tax," the court wrote, "will produce economic ripples that reach every significant market participant. If state agencies could invalidate municipal taxes based on these indirect effects on their operations, little would be left of the city's revenue power."

The trial court had ruled against San Francisco, citing the so-called "Means-Hall doctrine" forbidding local governments to regulate state entities' "governmental functions" without state consent, but allowing regulation of "proprietary functions." In re Means, 14 Cal. 2d 254 (1939), forbade a city to enforce a registration requirement on plumbers working on county fairgrounds (owned by a state entity). Hall v. City of Taft, 47 Cal. 2d 177 (1956), barred that city to enforce building safety codes as to public schools (that role now falls to the state architect). The 1st District Court of Appeal affirmed over Justice Kathleen M. Banke's dissent, urging the Supreme Court to clarify law she found "in some disarray." The Supreme Court responded: "Hearing the call, we granted review."

San Francisco and its amici criticized the governmental/proprietary distinction as resting on outdated, value-laden assumptions about the role of government, noting it had been rejected by courts in settings such as government tort immunity (Muskopf v. Corning Hospital District, 55 Cal. 2d 211 (1961)) and, in federal courts, commerce clause immunity and tax law. Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528, 543 (1985) ("The [governmental/proprietary] distinction the Court discarded as unworkable in the field of tax immunity has proved no more fruitful in the field of regulatory immunity under the Commerce Clause."). The Supreme Court declined to address the vitality of that distinction, however, deciding the case on another basis.

As San Francisco and its amici had also urged, the Supreme Court applied case law policing the boundary between state preemption and the home-rule power of charter cities and involving intergovernmental tax immunity. The latter protects governments from paying taxes, but not from a duty to collect taxes from employees, customers and vendors. The result is "a more flexible [approach], capable of adaptation to the practical imperatives of governance." It respects "the need to maintain a sensitive balance between competing prerogatives" and "the fact- and circumstance-specific nature of the determination whether an ordinance governs a 'municipal affair'" so as to fall within home rule power. The rule requires "a sensitive balancing of constitutional interests, rather than a simple invocation of constitutional rank."

The power to tax those who engage in economic transactions with other governments is well established. Local governments may tax private actors transacting with other governments "provided the tax is nondiscriminatory" (i.e., does not target other governments' staff and vendors) and "bears the necessary 'fiscal relation to protection, opportunities and benefits given'" (i.e., is sufficiently within the jurisdiction of the taxing agency). Like Indian tribes, state entities may not extend their immunity from regulation to others: "Private parties transacting on state property may not appropriate to themselves the state's immunity from local taxation" nor may state agencies lease out that immunity for a share of the gain. Cf. People ex rel. Owen v. Miami Nation Enterprises, 2 Cal. 5th 222 (2016) (defendant seeking immunity from California's payday lender regulations required to prove it is "arm of the tribe" and not mere a licensee of its sovereign immunity).

The "anti-commandeering rule" of the federal Constitution, barring the federal government from conscripting state and local governments as a workforce, has no parallel under California's Constitution. Provided the burdens on other governments are reasonable (as where the taxing agency reimburses the collection cost) and there is no intrusion into regulation (how many parking spaces to provide and where, for example), the constitutional balance will typically favor the taxing agency.

This is a helpful clarification of rules that balance the powers of charter cities and state entities. It may also shed light on how this Supreme Court will view the occasionally conflicting roles of federal, state and tribal governments, too. 

Michael authored an amicus brief in San Francisco v. Regents for the League of California Cities.