By: @Kyle Packham, @Marcus Detwiler, and @Anthony Tannehill
Late Monday, June 29, the California State Legislature formally passed the 2026-2027 State Budget deal announced by Governor Gavin Newsom and Legislative leaders the preceding Friday. The $352 billion budget spared special districts from new restrictions on development related fees needed for infrastructure while raising sales and use taxes on digital software.
Additional budget legislation is possible later this week and is expected in the closing days before the August 31 end to the legislative session. The Legislature and Governor have deferred Proposition 4 bond funding allocation decisions to such August budgetary legislation. Some discussions related to the Greenhouse Gas Reduction Fund also have also been deferred until August.
Thus far, the California High-Speed Rail Authority’s proposal to divert property tax revenue away from local governments has not been formally introduced. CSDA and local government partners continue to vigilantly advocate against such action.
California’s State Budget was formally placed into print as SB 111 and AB 111 late Friday, June 26, along with about 20 budget trailer bills. Overviews of the approved State Budget include:
CSDA Secures Language to Clarify Special Districts Excluded from Development Related Fee Restrictions
One proposal includes language that would pressure local governments to waive a wide array of development related fees to apply for grants on certain state subsidized state affordable housing programs. It would also bar local governments, when acting as a lead applicant or co-applicant on certain housing projects receiving state funding, from charging development impact fees on those projects as a condition of receiving state funding. “Impact fee” for these purposes is defined as those in mitigation fee act, Quimby fees-in-lieu for park lands, certain Mello-Roos and special taxes.
The Governor’s administration stated that special districts were not intended to be included in the proposal. However, given the nature of the relationship between land-use authorities and special districts regarding the imposition and collection of impact fees, many districts found the language lacking clarity. There were concerns that a city or county would be able to waive fees for special districts based on the original language. CSDA and its aligned partners sought assurance special districts will not have their impact fees cut in these circumstances.
CSDA staff met with the Governor’s administration and key budget and legislative leadership staff, and testified in the relevant hearings, successfully securing amendments explicitly exempting special districts from the measure.
CSDA Continues to Push for Exclusion from New Sales Tax on Digital Software
The Governor’s May Revision budget proposal included a quartet of revenue generating proposals, one of which was the imposition of sales and use taxes on the purchase of digital prewritten software. Previously, sales and use taxes only applied to the sale of software furnished in a tangible, physical medium (e.g., CD-ROM).
While certain purchases in certain situations would be spared from the imposition of sales and use taxes, special districts would largely be required to pay these new taxes when acquiring software for their operations. Problematically, while the requirement to pay those sales and use taxes would also apply to the State and cities and counties, those governmental entities receive shares of those taxes; special districts generally do not receive sales and use tax revenues. This has created a disparity where special districts as a unit of local government are required to pay these new taxes without offsetting revenues like the other units of government.
CSDA, in collaboration with other local government association stakeholders, has pressed for a special district exemption from the sales and use tax on software purchases.While the sales and use tax proposal has been incorporated into the trailer bills AB 122 and SB 122, CSDA remains engaged on this issue as budget conversations continue to occur in the Capitol. CSDA is also soliciting special districts to make their opposition known by authorizing CSDA to include individual districts on advocacy communications going forward.
CSDA Vigilantly Protects Against Property Tax Diversion by High-Speed Rail
CSDA, along with its local government association partners, expressed opposition to specific elements of the California High-Speed Rail Authority’s 2026 Business Plan. One element in particular would implicate special district property tax revenues: the Authority’s 2026 Business Plan detailed the Authority's intent to pursue legislation that would empower it to create tax increment financing districts, intended to effectuate “value capture” around the planned High-Speed Rail project’s rail stations. The tax increment financing districts would capture growth in property tax revenues within a one-half mile radius of the rail stations, directing that growth to the Authority to spend on the project. Special districts with property taxes assessed on any of the parcels falling within that half mile radius would effectively see those revenues frozen at a certain level as a result of the tax increment district.
CSDA submitted public comments at budget subcommittees, a Senate informational hearing, and the California High-Speed Rail Authority’s June 1 meeting where approval of the Business Plan was considered. This accompanied a coalition letterfrom CSDA and other local government associations submitted in connection with written public comments on the Business Plan. Special districts also provided comments, including the Ripon Fire Protection District that provided verbal public comments at the April 27 meeting of the Senate Transportation Committee.
Ultimately, while the Authority approved a version of the 2026 Business Plan that kept references to the tax increment financing districts intact, Authority staff were pressed by Authority board members to explain the intended nature of local government participation in the potential tax increment financing districts. Local governments, including special districts, had made an impact on the proceedings by gaining the attention of Authority board members. Authority staff responded that local government participation in the potential tax increment financing districts is envisioned to be voluntary. CSDA continues to monitor this issue to ensure that special district participation in the potential tax increment financing districts is conditioned on their express, meaningful, freely-given consent, safeguarding property tax revenues for special districts.
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