California Tax Change Procedure Challenged

June 18, 2002 ( - A bill that brings California state tax law in line with EGTRRA changes is now the subject of a court fight over the way state legislators handle new tax bills.

A California taxpayer rights group and 44 Republican legislators alleged in a lawsuit that a state pension law required a two-thirds vote – not a majority vote – for passage because it contained items that increased or changed taxes, according to a BNA report.

The Howard Jarvis Taxpayers Association claimed in its suit that Governor Gray Davis violated Proposition 13 when he signed AB 1122 into law on May 8. Proposition 13 is a voter initiative adopted in 1978 that requires a two-thirds vote of the Legislature to enact state tax law changes that increase revenue collection.

The suit, filed in the Third Appellate District in Sacramento, challenged a 20-year-old legislative practice to package tax changes that increase and decrease revenue together to create a revenue-neutral bill.

Lawmakers had been using this approach under advice from the Legislative Counsel, which ruled in the early 1980s that a revenue-neutral bill requires only a majority vote.


In AB 1122, lawmakers conformed state law to federal pension and retirement changes under the Economic Growth and Tax Relief Reconciliation Act.

With a $44-million price tag for those changes in the first year, and a projected budget deficit of more than $23 billion, lawmakers added several provisions that increase revenue or accelerate revenue collection to make the measure revenue neutral in the first year.

The state’s Franchise Tax Board estimated the bill would increase revenue by $180 million after three years.


The provisions at issue in the lawsuit include:

  • elimination of the business deduction for employee compensation in excess of $1 million,
  • elimination of the business deduction for club dues, and
  • a requirement that taxpayers making an election for a Subchapter S corporation or Subchapter C corporation on their federal returns make the same election on their state returns

The Legislature faces a July 1 constitutional deadline to enact a state budget for the 2002 to 2003 fiscal year and “needs to know, as soon as possible, if it must replace the revenue anticipated from the challenged tax changes,” the lawsuit said.

The case is Howard Jarvis Taxpayers Association v Davis, Cal. Ct. App., No. CO41398, filed 6/13/02.