No Tax Relief for the Anexed: Court of Appeal Holds Proposition 218 Does Not Apply to Annexations

Water Law  

October 2012

On October 5, 2012, the Fourth Appellate District Court of Appeal issued an opinion in Citizens Association of Sunset Beach v. Orange County Local Agency Formation Commission, ___ Cal.App.4th ____, Case No. G045878 (2012), holding that plaintiff landowners in Orange County whose property was annexed into the City of Huntington Beach must pay the city’s existing taxes even though they did not get to vote on either the taxes or the annexation. The landowners, from Sunset Beach, argued that Proposition 218 prohibits levying a special tax and an additional increment of general tax on them unless they first get to vote on them. In rejecting their argument, the Court’s concluded that if Proposition 218 were intended to require a vote whenever an annexation involved a tax differential, its proponents would have resolved the quandary of how an annexation vote is to deal with applying Proposition 218’s two different thresholds for approving general taxes (simple majority) and special taxes (two-thirds), but they did not.


Since 1904, Sunset Beach has been 134 or so acres of unincorporated land in Orange County. Too small to make a viable city on its own, Sunset Beach was content to go on receiving various municipal-type services from the County. The County, wishing to divest itself of these kinds of services, encouraged the City Council of adjacent Huntington Beach to apply to the Orange County Local Agency Formation (OC LAFCO) for an order annexing Sunset Beach.

When OC LAFCO staff recommended approval of the annexation, the Citizens Association of Sunset Beach filed suit, arguing that Proposition 218—which applies to new, increased, or “extended” taxes—required giving them the chance to vote on whether they should be subject to the existing Huntington Beach tax regime. Although the superior court had granted a preliminary injunction prohibiting the annexation while the challenge was pending, the court’s final judgment for defendants concluded that applying the existing taxes to newly annexed Sunset Beach was not within the scope of Proposition 218’s prohibition. Plaintiffs appealed.

The Decision

The Court of Appeal’s guidepost in its decision was the voters’ intent in passing Proposition 218. Discerning voter intent was complicated by the fact that nothing in the history or text of Proposition 218 addresses the situation in which an annexation results in a net increase in tax burden for residents of the annexed territory. In fact, the word “annexation” appears nowhere in Proposition 218 or the corresponding ballot materials.

Against this lack of evidence of intent, the court further observed that the diversity of local tax regimes in California would require some procedure for determining whether an annexation would indeed result in a net tax increase for residents of the annexed territory. Given that Proposition 218 contains no mechanism for making this determination, it is difficult to conclude that voters intended for a tax vote to apply to annexations. California’s dual system for voting on tax increases—simple majority for general taxes, two-thirds majority for special taxes—means Proposition 218 impliedly requires as many as three elections for annexations: One on the annexation itself, one on general taxes that were “new” to residents of the annexed territory, and one for “new” special taxes. The structure of Proposition 218 did not provide for this eventuality, lending further weight to the argument that it was never meant to apply whenever annexations involved a negative tax differential. Moreover, in a 1979 decision in Metropolitan Water District v. Dorff, 98 Cal.App.3d 109, the Court of Appeal recognized that annexations could have adverse tax effects on new residents without running afoul of Proposition 13. Because Proposition 218 was intended to close a loophole left by Proposition 13, the court concluded: “Had Proposition 218 been intended to satisfy or avoid the effects of Dorff, we would have expected some attempt somewhere in Proposition 218 to address the issue. We have found none.”

The court handily rejected the appellants’ arguments that Proposition 218’s text supplied the requisite intent, by making the imposition, increase or extension of taxes subject to voter approval. Instead the court concluded that usually an “imposition” refers to the first adoption of a tax, “increase” refers to a change in the amount of a rate, and “extend” refers not to application of a tax to an new geographical areas, but to extending a tax further in time.

Finally, several annexation statutes on the books when Proposition 218 was approved would be impliedly repealed if Proposition 218 were read to require a vote whenever an annexation resulted in an increase in taxes for the new residents. For so-called “island” annexations—at issue in this case—two statutes provided that no vote was required and that the taxes of the annexing territory automatically applied to the annexed territory. Even for non-island annexations, requiring a vote for all “taxpayer unfriendly” annexations would contradict the statutory protest procedure for annexations. Accordingly, the court found that applying Proposition 218 to annexations was inconsistent with the rule of construction disfavoring the implied repeal of statutes by later constitutional provisions absent clear intent.

Conclusions and Implications

The court’s holding in this case leaves open the question of whether Proposition 218 applies to annexations that have the effect of imposing a special assessment on residents of the annexed territory. On the one hand, the language that triggers Proposition 218—“impose, increase, or extend”—is the same for taxes as for special assessments. On the other hand, the major rationale underpinning the court’s opinion was the sheer impracticality of applying Proposition 218 to annexations. The fact that taxes can involve different voting thresholds, depending on whether they are general taxes (simple majority) or special taxes (two-thirds majority), meant that voting on the annexation could not always encompass voting on “new” taxes. That issue is absent in the case of special assessments, the imposition of which requires only a simple majority. Thus, residents of territory to be annexed could vote on an annexation with the understanding that a vote in favor would mean voting to impose the special assessments of the annexing territory.