Governor vetoes sales tax bill that would have cost cities and counties more than $2 billion

Gov. Gavin Newsom noted Cal Cities’ concerns in his veto message, stating, “We cannot ask our local governments to bear this loss in revenue.”

Following months of advocacy by Cal Cities, Gov. Gavin Newsom vetoed AB 1951 (Grayson), a sales and use tax exemption bill that would have greatly reduced local government revenues for housing, transit, public safety, and other critical services.

Specifically, the measure would have added locally approved tax rates to the current state General Fund-only sales and use tax exemption for the purchase of manufacturing equipment. Notably, the exemption did not include any requirements that would benefit local governments, such as job creation or environmental remediation. 

Manufacturing is an invaluable part of many local economies. However, local budgets should not be undermined for statewide initiatives.

California already has the smallest sales tax base of any state. This, combined with stark regional differences in revenue growth, means that many cities are already unable to sustain the services they offered 15 years ago. Narrowing the sales tax base even further makes this critical revenue source less reliable.

To the extent that AB 1951 would have resulted in increased economic activity, the tax benefits would largely have been enjoyed by the state General Fund via increased personal income and corporation tax collections at the expense of local governments’ sales and use tax revenue.

The Governor acknowledged Cal Cities’ position in his veto message, stating, “I agree with the intent of this bill to invest in California's economy, incentivize innovation, and spur a manufacturing marketplace that is competitive nation-wide. However, we cannot ask our local governments to bear this loss in revenue.”

The veto came after the Governor signed  AB 2887 (E. Garcia), which will increase the annual sales and use tax exclusion limit by $50 million for eligible alternative energy and advanced manufacturing. The local government revenue loss resulting from AB 2887 is estimated to exceed $25 million annually for three years.

However, that revenue loss is a small fraction of the fiscal impact that would have resulted from AB 1951. According to the California Department of Tax and Fee Administration, AB 1951 would have resulted in an estimated over $2 billion revenue loss for local governments over the lifetime of the broadened sales and use tax exemption.  

Throughout the year, Cal Cities urged lawmakers to backfill revenue loss to local governments for both measures using the state’s historic budget surplus. Cal Cities, along with a coalition of counties, labor groups, and transit agencies, moved to an opposed position for the two bills after the budget was passed without any related financial relief.

The Governor and his staff paid close attention to the coalition’s concerns, demonstrating the value of strong state and local partnerships and proactive, constructive conversations. Cal Cities looks forward to working with the Governor and the Legislature on the 2023-24 State Budget.

For more information about AB 1951 or AB 2887, please contact Revenue and Taxation Legislative Affairs Lobbyist Nick Romo.