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Reason Foundation

The Salinas Utility Users Tax

Necessary Revenue Source or Government Waste?

Geoffrey Segal and Adam Summers
October 1, 2002

Introduction

This November, citizens of the city of Salinas, California will go to the polls to decide, among other things, on Measure O, an initiative to repeal the city’s utility users tax over a three-year period. Proponents claim that the utility users tax is another unnecessary tax, particularly in the wake of the state’s energy crisis, which generated greater-than-expected revenue due to inflated energy prices, and that the city need only be more responsible and efficient in its management of city services to maintain current service levels. Opponents claim that the tax repeal will eliminate needed revenue and that the city will have to significantly scale back services as a result.

This study analyzes the underlying assumptions of both sides and demonstrates that through contracting out and privatization the city can obtain the best of both worlds—relief for taxpayers through the abolition of the utility users tax and the maintenance of (or even increase in) the quality and quantity of city services made possible by cost savings and increased competition.

The city of Salinas receives about 8.5 percent of its $94.7 million budget from a utility users tax. The tax is added to the cost of gas, electricity, water, cable television, and telephone services. More than two-thirds of all cities in California do not have a utility users tax. Repeal of the tax would generate a savings of approximately $200 annually to the average family in Salinas.

In 2001, the city received an unexpectedly high payoff because the state energy crisis drove up electricity and gas prices. It generated utility users tax revenues in excess of anticipated revenues. In fact, revenues increased $830,839 from FY99-00 over FY 00-01, more than double the average increase of revenues from FY 97-98 and FY 01-02 of $428,394. Measure O was born out of a request to reduce the tax—considering the payoff the city had received.

Measure O calls for an immediate tax reduction from 6 percent to 3 percent, another cut in 2004 to 1 percent, and the repeal of the tax in 2005.

In many ways, Salinas does not have a revenue problem. The revenues generated by the current tax structure more than cover the costs of providing services. However, is there another way of looking at things? Can the city cope with the loss of revenue? City officials suggest that they cannot—that they are running a tight ship at or near maximum efficiency.

However, it is highly unlikely that Salinas is operating at maximum efficiency. In fact, best practices in government management tell us that it is not. Absent competition, services languish, lose focus, and fail to operate efficiently. This holds for both the public and private sectors. Many opportunities are present for Salinas to save money without jeopardizing service level or quality. Like many governments today, Salinas essentially has an expenditure problem. Measure O, whether it passes or not, forces officials to at least think about innovative ways to cut costs without cutting services.


Adam Summers is Senior Policy Analyst

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