A California appeals court recently held that the Keep Groceries Affordable Act, which deprives local governments of their sales and use tax revenue if they impose a “soda tax,” is unconstitutional. The California Third District Court of Appeals held that the statute “improperly uses the threat of crippling penalties to chill charter cities from exercising their constitutional rights.”
The Keep Groceries Affordable Act, also known as AB 1838, was passed in 2018 to ban the imposition of special taxes on sodas and sugar-sweetened drinks until 2031. The law required the California Department of Tax and Fee Administration to withhold the administration of any local sales or use tax if that local agency “imposes, increases, levies and collects, or enforces any tax, fee, or other assessment” on groceries. (Local governments in California are allocated 1 percent of the state sales tax assessed in their jurisdiction.) Localities that had a soda a tax in place on or before January 1, 2018 were exempted.
The law was passed as part of a deal between business groups and labor unions to ban soda taxes for 12 years in exchange for the withdrawal of a voter initiative that would have curtailed the ability of local governments to raise taxes. The initiative, known as the “Tax Fairness, Transparency and Accountability Act of 2018,” would have amended Section 3 of Article XIII A of the California Constitution to raise the voter requirement from a simple majority to two-thirds voter approval of any local tax, fee, or assessment.
The voter initiative arose in response to the implementation of soda taxes in several cities, beginning with Berkeley in 2014, as part of a public health effort to reduce demand for sugar-sweetened drinks. As more cities considered imposing these taxes, the beverage industry helped to place the initiative on the ballot. Labor unions and local governments groups opposed it, leading to the deal that resulted in the passage of AB 1838. The law proved effective, as efforts to enact a soda tax in several charter cities were abandoned soon after its passage.
Constitutional Challenge
In 2020, a nonprofit health advocacy organization and a city council member challenged the law, arguing that it wrongly penalizes charter cities that lawfully exercise their constitutional rights under the home rule doctrine. They believed that the legislature probably understood that the home rule doctrine prevented the state from banning charter cities from taxing sugar-sweetened drinks and created the law’s penalty provision as a workaround to discourage charter cities from doing so. The trial court agreed and held that the penalty provision was unlawful and unenforceable.
The appeals court affirmed the trial court’s decision and held that the penalty provision of the law “improperly uses the threat of crippling penalties to chill charter cities from exercising their constitutional rights.” Citing California Supreme Court precedent, the court stated that if a law has “no other purpose . . . than to chill the assertion of constitutional rights by penalizing those who choose to exercise them, then it [is] patently unconstitutional.” The court stated that the penalty provision in the grocery act “serves to penalize a charter city only when its tax, fee, or other assessment on groceries ‘is a valid exercise of [the] city’s authority under Section 5 of Article XI of the California Constitution with respect to the municipal affairs of that city.’”
Tax Politics
While the decision centers on the current conflict over soda taxes, it also provides insight into tax politics in California. During debate over the bill in 2018, the beverage industry argued that soda taxes would disproportionately harm lower-income individuals. Labor leaders and Governor Jerry Brown, however, took a less democratic direction and supported the ban on soda taxes in order to prevent California voters from possibly increasing the voter threshold to raise local taxes.
Labor leaders argued that the two-thirds voter threshold would prevent the passage of about half of local tax measures. This restriction, they argued, would outweigh any benefits of implementing a soda tax. Brown, meanwhile, noted that the “far reaching initiative” would “restrict the normal regulatory capacity of the state by imposing a two-thirds legislative vote on what is now solely within the competency of state agencies.” This, Brown said, “would be an abomination.”
The labor interests that supported AB 1838 face another voter initiative to increase voter thresholds for tax increases. In an initiative similar to the 2018 measure, the Taxpayer Protection and Government Accountability Act would amend Article XIII of the California Constitution to reverse a series of recent court decisions that interpreted the voter approval thresholds for tax-related citizen initiatives and would expand the definition of “taxes” to include certain regulatory fees. The initiative qualified for the November 5, 2024 ballot.