L.A. Voters Reject Sales Tax, Send Two Into Mayor Runoff

Los Angeles voters’ rejection of a half-cent increase in the local sales tax suggests that Californians may be weary after levies on sales and income went up this year, Moody’s Investors Service said.

With all precincts reporting, the proposal to raise the city’s total sales tax to 9.5 percent from 9 percent lost, 55 percent to 45 percent, according to unofficial results from yesterday’s election on the City Clerk’s website.

Last November, voters in Los Angeles and across California approved Proposition 30, which raised the statewide sales tax by 1/4 cent and imposed higher levies on people earning $250,000 or more a year. Voters in about two dozen cities and counties, including San Mateo County immediately south of San Francisco, backed higher local taxes.

Los Angeles voters have for years been willing to vote for higher local taxes and their rejection may indicate that voters in the state are unwilling to raise local taxes further, given the recent statewide increases in sales and income taxes under Proposition 30,” Naomi Richman, a Moody’s managing director, said in an e-mailed statement. “This is credit negative for California local governments as they will likely need to manage their finances and address spending pressures within their current tax structures.”

Raised Ratings

Moody’s raised its rating for the city of 3.8 million to Aa2 in January, the third-highest level, citing growth in property taxes. Standard & Poor’s rates Los Angeles AA-, its fourth-highest grade.

After yesterday’s municipal election, Controller Wendy Greuel and Councilman Eric Garcetti will face each other in a May 21 runoff to replace Mayor Antonio Villaraigosa, a 60-year- old who can’t run due to term limits. Neither candidate won enough votes to claim victory outright.

Nor do the candidates have answers for the city’s budget strains, according to Austin Beutner, a co-founder of New York investment bank Evercore Partners Inc. (EVR) and former Los Angeles deputy mayor.

“They haven’t identified where new revenue would come from, they’ve sworn off new taxes and they’re not making any specific proposals regarding employee compensation and benefits,” he said in an interview before yesterday’s vote.

Police Jobs

Villaraigosa, a Democrat, endorsed the sales-tax increase and said that its defeat might force the 10,000-officer Los Angeles Police Department to cut as many as 500 jobs. The higher tax would have yielded as much as $215 million a year, according to an estimate from City Administrative Officer Miguel Santana, roughly equal to the deficits he projected for the next three years.

The Los Angeles Area Chamber of Commerce and several unions representing city workers, including Service Employees International Union, backed the higher tax rate. Opponents included neighborhood groups and former Mayor Richard Riordan.

Los Angeles has faced $1.6 billion in deficits over the past four years. Villaraigosa said the city has eliminated 80 percent of its recurring deficits without shrinking the police or fire departments. Without new revenue, he warned Feb. 11, that may no longer be possible.

Greuel, 51, and Garcetti, 42, opposed the higher sales tax rate, saying the budget gap could be closed without it. The candidates, both Democrats, also urged elimination of a business levy that generates about $450 million a year.

Greuel was an executive at Dreamworks Animation SKG Inc. (DWA) before winning a seat on the council representing part of the San Fernando Valley in 2002. She was elected controller, the official who audits city departments and prepares financial reports, in 2009. She would be the city’s first female mayor.

Garcetti, the son of former Los Angeles County District Attorney Gil Garcetti, was elected to a Hollywood-area council seat in 2001 and served as the body’s president for six years.

Villaraigosa, modern Los Angeles’s first Latino mayor, didn’t endorse any candidates.

To contact the reporters on this story: James Nash in Los Angeles at jnash24@bloomberg.net Michael B. Marois in Sacramento at mmarois@bloomberg.net;

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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