Local Cities Reaping Tax Windfalls From Energy Crisis.

Call it an unintended consequence of the state's energy crisis: Dozens of cities in L.A. County have reaped large windfalls from their utility taxes as residential and business bills for natural gas and electricity have soared. And taking the same tack as President Bush, several cities are now looking at ways to return or reduce the taxes for some or all of their residents and businesses.

Last week, Santa Monica and Burbank considered such measures; Culver City, which has the highest natural gas utility tax in L.A. County, is expected to take up the idea next week. Pomona is set to look at the issue next month. And Long Beach has already taken some action: Voters last November approved a cut in the city's utility tax rate.

"This has the potential to be a real volatile issue as the high utility bills roll in," said Brian Cooley, policy analyst for the California League of Cities. "That's why a lot of cities are being proactive with this, trying to get out in front of public opinion."

So far, it has been the natural gas utility users' taxes that have created the huge windfalls, largely because natural gas bills doubled in December and have come down only slightly since then. Electricity rates have increased only 9 percent so far; the 40-percent-plus rate hikes proposed last month by the state Public Utilities Commission won't show up on customer bills until May or June, at the earliest.

Even the City of Los Angeles, the 800-pound gorilla with more than $20 million in windfall utility tax revenues -- principally from the natural gas side -- may be backing away from its earlier no rebate stance. Peter Hidalgo, spokesman for Mayor Richard Riordan, said the issue might be addressed in Riordan's budget, due out this week.

But when those bills start hitting, the pressure to cut rates and/or institute refunds is expected to become really intense for the handful of cities with double-digit utility tax rates, including L.A., Santa Monica and Culver City.

"Cities with lower percentage tax rates are not going to have as much pressure on them because the hits won't be that big," said Larry Kosmont, an L.A.-based economic development consultant. "But if you're a double-digit taxer, you better start thinking of ways to reinvest in the community."

Ballot measure

Indeed, the city of Long Beach felt the pressure last year, as citizens put a measure on the November ballot to reduce the utility tax rate from 10 percent to 8 percent. That measure passed, beating out a city-backed compromise measure that would have enacted more-gradual rate reductions.

But whether residents and business owners of other cities will actually receive relief from the city tax portion of their bills is another matter. For one thing, while cities may be reaping hundreds of thousands -- or even millions -- of dollars more in utility taxes, they are also spending more to pay for higher-cost energy, particularly natural gas. In Culver City, for example, these higher costs have offset virtually all the $83,000 revenue windfall.

"For us, any relief we give would likely have to come out of the general fund," said Culver City Treasurer Mark Ambrozich.

Other cities with double-digit tax rates facing similar predicaments are Inglewood, Compton and Bell. And in each case, city officials said no immediate action is planned.

"A lot of cities are going to wait and see how this plays out over the next month or two," Cooley said. "If it looks like excess revenues are outstripping added costs, then they may decide to take some action. Otherwise, many cities fear having to dip into their general funds, a move they really don't want to take in a slowing economy."

Culver City is not waiting, however. The city has the highest natural gas utility rate in the county, at 11 percent. Treasurer Ambrozich said officials are mulling over whether to expand utility tax exemptions for low-income seniors and disabled people. Currently, the income threshold is $9,600; the city is looking at doubling that threshold.

Expanding exemption programs for low-income or fixed-income residents seems to be the method of choice for most cities reconsidering their utility tax rates. That's because a broader rebate would have very little actual impact, especially in mid-sized cities like Burbank.

"Look, we've got about $300,000 more in natural gas revenues this year over last year. Half of that goes to businesses, so that leaves $150,000 to be distributed among 100,000 residents, or $1.50 per resident per year," said Bud Ovrom, Burbank's city manager. "That's why we're looking more at our lifeline program, where low-income residents get a discount or a complete exemption."

Pitfalls of strategy

Other cities in California have taken a similar tack, according to Cooley. One of those cities is San Jose, which last month temporarily expanded its exemption for seniors and low-income residents.

But, Cooley said, there is a potential problem with this strategy: removing the exemption if natural gas and electricity prices fall. Reimposing the original utility tax rates on these citizens could constitute a tax increase, as defined under Proposition 218, which mandates a two-thirds vote of the people for all local tax hikes.

"Our attorneys are looking into this," Cooley said. "With utility taxes comprising as much as 25 percent of the revenue stream of some cities, there is great reluctance to reduce that stream on what could turn Out to be a permanent basis."

As a result of this uncertainty, he said, several cities have opted for the one-time rebate program, even if it is largely symbol ic.

The Santa Monica City Council last week ordered city staff to look into the feasibility of a rebate. Councilman Robert Holbrook introduced the proposal, which calls for capping utility taxes at levels before the big price runups and returning any excess to the ratepayers.

"We want to assure that the city does not collect utility taxes on the increase of energy rates that may severely impact the budget of residents and businesses," Holbrook stated in his motion.

City staff must report back by the next council meeting, slated for April 24.

                          Windfall Recipients
                          Cities with highest
                        utility user tax rates.
                           Natural
              Electric       Gas
Los Angeles     12.5% [*]   10.0%
Culver City     11.0        11.0
Bell            10.0        10.0
Compton         10.0        10.0
Inglewood       10.0        10.0
Santa Monica    10.0        10.0
Pomona           9.0         9.0
Long Beach       8.0         8.0
Pasadena         7.7         7.9
Irwindale        7.5         7.5
(*.)Big commercial users' rate.
Source: Kosmont Cos.