California Fed. Savings & Loan Assn. v. City of Los Angeles

Decision Date29 July 1991
Docket NumberNos. S013951,B033586,s. S013951
Citation283 Cal.Rptr. 569,54 Cal.3d 1,812 P.2d 916
CourtCalifornia Supreme Court
Parties, 812 P.2d 916 CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff and Respondent, v. CITY OF LOS ANGELES, Defendant and Appellant.

James K. Hahn, City Atty., Richard A. Dawson, Asst. City Atty., and Myrtle Dankers, Deputy City Atty., for defendant and appellant.

Louise H. Renne, City Atty., San Francisco, John J. Doherty and Thomas J. Owens, Deputy City Attys., Joan R. Gallo, City Atty., San Jose, Michael F. Dean, City Atty., Roseville, Jack L. White, City Atty., Anaheim, and William C. Marsh, City Atty., Monterey, as amici curiae, on behalf of defendant and appellant.

Martin S. Schwartz, McKenna, Conner & Cuneo, McKenna & Fitting, Aaron M. Peck, Michael T. Lambert and Theresa A. Kristovich, Los Angeles, for plaintiff and respondent.

Christopher E. Chenoweth, Philip M. Plant, San Francisco, Ronald A. Zumbrun, Anthony T. Caso and Jonathan M. Coupal, Sacramento, as amici curiae, on behalf of plaintiff and respondent.

ARABIAN, Justice.

Since the addition of the "home rule" provision to our Constitution in 1896, the organic law of California has granted charter cities sovereignty over "municipal affairs." Although this court and the Court of Appeal have parsed that cryptic phrase in literally scores of cases in the 95 years since the adoption of what is now article XI, section 5, subdivision (a) of the Constitution, what an early member of this court called those "wild words" have defeated efforts at a defining formulation of the content of "municipal affairs." We granted review in this case to decipher the "municipal affairs" clause as it governs conflicting claims of the Legislature and a charter city to levy taxes on financial corporations.

I. Introduction

The City of Los Angeles (City) imposes an annual license tax on most businesses within its municipal boundaries. It sought to collect the tax from California Federal Savings and Loan Association, petitioner here, for the 1982 through 1984 tax years despite the Legislature's 1979 amendment of Revenue and Taxation Code section 23182, which declared that a state income tax on financial corporations such as petitioner was in lieu of all other taxes and licenses, including charter city business license taxes.

Petitioner paid the business license tax under protest and filed this refund action in the superior court, claiming that the state statute, as amended, nullified the City's power to levy the business license tax upon it. The City defended on the ground that its tax was a local revenue measure to raise funds for local expenditure and that as such it qualified as a "municipal affair" immune from state legislative interference by virtue of article XI, section 5, subdivision (a) of the Constitution (hereafter article XI, section 5(a)). 1 Following a bench trial, the superior court ruled for petitioner, holding that the taxation of financial corporations is a subject of "statewide concern" rather than a "municipal affair" and that the record before it supported findings of the Legislature to that effect.

The Court of Appeal disagreed. Reversing the trial court, it concluded that unlike regulatory matters, where state laws addressing subjects of statewide concern prevail over conflicting charter city enactments, our decisions presented a distinct line of authority that charter city tax measures are inflexibly "municipal affairs" and thus invariably are immune from state legislative supremacy.

We reverse. Although municipal taxation is a "municipal affair" within the meaning of article XI, section 5(a), in that it is a necessary and appropriate power of municipal government, aspects of local taxation may under some circumstances acquire a "supramunicipal" dimension, transforming an otherwise intramural affair into a matter of statewide concern warranting legislative attention. In short, our cases do not support the distinction drawn by the Court of Appeal; charter city tax measures are subject to the same legal analysis and accumulated body of decisional law under article XI, section 5(a), as charter city regulatory measures. In the event of a true conflict between a state statute reasonably tailored to the resolution of a subject of statewide concern and a charter city tax measure, the latter ceases to be a "municipal affair" to the extent of the conflict and must yield. In addition, we hold that under the circumstances of this case the trial court correctly concluded that the aggregate intrastate tax burden on financial corporations--including local taxes such as the City's business license tax--is a subject of statewide concern.

The path to these conclusions requires our review of the recent history of California's differing tax treatment of commercial banks and savings banks such as petitioner as well as the development of the "municipal affairs" doctrine in this state. 2

II. The Regulatory Setting

In the idiom of banking law, petitioner is a "HOLA" institution, meaning it holds a charter granted by the Federal Home Loan Bank Board under the federal Home Owners' Loan Act of 1933 (12 U.S.C. § 1461 et seq.). Although headquartered in Los Angeles, petitioner maintains 135 branch offices throughout the state as well as a smaller number of full service branches in Nevada, Florida, and Georgia. Together with other commercial and savings banks, petitioner participates in a network that operates several thousand automatic teller machines across North America. Many of petitioner's borrowers and depositors reside outside of both Los Angeles and California. Much of the real property securing loans made by petitioner lies outside of Los Angeles, and some lies outside of the state.

California-chartered counterparts to federal HOLA institutions such as petitioner are known as "Division Two" institutions, a term derived from the regulatory locus of state savings banks in division 2 of the California Financial Code. In statutory origin, state and federally chartered savings banks are distinct from the two major types of commercial banks operating in California: national banks established under the federal National Bank Act (12 U.S.C. § 21 et seq.), and state commercial banks chartered and regulated under division 1 of the California Financial Code.

For over 60 years, both state and federally chartered commercial banks operating in California have been subject to a single state tax levied on their net income and imposed in lieu of all other taxes, whether state, county, or municipal. The Legislature's exclusive power to tax commercial banks is conferred by article XIII, section 27, of our Constitution, a provision first adopted by the voters in 1928 following a series of decisions by the United States Supreme Court requiring in effect a single state tax on national banks in lieu of all other state taxes and one no higher than the highest tax rate levied on nonfinancial corporations. 3

Although not included within the class of banks subject to the exclusive state tax required by article XIII, section 27 of the Constitution, state and federal savings banks also became indirectly entitled in 1928 to substantially equivalent tax treatment through a so-called "offset" system effected by statute. Under the offset system, both state and federal savings banks could claim a credit against their net state tax liability for taxes paid to municipalities. In effect, the offset system promoted a rough albeit indirect equality between the aggregate California tax burden on commercial banks--whether state or federal--and on their state and federal savings bank counterparts. 4

The offset arrangement continued in effect until 1979. In that year, the Legislature passed Assembly Bill No. 66 (1979-1980 Reg.Sess.; enacted as Stats.1979, ch. 1150), an omnibus tax measure that included the statute at issue in this case. Section 14 of Assembly Bill No. 66, set out in the margin, 5 amended Revenue and Taxation Code section 23182 (further unspecified statutory references are to this code) to abolish the offset system by declaring that the in lieu feature of the net income tax, formerly applicable only to commercial banks, extended to financial corporations. 6 Effective January 1, 1981, except for taxes on their real property and miscellaneous imposts, section 23182 subjected both commercial and savings banks--whether national banks or federal HOLA savings banks, state division 1 commercial banks or division 2 savings banks--to a single state-imposed net income tax and to no others. At the same time that it placed commercial and savings banks under a unitary income tax regime, the Legislature moved to mitigate the anticipated revenue loss to local governments resulting from the elimination of municipal taxes on financial corporations. 7

The net effect of the 1979 amendment to section 23182 was to place savings banks and other financial corporations on an equal footing with commercial banks as far as their California income tax burden was concerned by, among other changes in tax treatment, eliminating municipal taxes on their activities. As part of Assembly Bill No. 66, the Legislature made the express findings in support of the amendment to section 23182 set out in the margin. 8 In brief, the Legislature explained that the amendment sought to "insur[e] competitive parity between banks and financial corporations" by imposing on both "an equivalent tax burden." Tax equality it went on to find, would promote the continued existence of both types of institutions as well as ensure that the tax burden on both remained comparable to that on nonfinancial corporations. In addition, the legislative findings in support of the amendment asserted that local taxes on financial corporations were "divergent and competing" and "impair[ed] the uniform statewide regulation of banks and financial corporations." For these reasons, the...

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