LA County Sales Tax Revenue Frozen Amid Legal Challenge

An estimated $1 billion in new revenue generated from Los Angeles County’s latest sales tax increase will remain frozen due to a legal challenge. The measure, Measure ER, which took effect on Thursday, is now subject to a lawsuit questioning its validity.

The Libertarian Party of L.A. County filed the lawsuit on August 31, asserting that the measure and supporting state legislation are unconstitutional. The suit also claims the tax hike exceeds state-mandated sales and transaction tax limits in several county cities, despite Governor Gavin Newsom signing Assembly Bill 1768 the day before the June election, which allowed the county to surpass state tax levels.

"The county cannot distribute the funds to hospitals, clinics or county health departments until the case is resolved," stated L.A. County Chief Executive Officer Joseph Nicchitta in a letter to the Board of Supervisors.

Measure ER, also known as the Essential Services Restoration Act, imposed a 0.5% sales tax increase for five years, with the goal of generating approximately $1 billion annually for healthcare and essential services. This increase raised the county’s baseline sales tax rate from 9.75% to 10.25%. Some cities, including Azusa, Calabasas, Compton, Gardena, and Santa Monica, now have sales tax rates reaching 11.25%, while Lancaster and Palmdale have the highest at 11.75%.

The measure was proposed to address funding shortfalls impacting the county's healthcare and public health system, stemming from federal changes to Medi-Cal and other reductions. L.A. County Public Health indicated that the measure aimed to mitigate these issues.

Critics, such as the Los Angeles County Taxpayers Association, argue that voters were misled into supporting the measure. Aidan Chao, chairman of the association, stated that a nearly $10 million campaign, backed by healthcare groups and organized labor, deceived the community into believing the funds would focus on healthcare, when in reality, it is a permanent tax.

The county has called the lawsuit "meritless," warning that it will "strip the County’s most vulnerable patients of life-saving care and do irreparable damage to the regional healthcare system."

Under state law, the collected tax revenue must be held in an escrow account until the legal proceedings are concluded, a process that could potentially take two years or longer. This means that while residents continue to pay the increased tax, no services will be funded by the new revenue until the case is resolved.

Plaintiffs in the lawsuit also contend that the name "Measure ER" is misleading, suggesting that the funds would be specifically allocated to emergency rooms or related services, which they claim is not guaranteed by the measure's text.