A Streaming Tax Bait and Switch in Santa Barbara

For the last two decades, California’s Proposition 218 has required new taxes to be voted on by local communities that would have to pay. It’s an underappreciated part of our citizens’ democracy that gives people a meaningful say over the rules and policies that govern their lives.

But a new legal case challenging the imposition of unauthorized streaming taxes in Santa Barbara is testing the strength of those principles and posing a fundamental question: If voters must approve new taxes, what happens when policymakers lie to win their votes?

The background is simple. Since the 1970s, Santa Barbara, like many California communities, has imposed a local utility tax on services that use the city’s infrastructure like gas, water, electricity, and cable television. In 2008, the City Council amended the law to cover new video technologies like IP television channels (delivery of TV stations over the internet) that were becoming part of the cable mix.

This change was heavily debated given strong opposition in California and around the country to any new taxes that would hinder innovation and growth of the internet.

Supporters of the amendment addressed this challenge by crafting a narrow proposal that applied to cable-like technologies but not internet streaming. “This is not about taxing the internet,” explained City Finance Committee Chair Iya Falcone. “It’s not the internet streaming videos,” she reiterated when asked if the new tax would apply only to cable television services or to internet access services. The City Finance Director made the same point, “When we say video, we’re not talking about going to YouTube and watching YouTube videos.” And the Mayor Pro Tempore was even more direct: “We’re not taxing the internet.”

When the utility tax updates were presented to voters as Measure G in the 2008 election, this limit was clearly explained: “The new ordinance would not apply to charges for internet services.”

After the updates were enacted, no effort was made to apply the tax to existing streaming services like Hulu and Netflix or to any new ones until the city’s about-face in 2022 that launched the current litigation. Overnight, the city decided it would tax streaming after all.

It’s no surprise the idea of taxing internet streaming services was toxic. I’ve written before about the problems with regressive streaming taxes that would drive up consumer bills and undermine diversity, quality, and consumer choice online.

Consumers — and if given an honest chance, voters — recognize they will be the ones paying any new streaming tax. Opposing new streaming taxes that were ultimately rejected in Vermont earlier this year, the CEO of AfroLandTV explained these new fees would also “threate[n] the economic viability of small and independent streaming services that provide diverse, high-quality programming and serve underrepresented audiences and communities.” The result would be to further isolate fixed-income seniors, low-income families, and audiences of color.

But in Santa Barbara, taxing internet streaming services isn’t just bad policy, it’s clearly against the law.

If local governments can explain the impact of a proposed new tax one way in order to win approval votes and then apply the tax in a fundamentally different way once the election is closed, Proposition 218 would become a dead letter.

And the results would be devastating. Innovation and investment would crater due to overnight uncertainty about the reach and meaning of virtually all local taxes. Here, Santa Barbara not only reversed its earlier understanding that utility taxes did not apply to streaming services, it made that reversal retroactive and imposed two full years of back taxes as well as thousands of dollars in interest, penalties, and fees. It’s the height of irrational and unfair government.

It’s also a deep threat to the idea of local self-government at the heart of Proposition 218. If this kind of bait and switch is allowed to stand, approval votes would turn into a Wild West free-for-all of misdirection and lies where anything goes if it helps win votes and nothing matters once an election is complete. And while the problem may be in Santa Barbara today, it would surely spread to cities up and down the state if this overreach is allowed to stand.

I believe taxing innovative and diverse new streaming services is a bad idea that would hurt vulnerable Californians and undermine less commercial and risk-taking entertainment options. To me, there are far more straightforward ways to balance the state’s books without the regressive harms of a streaming tax.

But if Santa Barbra disagrees, it simply needs to propose a new tax, enact it through city government, and hold an honest vote.

Mike Montgomery is the executive director of CALinnovates, a nonpartisan technology advocacy coalition.