It’s alive: Anti-tax cut bill returns

March 28, 2013

By Dave Roberts

It’s alive. Similar to a bill narrowly defeated last year, SCA 6 is by Sen. Mark DeSaulnier, D-Concord. Taxpayer advocates fear the bill could make it difficult, perhaps impossible, to cut or limit taxes through the initiative process.

But SCA 6’s wording specifies it “would prohibit an initiative measure that would result in a net increase in state or local government costs,” except for bonds, from being put before voters as an initiative. Unless “the Legislative Analyst and the Director of Finance jointly determine” the initiative provides enough revenue to pay for higher costs.

The intent of the constitutional amendment, which would need two-thirds approval in the Legislature and majority support on a statewide ballot, is to eliminate so-called “ballot-box budgeting.” That’s the practice of using initiatives to determine how General Fund revenues are spent, rather than leaving those decisions to the Legislature. The most notorious example is Proposition 98, which mandates that about 40 percent of the discretionary budget go to K-12 schools.

SCA 6 would eliminate “the things we’ve had to deal with for the last four or five years, where we’ve gotten stretched,” DeSaulnier told the Senate Elections and Constitutional Amendments Committee on March 19. “Where so much of our budget is by formula as a result of the electorate not fully understanding sometimes the implications of some of the initiatives that they approve.”

Asked Committee Chairman Lou Correa, D-Santa Ana, “Mr. DeSaulnier, can you give me an example of an initiative recently proposed or passed that this would apply to?”

That question stumped DeSaulnier, who said, “I can’t just sitting here right now.”

SCA 6 support

Paul Smith, representing the Regional Council of Rural Counties, came to DeSaulnier’s rescue. Smith cited Proposition 36 in 2000. It moved many persons convicted of drug possession “out of the criminal justice system into other programs,” Smith said. “It had a six-year funding window in the initiative. Once that six years expired, now we’re left to honor the mandate of Prop. 36 without any funding. That’s been reduced in recent years by the Legislature because of our tight fiscal measure.”

Rural counties support DeSaulnier’s bill, Smith said, because “a lot of times ballot measures appear before the voters, they are approved, [and there’s] no funding source. Entities like the state and counties may have to make up the revenue and find a way to pay for the things the voters want. Other programs get squeezed. It puts counties, others in a very difficult position.”

State Sen. Loni Hancock, D-Berkeley, cited two other initiatives that would have been reined in by SCA 6.

“The poster child for this is Proposition 49, where you took millions and millions of dollars from the General Fund for a good cause, after-school programs,” she said. That was the 2002 initiative sponsored by Arnold Schwarzenegger to gain himself statewide political exposure a year before he ran for governor.

“Who could be opposed?” continued Hancock. “Another one would be $3 billion for stem cell research,” Proposition 71 in 2004; with interest, the payback amount is $6 billion. “It could be that the people of California would have said, ‘We don’t care if we have to close schools or if college tuition goes up, we think that stem cell research is the most important thing for us to be doing.’ But I think what tends to happen is that it’s a good cause, why not, we like it, and people vote for it. But they don’t realize that in a zero sum game where it takes a two-thirds vote to get any new sources of revenue, it means that something else that they may care more deeply about is going to have to be cut.”

SCA 6 opposition

But taxpayer advocates are more concerned about SCA 6’s impact on those who seek to use initiatives to cut or limit taxes.

“In theory this is a good idea,” David Wolfe, representing the Howard Jarvis Taxpayers Association, acknowledged to the committee. “As a fiscal Republican, these measures should be able to pay for themselves. I think we all want that. In practice the way it works out, though, I think is entirely different. Let me run through the litany of concerns that we have with this bill.

“SCA 6 states that any measure that results in a ‘net increase in costs’ needs approval by DOF and the legislative analyst. My question would be, first of all, define ‘cost.’ Would tax measures like Proposition 13 be a cost to the state due to the back-filling of ‘lost revenue’? When Prop. 13 was passed in 1978, that resulted in about $6-7 billion of revenue that the state needed to backfill out of the surplus that they had to local government. So would that be a cost? We believe that it would. So … we believe that important measures to us, including Prop. 13, [Proposition] 218 and [Proposition] 26 — all measures which we supported in the past — would no longer be able to qualify for the ballot.”

Wolfe also is concerned that DeSaulnier’s bill doesn’t allow increased costs from an initiative to be offset by spending cuts elsewhere.

“If this is accurate, we would be forced into a position where we would have to oppose important public safety measures such as Three Strikes and Marsy’s Law and Jessica’s Law,” he said. “Things that we would ordinarily not take a position on, but would now have to oppose because they would include a tax increase.”

Wolfe pointed out that SCA 6 would weaken the Legislature’s power of the purse by having special interest groups, rather than legislators, determine which taxes to raise to offset the costs of their initiatives. And he cited a 2010 study by USC professor John Matsusaka that asserts that concerns about ballot box budgeting are overblown.

“Contrary to the claims of many pundits, voter initiatives have not constrained the California budget to the extent that fiscal crises are inevitable,” said Matsusaka’s study. “I reach this conclusion by examining each of the 111 successful initiatives in the state’s history. For the 2009-2010 budget cycle, voter initiatives locked in about 33 percent of spending, most of which probably would have been appropriated even if not required, and placed no significant prohibitions on the two primary sources of state revenue – income and sales taxes.”

Wolfe added, “If you remove Proposition 98, that number drops to 4 percent. I know that it’s not really feasible and practical to suspend Prop. 98, and there’s probably opposition on both sides of the aisle to that decision. But the point is, the Legislature has the ability to untie their hands from this ballot box spending. So there’s plenty of flexibility that legislators have without this measure to control spending.”

Prop. 98 also can be suspended with a two-thirds vote of the Legislature.

The California Taxpayers Association also was concerned about SCA 6. “The measure’s definition of costs would apply to tax reductions, credits, exemptions, exclusions, federal conformity and other tax changes,” the organization wrote on its website. CalTax wrote to the committee, arguing, “Although requiring a mechanism to pay for new programs is appealing, giving power to either a legislative appointee (the legislative analyst) and/or gubernatorial appointee (the director of finance) to remove an initiative from the ballot sets a dangerous precedent. It has the potential to disregard important policy measures for manipulative political purposes.”

It failed last session

SCA 6 is identical to DeSaulnier’s SCA 4, which fell three votes short of the necessary two-thirds support in the Senate on Aug. 21, 2012 after Republicans balked.

Sen. Ted Gaines, R-Rocklin, said before the vote, “I’ve got challenges to the accuracy of the information provided by LAO and the director of finance. We are looking for a non-biased opinion on these initiatives, and I’m not clear that you’re going to get that. For instance, whenever a proposal comes forward on a tax cut and how that can accelerate growth within the economy, there’s no consideration for dynamic analysis by the LAO. So I think you’re going to get a jaded perspective as to what the fiscal impacts are on initiatives.”

DeSaulnier responded, “I do hear the concerns that the analysis won’t be robust enough. But I think that’s as good as we can get. And having the LAO, a well respected group, work with the Department of Finance will put more pressure on the people who submit these initiatives to make sure that there’s a more robust financial consideration.”

In last week’s committee hearing, DeSaulnier was more conciliatory, saying that Wolfe “makes some very good arguments, so I think there’s some room for tweaking.” That tweaking may include changes to the bill’s exemption for an initiative’s costs from the issuance, sale or repayment of bonds.

With the Democrats having gained a supermajority in the Legislature, chances for passage of DeSaulnier’s bill in this legislative session have improved dramatically. It received strong support from the committee last week, passing 3-1. It’s scheduled to be considered by the Senate Appropriations Committee on April 8.