Proposition 26 requires politicians to meet the same vote requirements to pass these Hidden Taxes as they must to raise other taxes, protecting California taxpayers and consumers by requiring these Hidden Taxes to be passed by a two-thirds vote of the Legislature and, at the local level, by public vote.

But this hasn’t stopped California politicians from attempting to get around its restrictions. In San Diego, authorities seeking to fund a costly expansion of the convention center so it could continue to attract Comic Con came up with a novel approach raising hotel room taxes in tiers based on how close they were to the convention center. It won approval from a trial court judge.

San Diego leaders were warned plan was risky

Then it ran into an appellate court that understood that Prop 26 was intended to thwart maneuvers just such as this. Here is the KPBS account:

The Fourth District Court of Appeals overturned a 2013 ruling by Superior Court Judge Ronald Prager that approved a hotel room tax to be used to finance the $520-million expansion. That tax was voted on by hoteliers, not by voters.

A state law [actually, the California Constitution] says increasing taxes requires approval by two thirds of voters.

San Diego city officials tried to get around that requirement by forming a district of hotel owners who voted instead, saying the vote was only required by the people who own the land on which the hotels sit. 

They did so despite an explicit warning from San Diego City Attorney Jan Goldsmith that the strategy was legally risky.

Today, city leaders will try to figure out what to do next. They missed the deadline to put the matter before voters in November, which is what Goldsmith recommended in the first place. Voters aren’t nearly as hostile to taxes on visitors as they are to taxes they pay directly, so that’s still the logical approach.

Goldsmith is now warning city leaders that an appeal to the state Supreme Court is a long shot.

I think he’ll be heeded this time around.

Prop 26 has teeth!

Remember Proposition 26, the Stop Hidden Taxes Initiative, passed by 52.5 percent of California’s voters in 2010?  Probably no one who voted at that time had any idea Prop. 26 would help resolve — at least for now — the 68-year water rate battle between the San Diego County Water Authority and the Metropolitan Water District of Southern California.

SDCWA and MWD have been fighting a water war since 1946 over who has paramount water rights during droughts and how much SDCWA should pay for the transport of water through MWD’s aqueduct and pipeline system.

After 68 years of nearly perpetual water war, on April 24 San Francisco County Superior Court Judge Curtis E. Karnow issued a decision in the water rate battle of the war in favor of SDCWA.  The judge ruled that MWD had overcharged SDCWA in violation of the California Constitution, state water wheeling (transportation) laws and Prop. 26.

MWD is the wholesale water supplier to the Southern-most six urban counties in the state.  MWD built and operates the Colorado River Aqueduct and pays for most of the costs to operate the California Aqueduct that delivers water from Northern California.

(MWD is not identical to the Los Angeles Department of Water and Power that built the Los Angeles Aqueduct from Owens Valley.  MWD is so big that LADWP is just one of its member water agencies.)

If California’s water system were to be characterized as one big pipeline from Northern to Southern California, SDCWA would be at the very end of the line.  And since SDCWA had few groundwater basins due to its geology, it was also the largest urban county most dependent on imported water.

SDCWA lost water war before it started up

Historically, SDCWA was a latecomer to MWD’s current confederation of 26 cities and water district; it joined MWD in 1946. Two years earlier, in 1944, President Franklin D. Roosevelt had forced SDCWA to abandon its plans to use the gravity-fed All American Canal in favor of MWD’s costly Colorado River Aqueduct that had to pump water over Mojave Desert mountain chains.  Roosevelt’s main interest was to supply water to Navy bases in SDCWA during World War II.

SDCWA has always agonized over whether the original 13 cities that formed MWD could exert preferential rights to water over SDCWA, leaving it dry in a drought.  MWD’s Laguna Declaration of 1952 stated it would supply all the water all member agencies needed at any one time, either in wet or dry years.  Nevertheless, in 1991 SDCWA’s share of MWD water was reduced by 31 percent in a drought.

Even though SDCWA is MWD’s biggest water customer, it has never had enough political clout on MWD’s Board of Directors to undo what it has long considered an unfair arrangement. According to an email from spokesman Mike Lee, SDCWA buys on average about 25 percent of MWD’s water, but has only four votes on its 37-member board — or 11 percent of the votes.  The voting formula on MWD’s board is weighted based on assessed property values, not on what pays most of the bills.

From 1947 to the 1990’s, six pipelines were built branching off from MWD’s Colorado River Aqueduct, then stretching some 70 miles to San Diego.  The U.S. Navy built most of the lines, but MWD operated them.  The only user of these pipelines was SDCWA.  Yet, SDCWA was charged a “water wheeling” (transportation) fee over MWD’s entire grid of 800 miles of pipelines across nearly all of Southern California.

Back in 2000, MWD prevailed in court in a water-wheeling rate case against SDCWA. SDCWA argued that wheeling fees should be charged on a point-to-point basis. But the Appeals court ruled that MWD was entitled to recover its full system costs.

MWD ended up counter-suing SDCWA, Imperial County, private water developer Cadiz Inc., and some Indian tribes to validate the Appeals court’s decision.

Along came Proposition 26

Then in 2010, along came Prop. 26, which only applied to fees imposed after Nov. 3, 2010, the date of the election. The provisions of Prop. 26 required that fees must be based on the actual costs of a particular government service, not full system costs. Prop. 26 reclassified regulatory fees as a taxes requiring a two-thirds vote of local voters consistent with prior Props. 13 and 218.

Prop. 26 re-opened the spillway to the longstanding water rate dispute between SDCWA and MWD.  MWD insisted that its water-rate structure is legal and is reportedly in the process of appealing Judge Karnow’s decision to a higher court.  However, unlike MWD and SDCWA’s 2000 water-rate court case, for the current case an appeals court would have to overcome the “will of the electorate” expressed in Prop. 26.

This is a good example of how water cases commonly last decades in the courts, and in some cases never really end.

But so far, at least, Prop. 26 is a taxpayer-built dam to hold back a flood of taxes.

                                     Contributions for and Against Prop. 26 in 2010 

By Dave Roberts

It hasn’t been a great year for the California Department of Forestry and Fire Protection. In January, the Los Angeles Times revealed that for seven years Cal Fire has been hoarding a slush fund that grew to $3.66 million. In February, the Sacramento Bee reported that Cal Fire fees that were supposed to be used for fire prevention measures had instead been used to investigate wildfires, according to the legislative counsel.

And earlier this month, the Howard Jarvis Taxpayers Association served Cal Fire and the state Board of Equalization with a lawsuit seeking to nullify Cal Fire’s $150 annual fee (or tax) on homeowners in mostly rural California for fire prevention. In addition, three bills have been introduced by Republicans in the Legislature seeking to do likewise.

The slush fund was a major black eye for Cal Fire. Instead of following the law by depositing money from legal settlements into the state General Fund, fire officials put it into the care of the California District Attorneys Association. In addition to paying CDAA a fee to hold the money, fire officials spent it on digital cameras, evidence sheds, GPS equipment, metal detectors and a conference at a Pismo Beach resort, among other expenditures.

Cal Fire faces bipartisan fire over slush fund

Coming on the heels of the revelation of the state Department of Parks and Recreation’s secret $54 million slush fund, Cal Fire was pilloried on editorial pages up and down the state:

— “Once again, California residents have been asked to pay higher taxes to help revenue-challenged state agencies fund important services — only to learn that those agencies had hidden large sums of money in secret accounts to keep it away from public scrutiny,” editorialized the Orange County Register.

— “Its arrogance underscores the larger issue: The money doesn’t belong to some bureaucrat with a badge. It belongs to the people,” lectured the Sacramento Bee.

Gov. Jerry Brown was quoted in the Bee calling the slush fund “a relatively boring story, to tell you the truth.” But the governor added that he would look into it. Senate Republican Leader Bob Huff, R-Diamond Bar, responded that “’boring’ is the last word I would use to describe these very disturbing revelations of hidden funds.”

Cal Fire spokesman Dennis Mathisen said in an interview that there was no effort to conceal the fund.

“The reality is that the fund had been publicly known,” he said. “We initiated our own audit of the fund a few years ago. The audit tried to determine the appropriate way of administering the fund. We are going through the process of re-evaluating it and determining the correct method of administering the fund.”

Scathing audit was three years old

Apparently that re-evaluation process has been going on for more than three years. The 26-page audit report, which was issued in November 2009, contains numerous criticisms of the way Cal Fire was handling the money:

— The funds collected from legal settlements were not reported to the Cal Fire Departmental Accounting Office or the Law Enforcement Program, and did not become part of the state’s accounting system.

— The money was dubbed a “Fire Investigation Trust Fund” — but was never placed in a trust account — in order to ensure it wouldn’t go into the state’s General Fund. “It is not clear what authority Cal Fire has to separate the Fund money from State money,” the audit states.

— There was no documentation of how the fund committee made its decisions on spending the money.

— State purchasing guidelines were not followed for hundreds of thousands of dollars spent on equipment.

— Travel expenses for training conferences were improperly documented, including numerous overcharges for lodging and unapproved travel to conferences in other states.

Slush fund depicted in benign light

Mathisen defended the expenditures, saying, “The sole purpose of that fund is to help support fire investigation-related things such as equipment and training. That involves Cal Fire investigators, local agency investigators, district attorneys.” The Pismo Beach conference focused on fire investigation training, he said, adding that “the hotel charged the typical government rate, which is lower than the standard rate.”

Mathisen also disputed the Bee’s report that fire prevention fees were not supposed to be spent on wildfire investigations.

“One of the fire prevention activities that’s mentioned in the law, it’s very clear that it includes the activities involved in fire investigations,” he said. “We look at the act of investigating fires and determining the cause, whether negligence or a crime such as arson. [If arson is suspected] we go through case development and district attorneys to prosecute. In the case of accidents, [investigation] helps us educate the public on how to prevent those things from happening in the future.”

The enabling legislation for the fire prevention fee, ABX1 29, does not specifically cite wildfire investigation as one of the uses for the funds. Money can be spent on public education, fire prevention projects and activities as well as fire severity and hazard mapping.

But there is no definition for what constitutes a “fire prevention project.” The legislation leaves it up to the Cal Fire board to determine that. In essence, the fire prevention fee, which was projected to total as much as $89 million annually, is potentially another slush fund for Cal Fire officials to use as they see fit as long as they can call it a fire prevention project or activity.

The goals of the Howard Jarvis lawsuit

And that’s what concerns the HJTA, which filed its class-action suit in Superior Court in Sacramento in October.

“This tax was dreamed up by politicians in Sacramento who are so desperate for revenue that they were willing to ram this through the Legislature without the proper two-thirds vote,” said HJTA President Jon Coupal in a press release. “The fire tax is a direct violation of Prop. 13. It is our goal to overturn this tax, prevent the politicians from taking more money from hardworking people for a program they were already paying for, and help taxpayers to get a refund from the government.”

The suit argues that the fire prevention assessment does not fall under the state constitutional definition of a “fee.” Therefore, it’s a tax requiring two-thirds approval in the Legislature, which it did not receive due to strong Republican opposition.

Article 13 A, section 3, subdivision (b) of the California Constitution defines a tax as “any levy, charge, or exaction of any kind imposed by the state” unless it’s imposed for a specific benefit, privilege, service or product provided directly to the payer that is not provided to those not charged, and which does not exceed the reasonable costs to the state of providing the benefit, privilege, service or product.

It’s likely that state attorneys will argue that fire prevention fits the definition of a fee instead of a tax, because it’s: 1) a specific service provided directly to people living in the mostly rural 31 million acres of California that are in Cal Fire’s State Responsibility Area, 2) that it is not provided to people outside of that area who are not charged a fee, and 3) it does not exceed the cost of providing that service.

A version of that argument was made by the author of ABX1 29, Assemblyman Bob Blumenfield, D-Los Angeles, on the Assembly floor just before the bill was approved on June 15, 2011.

“This approach has long been supported by the LAO [Legislative Analyst’s Office],” he said. “It reduces the financial exposure of the state to fight fires in the State Responsibility Areas, especially at a time when local governments continue to approve developments that increase fire risk. … We worked very closely when the Senate sent this over with leg[islative] counsel. And the key distinction here [making this a fee instead of a tax] is that it deals with prevention rather than protection. And so it’s not replacing existing services. But there’s a direct nexus. And that’s why this is an acceptable bill.”

Prediction of fire tax’s demise

Blumenfield was responding to then-Assemblyman Kevin Jeffries, R-Lake Elsinore, who predicted the fire assessment would soon be doused.

“We’ve seen this bill before,” he said. “At least I have over previous terms here. A funny thing happened: it failed in previous versions. When it was a $50 tax — you can call it a fee — but when it was a $50 tax it required a two-thirds vote. Now that it has moved to a $150 tax, somehow it’s been changed to a majority vote. I’m wondering if the leg[islative] counsel has issued a new opinion reversing their previous opinions that said this was a tax. It clearly violates Proposition 26 [requiring two-thirds support for tax hikes], and will last maybe a week at best until any number of interest groups, property rights proponents, any group out there who just happens to have a spare moment, and this bill will be dead. This tax will die a fast, quick death.”

Despite Jeffries’ assurance, the assessment is very much alive and well nearly two years later. The first billing for about 750,000 habitable structures was sent out from August through mid-December last year (in alphabetical order by county). A little over $73 million has been collected so far.

That’s short of the estimated revenue because 20 percent of respondents have declined to mail back their payments. More than 87,000 have filed an appeal. About 71 percent of the appeals, which were based on the fee being an illegally passed tax, were denied, according to Mathisen. More than 12,000 appeals were granted, however, as those assessments were based on misinformation from incorrect records.

“When this law was created there was no database in existence that identified all habitable structures in the SRA,” said Mathisen. “That was a significant task to put together that database. So we knew that there were going to be some inaccuracies. We are making those corrections as we move along.”

Fighting fire tax: The big picture and at individual level

The second round of billing for the current fiscal year was due to start in April. But it will be delayed, according to the Associated Press, to allow more time to sort through the thousands of complaints stemming from the initial billing.

In the meantime, three bills seeking to kill the fire prevention assessment are due to be heard in committees this legislative session: AB 23, AB 124 and SB 17. Click here for more information on the assessment from Cal Fire’s perspective. For the HJTA’s take, including instructions on filing an appeal, click here.

By Wayne Lusvardi

California voters may soon ask themselves: “Why vote for an $8.5 billion sales and income tax increase in November 2012 if Cap and Trade is going to raise $50 billion to $100 billion for state discretionary spending? That’s $6.25 billion to $12.5 billion per year from 2012 to 2020.

But will Cap and Trade generate enough revenues, and can those revenues be used to bailout the state general fund deficit? That is the proverbial $16 billion deficit question.

Cap and Trade is a program authorized in 2010 under Assembly Bill 32, the Global Warming Solutions Act of 2006.  AB 32 requires excessive air polluters to buy emission permits in an auction from those industries and utilities that pollute less than their pollution quota. The rules of Cap and Trade apply first to large industries; and by 2015 to utilities, including local municipal water and power departments. Eventually, 360 industries and utilities will be subject to Cap and Trade rules.  Where the proceeds of these auctioned permits are to be spent is still to be determined.

California legislators have already started floating up a flurry of bills to divvy up the estimated $50 to $100 billion windfall from 2012 to 2020 from Cap and Trade auctions. This is addition to Gov. Jerry Brown’s notion to fund the cost of the California High-Speed Rail Project with Cap and Trade funds. The California Legislative Analyst’s Office has recommended against this proposal because the funding is too speculative.

Cap and Trade Fund Distribution Bills

Assembly Bill 1532, sponsored by Assembly Speaker John Perez, D-Los Angeles, would deposit Cap and Trade pollution permit monies into a new Greenhouse Gas Reduction Account to be controlled by the California Air Resources Board.

Senate Bill 535, sponsored by State Sen. Kevin de Leon, D-Los Angeles, would divert some of the Cap and Trade auction funds to disadvantaged communities, affordable housing, hospitals and schools.

Senate Bill 1572, the AB 32 Revenue Investment Plan, sponsored by State Sen. Fran Pavley, D-Los Angeles, devises a strategic investment plant to distribute Cap and Trade proceeds.

AB 2404, the Local Emissions Reduction Fund, sponsored by Assemblyman Felipe Fuentes. D-Arleta, would delegate the award of Cap and Trade monies to the Strategic Growth Council — a six person cabinet level committee under the Governor’s Office.

What is the Strategic Growth Council? 

The Strategic Growth Council was authorized under Senate Bill 732 in 2008, sponsored by State Sen. Darrell Steinberg, D-Sacramento. It creates a cabinet-level committee to serve as a clearinghouse for the distribution of Cap and Trade funds.  According to the Strategic Growth Council website, a laundry list of activities can be funded: “to improve air quality, protect natural resources, increase the availability of affordable housing, promote public health, improve transportation, encourage greater infill and compact development, revitalize community and urban centers, and assist state and local entities in the planning of sustainable communities.”  But this may be a wish list more than what Cap and Trade auction proceeds can be legally spent on.

Who is on the Strategic Growth Council? 

The Strategic Growth Council is composed of six members. Five are the heads of state agencies and a sixth member is from the public.

Current Council members include:

Ken Alex, secretary of the Office of Planning and Research;
John Laird, secretary of California Natural Resources Agency;
Diana Dooley, secretaru of California Health and Human Services;
Brian Kelly, acting secretary of the Business, Transportation and Housing Agency;
Matt Rodriguez, secretary of the Department of Environmental Protection;
Bob Fisher, public member, president of the Mendocino Redwood Corporation and a member of the National Resources Defense Council, an environmentalist group.

The Strategic Plan of the Growth Council for 2012 can be found here.

Cap and Trade Auction Monies Hit Prop. 13 Snag

California’s Proposition 13, passed in 1978, mandates that any tax must be approved by two-thirds of the voters. Proposition 26, passed in 2010, added fees, charges, levies or tax revenue allocations as prohibited without a supermajority vote.

AB 32 authorized the California Air Resources Board to devise a Cap and Trade emission program. But it was only passed by the Legislature. It was never put to an election.  So we don’t know if all the bills for spending Cap and Trade proceeds are legal yet.

A number of liberal non-profit and advocacy organizations have leapt into the void and have issued quasi-legal opinions as to whether California can divert Cap and Trade funds to its operating budget, to fund the proposed bullet train project, and to a number of other programs.

Next10, a liberal non-profit public policy organization, has issued four reports on “Using the Allowance Value from California’s Carbon Trading System: Legal Risk Factors, Impacts to Ratepayers and the Economy.”

The liberal environmental policy think tank Resources for the Future has issued a report, “The Variability of Potential Revenue from a Carbon Tax.”

Both reports tend to concur that Cap and Trade auction revenues cannot be used for unrelated programs or reduced tax rates.  If California used Cap and Trade proceeds for ineligible activities. it would be vulnerable to a legal challenge under Prop. 13 and Prop. 26.

Some Cap and Trade proponents claim that pollution credits or allowances are not taxes, but a fee. But Prop. 26 forbids imposing fees without a supermajority vote.

The University of California Berkeley’s Center for Law, Energy and the Environment, which prepared one of the four reports for Next 10, concluded that channeling Cap and Trade funds to projects that reduce or lessen greenhouse gas emissions is the least legally risky option. The center made four conclusions: 1) re-directing Cap and Trade proceeds back to electricity ratepayers could offset all the costs imposed by Cap and Trade; 2) the way in which Cap and Trade proceeds are re-directed back to ratepayers will affect the efficiency of the program; 3) if electricity bills are reduced by Cap and Trade credits, that may affect the political perception of the program; and 4) electric rate increases will result from other AB 32 policies — namely, the 33 percent renewable power requirement — and these costs may be substantial and occur independently of the Cap and Trade portion of AB 32.

A flaw in this report is to assume that there will be no transaction costs for administrating and monitoring Cap and Trade.  Not all costs will be returned to ratepayers. And if they were, ratepayers might ask: Why implement the program in the first place?

In a 2009 report, David Roland-Holst, a professor of resource economics at the Berkeley center, said Cap and Trade revenues must be returned to utility customers either in the form of rebates or subsidized electricity bills.  Holst said that home energy efficiency projects generate more Gross Domestic Product and employment growth.

There are several problems with this proposal.  Newer homes have been built to Title 24 Building Energy Efficiency Standards and would likely not require any energy efficiency work.  And large numbers of older housing stock have been retrofitted with energy efficiency improvements either as a condition of home remodeling permits, or have been retrofitted with state, federal, and public utility energy efficiency programs that started around the mid-1970’s.  Another problem is that any subsidized home energy efficiency loans would likely end up creating another sub-prime loan and a financial bubble.

Anything that substantially deviates from reducing greenhouse gases will no doubt be tested by a legal challenge under Prop. 13 and Prop. 26.

Cap and Trade Prone to Government Gaming of System

The California Air Resources Boardhas been spending a lot of money on retaining consultants and monitors to prevent the gaming of the Cap and Trade auctions by third-party speculative traders.  But it may not be traders that would be of the most concern if the activities that can be funded under Cap and Trade are expanded beyond reducing pollution.

The California Public Utilities Commission and CARB have estimated that the proceeds from Cap and Trade auctions could total $50 billion from 2012 to 2020.  But Robert Lucas, a consultant with the California Council for Environmental and Economic Balance, is quoted in Forbes.com that if pollution allowances are held in reserve by CARB for any year, the unit price per ton of reduced carbon pollution could spike to $40 or $50 per ton.  Lucas said, “we could be talking about $100 billion between now and 2020.”

This would provide a perverse incentive for CARB to intentionally withhold pollution allowances to generate revenues for greedy bureaucratic agencies seeking to perpetuate themselves with Cap and Trade revenues. California could see a return to skyrocketing electricity prices, as experienced in the 2000-01 Electricity Crisis. And where would the check and balance be for voters and electricity ratepayers if the only referees to appeal to have a stake in the system?

If Cap and Trade were allowed to directly or indirectly plug the state operating fund budget deficit, gaming bureaucrats could hide behind a “veil of the carbon market” to jack up electricity rates and inflate the price of nearly all goods.

Cap and Trade Won’t Cure Budget Deficit

It is highly unlikely that proceeds from Cap and Trade auctions can be used to reduce or cure the state budget deficit.  Politicians may be queuing up with bills full of funding wish lists.  But any effort to liberalize the eligible funding activities under Cap and Trade will be met with lawsuits as well as a possible voter revolt.

A 2010 study by T2 Associates for the AB 32 Implementation Group raised concerns about Cap and Trade taking in eight years more than 120 percent of the single year 2009-10 state budget.

But the gnawing questions remain: Why impose Cap and Trade charges at all if they just have to be re-circulated back to electricity ratepayers?  If electricity ratepayers are given home energy efficiency rebates, isn’t this just another stimulus program? And hasn’t home energy efficiency been accomplished much more cost effectively by Title 24 Building Energy Efficiency Regulations and utility company rebates since the mid-1970’s?

Neither California politicians nor bureaucrats apparently know today what to spend Cap and Trade taxes on.  The transaction costs to implement the Cap and Trade program were estimated at $8 billion by the Congressional Budget Office.  And when you factor in the complexity that Cap and Trade will add to the economy, is a tax the best solution to reducing pollution?

The experience with the California Energy Crisis of 2001 is that things won’t turn out as expected and are often much worse than leaving them alone.