Because voters approved Proposition 13 in 1978 — the ballot initiative that capped property tax hikes at 2 percent per year and required a two-thirds vote of the Legislature before taxes could be added or increased — California became known as the birthplace of the anti-tax movement that swept the nation. After President Ronald Reagan got a 25 percent income tax cut through Congress in 1981, antipathy toward taxes became a defining feature of modern conservatism.

The Howard Jarvis Taxpayers Association, business groups and Republican activists enjoyed decades of success in fighting off tax hikes in the Legislature and on the ballot. And in 2010 — long after California’s emergence as a progressive redoubt — this potent partnership won voter approval of Proposition 26, which targeted local and state efforts to get around laws like Proposition 13 by defining taxes as “fees” which only need majority approval by legislative bodies. It eliminated this loophole and applied the two-thirds approval threshold for tax hikes to local governments.

But less than a decade later, anti-tax groups have the right to feel besieged in California. In 2012, voters approved Proposition 30, which increased sales taxes for four years and income taxes for those who made $250,000 or more by seven years. In 2016, voters approved Proposition 55, which extended the higher income taxes on the wealthy until 2030.

Teacher unions push for Prop. 13 ‘split roll’

And in November 2020, it appears increasingly likely that voters will be asked to consider two separate ballot measures that would each raise state taxes by about $11 billion.

One measure — the California Schools and Local Communities Funding Act — has already made the ballot. Sponsored by the League of Women Voters and pushed by teachers unions, it would create a “split roll” exception for commercial property from Proposition 13, allowing the parcels to immediately have sharply higher assessments based on their current value and exposing many businesses to the possibility of large annual property tax hikes in an era in which property values are soaring. 

About $5.5 billion of the annual revenue would go to counties and cities for local services. Roughly the same amount would go to K-12 schools and community colleges.

But with school districts around California reeling from the phased-in 132 percent increase in payments to the California State Teachers’ Retirement System required as part of the CalSTRS bailout approved by the Legislature in 2014, that funding boost looks inadequate to the California School Boards Association. The group recently released a poll that showed public support for tax hikes on personal incomes of $1 million or more and on corporate income of $1 million or more, which it said would generate $11 billion in annual new revenue.

School boards seek relief from cost of pension bailout

EdSource reported that the CSBA was considering launching a “Full and Fair Funding” signature-gathering campaign to get such tax hikes before voters in November 2020. K-12 schools would get 89 percent of the new revenue and community colleges the remainder.

A May 26 analysis in the Los Angeles Times suggested that each tax hike measure might benefit from focusing on helping public schools.

But voters may question why two major tax hikes are needed less than two years after state leaders boasted about having a $20 billion-plus surplus. Democratic state lawmakers’ nervousness about the optics of adopting a first-ever tax on water when the state treasury was flush led to that proposal’s death even after months of lobbying by Gov. Gavin Newsom.

And the June 4 special election in the Los Angeles Unified School District raised questions about the value of linking tax hikes to school improvements. Measure EE would have imposed a parcel tax based on the square footage of commercial and residential property to generate $500 million a year for the state’s largest school district.

But even though advocates had a much better-funded campaign than opponents, Measure EE got only 46 percent of the vote — far less than the two-thirds necessary for approval. Analysts argued that many local voters simply didn’t trust L.A. Unified to spend the money in the ways that district leaders promised.

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!

Phil Isenberg wants to end California’s water wars. The member of the Delta Stewardship Council and its past chair wants to connect the cost of water more closely to its users.

According to a report by the California Economic Summit, he points out that the cost of water is about $30 billion a year for the state. And it breaks down to 4 percent from federal spending, 12 percent from state spending and 84 percent from water users.

    Yearly Water Spending in California by Source (2008-2011) in $ billions

Result

The result, Isenberg said:

“Well for one thing, because this is directly contrary to popular perception and most of the recommendations of interest groups who come to Sacramento — or at least the ones who talk to us. … Most of the water decisions about what to build and who pays are made locally in California — and grumpy ratepayers pay the majority of the cost.”

He noted that only $1 billion of that $30 billion the state spends on water comes from bond funds. Yet California spent about $25 billion on five voter-approved statewide water bonds since 2000.

The state hasn’t derived a drop of water storage from these bonds to lessen the impacts of the current combined drought and man-made water shortage; 54 percent of that funding went for open-space acquisitions.  Another 14 percent went for restoring wetlands.  None went for water storage, as shown by the graph below, from p. 47 of the recent study, “Paying for Water in California,” by the Public Policy Institute of California.

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Because these were statewide bonds, there was no link required between the funding and any water services provided as there is in local water projects under Proposition 218.

Local taxes

The problem leads the PPIC study to the following analysis:

“The flip side of the cost challenge is shrinking revenue alternatives. A series of constitutional reforms adopted by the state’s voters, starting with the landmark Proposition 13 (1978) and followed by Proposition 218 (1996) and Proposition 26 (2010), have made it increasingly difficult for local water agencies to raise funds from local ratepayers, and they have also set up higher hurdles for new local and state taxes to support this sector.”

The PPIC report concluded the tax reforms approved by voters for the local level are “impeding efficient and equitable funding of California’s water system.

Isenberg concurred. “Some provisions like Prop 218 are just nutty, but they serve another goal of the public, which is to reduce costs for themselves,” he said. 

In the California Economic Summit summary, “He believes any changes to Prop. 218 will have to show they’ll provide something the public wants just as much: ‘A regular supply of cheap water.’”

The specific reforms sought by the PPIC include:

• Provides that reviewing courts must uphold a public agency’s determination of a need for a tax or rate hike over the objections of any citizen initiative or petition to the Public Utilities Commission or water board;
• Allows “service fees” that don’t service those paying the fee;
• Specially carves out water projects from the two-thirds vote requirement of Proposition 13 so that only a majority vote would be required. In other words, there would be no Proposition 13 for water projects.

The PPIC also wants to use “regulatory fees,” which are limited under Prop. 26 as a source of funding for water projects. This would provide an incentive for government agencies to declare benign environmental substances as toxic as a way to end-run voter review of taxes for water projects.

For example, PPIC proposes a regulatory fee on the agricultural and residential use of fertilizer, which they say contains nitrates that contaminate water. There have been a number of previous attempts to justify taxing fertilizer to fund water projects in California, including the non-existent “blue baby syndrome.”  This has compelled agricultural researchers to find ways to escape such taxes by genetically modifying crops to take nitrogen out of the air, as sugar cane does, rather than from the ground.

Tax wars

However, ending California’s water wars might only spark tax wars.

If Prop. 26 were gutted to remove the provision requiring a tax or regulatory fee to benefit those who are taxed, it might undo a recent water rate court decision.  Last month a Sacramento judge ruled, based on Prop. 26, that the water rates of the Metropolitan Water District of Southern California would overcharge the San Diego County Water Authority by $2 billion over 45 years. Without Prop. 26, the court may have had to rule differently.

Finally, any attempt to change Prop. 13 would be met with string resistance from anti-tax groups, such as the Howard Jarvis Taxpayers Association. Such groups contend that any weakening of Prop. 13 might lead to gutting the whole proposition, leading to much higher property taxes for homeowners.

“Prop. 26 is divided into two parts. One part addresses state fees and the other addresses local fees. Although the two parts overlap substantially, there are also significant differences. This article focuses exclusively on the part addressing local fees.

“Prop. 26 is a constitutional amendment that introduces, for the first time, a definition of what constitutes a local tax: … any levy, charge or exaction of any kind imposed by a local government …

“Therefore, almost any requirement imposed by a local government that results in the local government receiving revenues is a local tax. This means that the local government would need to obtain a majority approval of the voters if the revenues are to be used for general governmental purposes, or a two-thirds voter approval if the revenues are to be used for a particular purpose. In contrast, a fee may be adopted by a majority vote of the city council.”

The intent was to end as much as possible shenanigans in which taxes were labeled fees and passed or adopted without the level of support necessary to enact higher taxes under Prop. 13 and other state laws. But what’s going on now in Contra Costa County shows a possible way that Prop. 26 can be gamed by the government officials who lust after higher revenue by any means necessary.

Fee doubles — new mandates blamed

This is from Contra Costa Times columnist Tom Barnidge:

“Rocco Biale got a surprise in the mail recently. The county health permit invoice for his Walnut Creek restaurant, Rocco’s Ristorante Pizzeria, was $1,813 — nearly twice as much as the year before.

“‘I wondered if it was a typographical error,’ he said. ‘I went back and looked up last year’s bill: It was $957.’

“Chris Frumenti, owner of Mangia Ristorante Pizzeria in Lafayette, got similar news, his fee jumping from $800 to $1,648. …

“The Contra Costa Environmental Health division didn’t stop at pizza joints. Zack Scott, who owns Walnut Creek eatery Havana, said his fees also doubled.”

How is this possible in the post-Prop. 26 era? Because of this exception written into the law, as cited by the League of California Cities:

“The Licenses and Permits Exception provides that the following are not taxes: a fee imposed for issuing licenses and permits; and the costs of administrative enforcement of licenses and permits. Common examples include health and safety permits, building licenses, police background checks and permits for regulated businesses (such as massage establishments, card rooms, taxicabs and tow-truck operators). …  the fee imposed must not exceed the city’s reasonable costs. If the fee does exceed the reasonable costs, then it is not eligible for any of these exceptions and would be a tax subject to voter approval.”

Play for revenue disguised as bureaucratic requirement

Back to what’s going on in Contra Costa:

“It turns out there’s a rational explanation — an explanation, anyway — for why Environmental Health Director Marilyn Underwood asked the board to increase fees.

“Since taking her post three years ago, one of her directives has been to get the department’s books in order — it previously operated at an annual deficit of some $750,000. She also must comply with the U.S. Food and Drug Administration’s recently updated food code calling for more thorough inspections. According to provisions of California’s Proposition 26, her agency can charge fees equal to the reasonable cost of enforcement administration.”

What a scam. If you really think the cost of food inspections to Contra Costa County more than doubled, I’ve got a subdivision in Lake Elsinore you might be interested in. This was a revenue play — not a considered and principled use of a Prop. 26 exception.

If anyone doesn’t think that that lots of government agencies will try to use this approach to get around Prop. 26, they haven’t been watching how California politicians act when it comes to other folks’ money.

The Contra Costa case is a harbinger of what’s to come.

By Dave Roberts

When is a tax not a tax? When it’s called a fee by Gov. Jerry Brown and fellow Democrats. But the $30 million that has been proposed to be sucked out of Californians’ wallets and fed into the wood chipper of state government definitely walks, quacks and smells like a tax, according to some Republicans.

Brown’s 2012-13 budget includes a 1 percent tax hike on retail sales of lumber and wood products. The money will pay the cost for state agencies to regulate the timber industry. Timber company officials are backing the bill because consumers get stuck with the tab instead of them, and the legislation, AB 1492, introduced by the Assembly Budget Committee, limits the amount of the judicial damages that timber companies can be hit with in the event of a forest fire.

The Senate Budget and Fiscal Review Committee approved the bill 11-0, with five Republicans abstaining, on Aug. 15. Although calling it a fee rather than a tax means that AB 1492 does not need the two-thirds legislative approval mandated by Proposition 26, the bill still requires two-thirds support because it’s been deemed an urgency item as the tax takes effect in January. Although the vote was lopsided in the budget committee, the bill was bashed and thrashed by several Republicans and even one Democrat before that.

That Democrat is Sen. Roderick Wright, who represents Inglewood. He sounded positively Republican as he blasted California’s expensive regulatory practices. He ended up voting for AB 1492, but was not happy about it.

“One of the things that we seem to do in California is we make stuff decidedly more expensive for absolutely no benefit,” said Wright. “Those states, Oregon and Washington in particular, seem to have figured out a way to manage their forest as well or in some cases better than we do, have a lower timber harvest plan cost, deliver more board feet of lumber at a better price. We are importing lumber from them in many instances. And their fire danger seems to be less than ours. So they end up achieving all of the benefits at a lower cost than we do.

“It seems like to me we have an ass backwards system. And I’m not sure what we do with it. Today we may have to support this because it may be the best that we have. But I don’t think anyone would even suggest that this is a good idea. It’s just better than the stupidity that we have been operating under. We’re just making an improvement over something that was before admittedly stupid. So now it’s just less stupid.”

New tax

Another Senate Democrat who voted for the bill, Gloria Negrete McLeod, also seemed skeptical about how the new tax on wood products would be implemented. “What if I go to the lumber store and I want a lath, and I only want six inches of a lath because I want to shore something up,” she asked. “Are you going to charge me six inches of a lath as opposed to a board as opposed to a bunch? What about toothpicks? They are made out of wood. [Laughter in the audience.] I’m serious.”

Although the specific wood products that will be taxed have yet to be identified, the intent is to focus on building products, responded Matt Paulin, assistant program budget manager for the California Department of Finance. But that answer did not satisfy Mira Guertin, a lobbyist representing Home Depot.

“Home Depot has concerns this new assessment burdens retailers like Home Depot,” she said. “The definitions are vague. The toothpick example raised by Sen. Negrete Mcleod is not really all that farfetched. There’s a lot of things like doors, window frames, lattice work, gardening barrels, tool handles, all sorts of things, thousands of products in these stores that could potentially be subject to the tax. And that is a big burden for retailers to try to program around that. And also the list will change every year.

“We are also concerned that this is potentially a double increase for our customers. They may be facing or choosing to impose on themselves a half-percent sales tax increase in the fall [Proposition 30]. This would go on top of that. It’s currently unclear in the language whether the sales tax is applied to the 1 percent lumber assessment or not. That’s something we’d like to see clarified at the very least.”

Quick decision

Senator Doug La Malfa, who represents Butte, led the Republican attack on the bill, which he said should first have been considered by other committees dealing with governance, finances and natural resources.

“Here we are with 16 days to go in the session taking up some very important policy that should be heard and fully vetted in these committees,” he said. “And we are doing it once again as a budget trailer item on some key tax and resource policy. Traditionally, when we have the implications on the regulatory side and the new tax that’s going to be involved, I think we would like to vet out in the committee process and have input on … what is going to be deemed a wood product that’s going to be subject to the 1 percent sales tax.”

Hearing the word “tax,” Committee Chairman Mark Leno, D-San Francisco, smiled and corrected La Malfa, calling it a “regulatory fee.”

La Malfa responded, “If it walks and quacks like a tax …” He went on to agree with Wright about incompetent regulations: “I’m just really troubled by this. And this is something that I care passionately about. I’ve served here almost eight years in the Legislature. And forestry management issues, the ability to harvest timber within our state instead of exporting our so-called environmental problem to other states or countries, I think great strides need to be made. Yet what we are doing is conceding California’s costs are going to be tremendously higher for timber harvest plans than Oregon or Washington, which are very successful in managing forests.”

Tax or fee?

Sen. Bill Emerson, R-Riverside, is concerned that the lumber tax revenue will be sawed off to other programs, especially if more money comes in than is needed to regulate timber.

“What happens when the economy improves and the dollars go to, say, $60 million?” Emerson asked Paulin. “You’re telling me that any excess funds would be protected and not ripped off as we’ve done traditionally in this state of California. Will they go into the General Fund and just be used for whatever?”

Paulin responded, “No, they clearly can’t go into the General Fund, being a regulatory fee.”

Emerson interrupted, “Sir, sir, it’s not a regulatory fee. Individuals are paying. This is a tax. It’s a consumer tax that individuals are paying. It has nothing to do with regulatory. You may use it for regulatory, but it has nothing to do with a regulatory fee. Let’s be honest about that one.”

But the committee Democrats were persuaded by the pleas from timber company officials, some of whom said that they are in danger of going out of business if AB 1492 is not passed. One of those is Chuck Henderson, manager for Shasta Forest Timberlands, who said his family-owned company owns 140,000 acres of timberland in northeast California and has been in business since 1894. It is being sued by the federal government for $791 million in connection with the Moonlight fire, which burned 65,000 acres in the Plumas National Forest in 2007. If the federal government is successful in court, Henderson called it “a virtual economic death penalty.

“This law is critical to the survival of family-owned timberland companies such as ours as well as farmers, ranchers, ski areas and anyone else whose business abuts government property. This law sensibly seeks a balance between economic and environmental damages and the value of the land damaged. It recognizes the cost of negligence while also ensuring the risk of accidents is insurable. Last year our insurance doubled for half the coverage. And what’s more, we now have four layers of insurance where we used to have two. This is not sustainable. If we are no longer able to afford insurance, we will no longer be able to stay in business and no longer be able to stewards of our land and no longer able to deliver the economic and environmental benefits that we have provided to the community and to the citizens of California for over a century.”

Leno cited the pleas from Henderson and other timber harvesters as he called for the vote. AB 1492 received two-thirds support, 47-23, in the Assembly on March 22. No Republicans voted for it, but four abstained. The full Senate still is considering it.

By WAYNE LUSVARDI

Call it pension “entrap and raid” —  instead of environmental “cap and trade.”

Gov. Jerry Brown is floating an idea to divert $1 billion from the auction of pollution credits under California’s Cap and Trade Program to plug a $9 billion gap in the state-operating budget. The $1 billion would go toward funding the huge shortfall in funding pensions.

The Jan. 11 issue of the Los Angeles Times is reporting that Brown’s proposal is enraging business organizations who are calling it a back-door tax.

This comes as no surprise to business groups who sponsored Proposition 26 on the Nov. 2010 ballot to plug a loophole in California’s Cap and Trade law that could have allowed it to impose “fees, levies, charges or revenue allocations” without a supermajority — two thirds — vote of the electorate.  Is it coincidental that, in the official ballot arguments for Prop. 26, the fiscal impact was shown as $1 billion?

Cap and Trade is a mandatory emissions trading program that forces industries to either reduce pollution or buy pollution credits from low polluting industries that have credits to sell.  The first auction, scheduled for August 2012, is coincidentally estimated to raise $1 billion.  The monies confiscated from businesses would be used to create green “jobs and deliver public health, economic and environmental benefits.”  But now part of those funds are proposed to be diverted to be put into the state general fund, which Prop 26. forbids.

Tax Farming?

The governor’s proposal confirms suspicions of critics that Cap and Trade is nothing but a “tax farming” scheme with little net environmental benefit.  Tax farming was a system used in ancient Persia, Egypt, Rome and Greece of outsourcing taxation to “tax farmers,” who bid at auction for the contract rights to collect a particular tax and make money doing so.

Under California’s Cap and Trade law, it will also be mandatory for municipal electricity and water providers to buy pollution credits.  This would result in a tax on utility rates.  Electricity and water ratepayers could end up paying for state pensions in their energy and water bills.

Brown’s proposal seems to be an action of desperation after State Controller John Chiang announced that state revenues for December fell $1.4 billion under the state’s projections.  A revenue gap of $2.5 billion has grown since the state budget was adopted in June 2011.

Quoted in the LA Times, Jim Metropulos, a lobbyist for the Sierra Club, stated that perhaps Cap and Trade auction receipts could be used to “backfill” existing state environmental programs.  These funds conceivably could be used to free up other general fund monies for other purposes.  But California’s Cap and Trade Law –AB 32, the Global Warming Solutions Act of 2006 — was not meant to be a way to partly backfill the state treasury.

A Trial Balloon

Brown’s proposal is apparently what is called a “trial balloon” in politics.  William Safire’s Political Dictionary defines a trial balloon as “a testing of public reaction by suggestion of an idea.”

Business groups are already saying they will legally challenge any such proposal to divert cap and trade funds to the state general fund.

Brown’s trial balloon may not fly with voters who are facing $6 billion in higher annual electricity costs due to the imposition of California’s new Green Power law.

Brown has yet to float a trial balloon on many of the recommendations of the State Legislative Analyst’s Office on where to cut state government, including $3.5 billion in annual tax credits the LAO says “are not achieving their stated purpose.”

It remains to be seen whether Brown’s trial balloon will stay afloat or will plummet back to mother earth.