Why some experts say a court just created a new pathway to “tax” Californians
Could a few words buried within a recent court ruling make it easier for the state to raise money from Californians?
Those words—contained within a decision affirming the constitutionality of California’s policy of charging polluters—are causing a stir among some state budget experts, who wonder if the ruling could be used to pry loose constitutional constraints that have long restricted lawmakers’ ability to increase taxes.
In its 2-to-1 ruling, California’s 3rd District Court of Appeal declared that the state’s cap-and-trade climate program is neither a tax nor a fee—the two categories into which state jurists have traditionally slotted all revenue raisers—but falls into a mysterious none of the above category.
Such semantic distinctions matter in California because the state constitution puts tight restrictions on lawmakers’ ability to raise money from taxpayers. Voters in 1978 passed the most famous of these restrictions, property-tax-cutting Proposition 13, which also lifted the legislative threshold for new state and local tax hikes from a simple majority to a two-thirds “supermajority.”
The suit, filed by the California Chamber of Commerce and other business groups, contended that when the Legislature created the cap-and-trade program in 2006, it introduced a new tax with only a simple majority vote—violating the two-thirds vote requirements of Prop. 13. (Since then, the auctions have generated $4.4 billion for the state.)
But what is a tax? In explaining its decision, the court offered a new, narrower definition of the word: “a tax has two hallmarks: (1) it is compulsory, and (2) it does not grant any special benefit to the payor.”
According to Tony Francois from the Pacific Legal Foundation, which represents one of the plaintiffs in the case, that definition leaves out many of the levies that most Californians would be surprised to learn aren’t “taxes.”
“Under (the court’s) analysis, any transaction-based tax, such as the sales tax or the gasoline tax, is voluntary instead of compulsory,” he says. “Anyone can choose whether to drive their own car and buy gas for it or not. And, all of these transaction taxes provide something of value to the payer.”
Seemingly anticipating that broad interpretation, the court’s majority opinion insisted there was an obvious distinction between a payment made for a thing of value (in this case, an allowance for emitting greenhouse gases) and a sales tax, which one pays “but receives nothing of particular value for the tax.”
But some conservatives find that distinction too blurry for comfort.
“All the Legislature has to do is say ‘we’re not taxing the purchase of the commodity, we’re just selling you the right to purchase the commodity,’” says Mike Genest, who directed the Department of Finance under Gov. Arnold Schwarzenegger and is the founding partner at Capitol Matrix Consulting. “If you take that logic and apply it liberally, you could probably apply it to any tax.”
The court has “invalidated the Prop. 13 two-thirds requirement,” he says. Even, he argues, as it applies to the income tax: “You just purchased the right to live and work in California for only 13 percent of your income—congratulations!”
Many legal analysts, policy advocates, and lawmakers disagree the ruling is quite so earth-shattering. A spokesperson for the Department of Finance says that they are still reviewing the ruling and its implications. And although the offices of both Assembly Speaker Anthony Rendon and Senate President Pro Tem Kevin de León declined to comment, numerous legislative staff members around the Capitol said that they do not expect to see a raft of new tax-hiking legislation emerge on the basis of this ruling, both because the ruling was narrowly focused on cap and trade, and because the case is being appealed to the California Supreme Court.
“I wouldn’t take one appellate court ruling as a landslide,” says Danny Cullenward, a lawyer and energy economist at Stanford University and a research associate with the non-profit Near Zero. “If one is convinced, as the plaintiffs are, that this fundamentally changes the line, I think there’s good reason to believe that the state Supreme Court would at least look into the question.”
But many are not convinced that this ruling fundamentally changes anything.
“This is not some sort of revolution,” says Cara Horowitz, co-executive director of the Emmett Institute on Climate Change and the Environment at UCLA School of Law, who also filed an amicus brief in support of the program.
“It’s not really reversing what we used to think. It’s really just figuring out for the first time what a cap-and-trade auction really is in the context of tax law,” she says. The court may have broken from precedent by establishing a “neither tax nor fee” classification of revenue generator, but Horowitz says that the cap-and-trade program is so unique it’s hard to imagine how this new third category could be applied to much else.
“There are no instances that jump out at me of other California regulations that I now think of differently in light of this opinion,” she says.
Plus, even if the ruling does undermine Prop.13, there are other constraints on lawmakers’ ability to raise taxes. In 2010, voters approved Proposition 26, a chamber-sponsored measure that significantly broadened the definition of tax, leaving only a few, specific exceptions. Prop. 26 didn’t enter into the court’s ruling this time around because the Legislature voted to enact the cap-and-trade program before voters approved the initiated constitutional amendment
“There’s so little case law developing the idea of how Proposition 26 defines a tax, it’s really hard to say what the courts will conclude,” says Horowitz.
That’s a question that will have to be answered before too long.
Under current law, California’s cap and trade program phases out in 2020. As Democratic lawmakers in both chambers introduce various extension proposals, the Brown administration has demanded a two-thirds vote to put any questions about the legal validity of the program in the rear view mirror.
But even if Gov. Jerry Brown sees a supermajority as politically necessary, it might not be legally so. The Office of Legislative Counsel, which prepares summaries on all new bills and serves as the Legislature’s official lawyer, has designated the two extension bills in the Assembly as simple majority votes. Not coincidentally, a third bill, introduced in the Senate this week, has been written to require a two-thirds vote.
In other words, even if the appellate court’s ruling does blow a hole in Prop. 13 and even if it is upheld by the Supreme Court, Prop. 26 still reigns. Or at the very least, that may be a question for a later day in court
Latest in Economy