Cap-and-Trade, Cigarette Tax and the Tale of Dwindling Funds

SmokingCalifornia’s cap and trade program and cigarette tax increases have something in common — the more they encourage behavioral changes in reducing greenhouse gas emissions and smoking, the less revenue they bring in. If the goal is to reduce the pollutants and the smoke then the programs can claim some success. But, these programs also appear to be about the money.

While the Legislature considered ways to divvy up the current cache of cap and trade money, tremors were felt through the system when the May cap and trade auction sold only 11 percent of the permits offered to business and fell far short of the expected revenues.

The cap and trade program is designed for companies to cap greenhouse gases or purchase permits at auction or traded in the market.

What happens if the polluting companies achieve the goal of reducing greenhouse gases and do not need permits? As Stanford economist Frank Wolak told the Los Angeles Times in a comprehensive article on the cap and trade issue, “To the extent that not all the permits are being sold, that is a success of the program.”

But not necessarily a positive to those who want to spend the money that come from the cap and trade auctions.

Chief among them is Gov. Jerry Brown. He needs the money to bolster his bullet train project, which is not capturing the revenues it needs to meet its enormous cost. Other programs designed to reduce climate change are also dependent on money from cap and trade. If greenhouse gases are reduced and there is no need to spend on permits, money is not available for the train or other projects.

There is a similar story when cigarette taxes are raised. Programs are funded with the expected revenue but when the increased taxes turn off smokers from purchasing cigarettes (that’s part of the plan we are told by advocates) the money dries up liked cured tobacco leaves.

Cigarette purchases are down and so is the revenue. The fund that pays the First 5 commissions has seen state revenue from the cigarette tax drop about $150 million annually since its peak. Now there is an initiative bid for an additional cigarette tax. The measure’s proponents recognized the potential for revenue decreases if the tax passes. In the measure, they wrote that if the new tax causes reduced tobacco consumption, that make-up revenue from the new tax would be transferred to existing tobacco funded programs.

But once this new tax reduces consumption where does the money come from to fund those existing programs or for the recipients who will receive money if the cigarette tax initiative passes?

Is cap and trade a different kind of revenue source than taxes on cigarettes? The California Chamber of Commerce doesn’t think so. That organization is seeking a court ruling that cap and trade revenue is a tax. Like the cigarette tax, given the goal of both the cap and trade fee and cigarette tax, the cap and trade charge could also be considered a “sin” tax. It is being levied to punish (and reduce) a certain practice.

It has been argued that not as much money would be needed for the anti-smoking programs or greenhouse gas reduction because problems associated with these concerns would be at least partially solved.

Show of hands from those who believes the money won’t be missed by those who currently receive it and that they won’t try to find a way to make their budgets whole again.

Thought so.

This piece was originally published by Fox and Hounds Daily

CA’s cap-and-trade program faces daunting hurdles to avoid collapse

As reported by the Los Angeles Times:

The linchpin of California’s climate change agenda, a program known as cap and trade, has become mired in legal, financial and political troubles that threaten to derail the state’s plans to curb greenhouse gas emissions.

The program has been a symbol of the state’s leadership in the fight against global warming and a key source of funding, most notably for the high-speed rail project connecting San Francisco and Los Angeles.

But the legality of cap and trade is being challenged in court by a business group, and questions are growing about whether state law allows it to operate past 2020. With the end of the legislative session in August, Gov. Jerry Brown, lawmakers and interest groups of all stripes are laying the groundwork for what could become a battle royal over the future of California’s climate change programs. …

Click here to read the full article

Cap-and-Trade Revenue Drastically Lower Than Expected

carbon-tax-1In yet another blow to California’s besieged bullet train, revenues from this year’s cap-and-trade carbon credit auction fell drastically below the state’s goals, triggering a selloff that left analysts unsure of the system’s long-term viability.

“The results of last week’s quarterly auction were posted and revealed that instead of the $500-plus million expected from the sale of state-owned allowances, the state will get only about $10 million, less than 2 percent,” the Sacramento Bee reported.

“The poor results confirmed reports circulating in financial circles that the cap-and-trade program has begun to stumble. February’s auction resulted in some allowances being left unsold — the first time that had happened. Afterward, there was a brisk trade in the secondary market as speculators began dumping their holdings due to uncertainty about the future of the program, which may expire in 2020.”

Officials and activists swiftly sought to downplay the damage. “Over the long-term allowances will be needed, and so the allowances that will be offered through the auction will need to be purchased,” said Ross Brown of the Legislative Analyst’s Office. “But in the short-term it’s hard to know and it depends on the underlying supply and demand.” From an environmentalist standpoint, meanwhile, “it’s important to remember that […] it’s the declining cap — not the price or number of allowances sold at auction — that drives emissions reductions,” wrote Alex Jackson at the National Resources Defense Council. “That is the purpose of the program, not raising revenue.” But with 2020 looming, Jackson allowed, the one-two punch against high-speed rail and cap-and-trade have cast doubt on California’s strategy of fusing infrastructure and environmentalism into a single economic policy.

Case and controversy

Adding to the upheaval, the carbon credit regime itself has wound up in court, as the state Chamber of Commerce pushes to prove that the legislation authorizing its creation — AB32 — has run afoul of the state constitution. “Propositions 13 and 26 require a two-thirds majority for the Legislature to approve new or higher taxes and fees,” as Hoover Institution fellow Carson Bruno wrote at the Bee. “Whether or not AB32, which barely passed in 2006, is unconstitutional depends on whether the cap-and-trade revenues constitute either a tax or a fee. These auction revenues fit the definition of both a tax and fee. They are imposed by a government entity, spent on government activities and are collected in exchange for a transaction — in this case a permit to emit greenhouse gases.”

Officials have countered that argument in court. “The state contends the fees are not taxes, but a consequence of regulations,” as the Times noted. But a judge hearing arguments “recently asked a series of questions that perhaps fueled speculation that he might rule in favor of the suit,” according to the paper.

The governor’s gambit

Flexing his considerable political skill and discipline to balance competing interests to his ideological left, Gov. Jerry Brown had labored to ensure that cap-and-trade funds could be leveraged to make the train a viable public and private sector investment. That presumed a degree of stability in revenues that now can’t be relied on. “The rail authority had been expecting about $150 million,” the Los Angeles Times observed; now, it will receive just $2.5 million. “Whatever prompted the lack of buyers, the auction is a stark example of the uncertainty and risk of relying on actively-traded carbon credits to build the bullet train, a problem highlighted in recent legislative testimony by the Legislative Analyst’s Office and a peer-review panel for the $64-billion high-speed rail.”

Brown had hedged against just such an eventuality, however. State finance spokesman H.D. Palmer “noted that there is a $500-million reserve set up in anticipation of volatility that could help close the gap,” the Times added. But Brown will have to clear the emergency expenditure in Sacramento, where some liberal lawmakers, hoping to channel more money to environmental policy, could try to nix the scheme by aligning with Republicans long bent on scrapping the train.

This piece was originally published by CalWatchdog.com

CA Cap-and-Trade Credits Extend to Brazil

carbon-tax-1In late 2012, as officials with the California Air Resources Board were refining rules for the state’s nascent cap-and-trade pollution rights program, a huge scandal was unfolding in the European Union. Five Deutsche Bank AG officials were arrested for their role in a complex scam involving using the sale of carbon-emission certificates to avoid paying taxes. Earlier that year, six cap-and-traders involved with the bank had been arrested as well.

Cap-and-trade critics had always warned that as soon as programs were introduced, there would be aggressive efforts to game and/or cheat the rules to make money. With these warnings reinforced by the EU scandal, California officials in early 2013 said they’d learned their lesson. Greenbiz.com reported that …

California, with the advantage of advanced warning, has taken the EU market’s lessons to heart. It has recognized the crucial need to tightly control — and extensively oversee — who can participate in the carbon market and how. With the help of the state Attorney General’s office, California has adopted more stringent rules than the EU ETS [Emissions Trading Scheme].

State tax credits for payments to indigenous communities?

Now, however, the Brown administration is pondering relaxing these rules by allowing companies to get pollution credits by paying for preservation of forest lands in Brazil.

The idea has been discussed for years but has picked up momentum of late. According to recent reports, state regulators are closer than ever to formally expanding the cap-and-trade program by allowing polluting industries to offset their carbon emissions by paying indigenous communities in the Amazon to preserve the rain forests in their region.

This idea has won praise from environmental groups, who have long depicted preservation of the rain forests in the Amazon delta as a global priority. They call it a great way for Brown to burnish his environmental legacy.

The Western States Petroleum Association has also been supportive, saying industries need options to meet their commitments under AB32 and related laws.

Brazil’s huge corruption scandal bodes poorly for CA program

But the initial coverage of Brown’s trial balloon omitted mention of two key issues: Gaming and cheating of cap-and-trade programs remains a huge problem around the world, and Brazil has both a long history of corruption and a lack of transparency.

In early 2015, Foreign Policy magazine reported how the European Union’s program had become a “playground for gangsters, international crime syndicates, and even two-bit crooks — who stole hundreds of millions of dollars in pollution credits.”

In October, Forbes magazine reported on a slew of new scandals, starting with schemers in Russia and Ukraine being accused of using the EU cap-and-trade market to sells counterfeit credits for 600 million tons worth of carbon dioxide emissions. The account noted that the less sophisticated a nation’s law-enforcement system, the more likely cap-and-trade scams were to be — and that some of the world’s richest people and companies were taking advantage.

“The cap-and-trade system of emissions trading is very difficult to control and its effects are diluted. … It is precisely because I am a market practitioner that I know the flaws in the system,” Forbes quoted financier-investor George Soros as saying.

Meanwhile, in January, Transparency International reported that over the previous year, Brazil’s corruption problems were growing worse at a faster rate than in any nation on the planet. Agence France Presse reported last week that a scandal involving billions of dollars of missing revenue from state oil giant Petrobras continued to grow, with dozens of government and business leaders implicated.

Efforts to remove President Dilma Rousseff from office have been complicated by the fact it is hard to find many credible critics of Rousseff within the Brazilian government, given how many prominent Brazilian politicians are either directly tied to the scandal or indirectly tied through close political alliances.

According to CalMatters, state air board officials said they would look to avoid problems caused by Western nations’ cap-and-trade programs in another tropical nation: Nigeria. But the issues there involved indigenous communities being denied use of forest lands they relied on because of restrictions under new conservation agreements — not necessarily the problems that California could risk if it counts on Brazil as a partner in a cap-and-trade pact.

This piece was originally published by CalWatchdog.com

Cap and Trade Costing CA Drivers $2 Billion Per Year

carpool-laneAs fast as California drivers will spend an extra $2 billion at the pump this year to fund the controversial cap-and-trade program, state lawmakers are finding ways to use it, according to two reports released Thursday.

Cap and trade was implemented by a state regulatory board to try to reduce greenhouse gas emissions to 1990 levels by 2020, as required by law.

One of several additional costs tacked on an estimated 11 cents to each gallon of gas and 13 cents per gallon of diesel, according to the Legislative Analyst’s Office, driving average prices to some of the highest in the nation.

“Most drivers have no idea that this is costing them $2 billion per year because it has been largely hidden from them,” said Asm. Tom Lackey, R-Palmdale. “It’s clear that we need to improve transparency for consumers about cap and trade’s costs.”

Where does the money go?

Cap-and-trade money is currently appropriated as follows: 40 percent is unallocated, 25 percent is for high-speed rail, 20 percent is for affordable housing and sustainable communities grants, 10 percent is for intercity rail capital projects and 5 percent is for low-carbon transit projects.

Waiting to spend the money are 36 pending proposals in the Legislature totaling $7.5 billion, which is more than double what was proposed in Gov. Jerry Brown’s draft budget, according to a study by the California Tax Foundation.

The most expensive proposal is SBX1 2, sponsored by Sen. Bob Huff, R-San Dimas. This bill would divert $1.9 billion annually to street and highway construction projects and block further cap-and-trade funds from going to high-speed rail.

In addition to barring further funds from going to high-speed rail (a recurring theme for Huff), the Huff bill is too vague to show whether it will reduce GHGs or not and may “leave itself open to litigation,” according to the legislative analysis.

Another bill, sponsored by Asm. Jimmy Gomez, D-Los Angeles, would fund nearly $1 billion worth of projects, including up to $100 million on new toilets. According to the report, many of the initiatives would likely reduce GHG emissions, while other parts of the bill might not.

Other bills include synchronizing traffic lights, implementing a car buyback program, promoting recycled glass and preventing forest fires. And while its unclear what effect most of the proposals would have on GHG emissions, the report was issued to help voters and legislators make that determination.

“This report identifies the auction revenue spending proposals that are active in the Legislature, so they can be given proper scrutiny,” California Tax Foundation Director Robert Gutierrez said in a statement.

Legality

Opponents of the program argue that by collecting revenue from drivers and businesses (those with large GHG emissions) it amounts to an illegal tax, which would have needed to be approved by a two-thirds legislative majority to be legal. A previous court ruling — which is now being challenged — found that the revenue is OK as a regulatory fee and thereby not subject to a two-third’s vote.

In 2006, the Legislature passed AB32, which tasked the state ARB to implement the GHG reduction. Proponents say this mandate gave the ARB the legal authority to auction off emission allowances (there’s a “cap” on emissions and business can “trade” them at auction).

In January, the non-partisan Legislative Analyst’s Office recommended lawmakers either narrowly tailor their proposals to unquestionably reduce GHGs or approve the program with a two-thirds majority to avoid legal complications.

Originally published by CalWatchdog.com

Los Angeles: The City Of Whining About The Car

los-angeles-freeway-helicopter-1There was something very strange about the Los Angeles City Council debate on the day they adopted the Mobility Plan 2035.

On August 11, the council was rushing to pass a 20-year plan that called for removing traffic lanes on busy streets to make room for 300 miles of protected bike lanes. Councilman Mike Bonin told his colleagues how much safer the roads would be once traffic was slowed by the lane reductions.

“Only 5 percent of those hit by a car going 20 miles per hour die,” Bonin said. “Over 80 percent of those who are hit by a car going 40 miles per hour die.”

You don’t typically hear an elected official arguing for slowing city traffic to 20 miles per hour. And then the council members began to hint that the plan wasn’t binding on anybody.

“Every particular project will need to be vetted by you, in your district, with your constituents,” Bonin told his colleagues.

“This is a concept,” council president Herb Wesson said. “If you choose to vote on this today, it will not be put in place tomorrow.”

They called it “a vision statement,” and “an aspirational document.” And then the truth came out.

“This is a document that also helps us get a lot of money from somewhere else,” Bonin said. “This is a document that can help us get active transportation funds from the state. This is a document that can help us tap into cap-and-trade funds because it will help us reduce greenhouse gas emissions. This is a smart thing to be doing.”

Sacramento has more than a billion dollars available for projects that reduce greenhouse gases, money that is pouring in from new fees on gasoline and diesel fuel that began on Jan. 1. The cash goes into a fund for politicians to hand out to anything green, or greenish.

And that’s why officials have turned Los Angeles, the city of the car, into the city of whining about the car.

“We have for too long been wedded to the single-occupancy vehicle,” Bonin intoned.

But how many people in Los Angeles want to divorce their cars?

A test is underway in Northridge, where Reseda Boulevard between Parthenia and Plummer has been declared one of the city’s “Great Streets.” It’s now the site of L.A.’s only protected bike lanes.

“People love it,” City Council representative Mitchell Englander said, “it’s brought back new vibrancy to an area that didn’t have that.”

Mayor Garcetti says the Great Streets initiative aims to create “transformative gathering places for Angelenos to come together.” So in addition to the bike lanes, the Reseda Boulevard sidewalks were given a paint job and some outdoor furniture.

But on a recent afternoon, no one was transforming or gathering on the new streetscape. The scattered furniture — yellow benches, chairs and tables styled to suggest a 1960s living room — sat empty and grimy, facing the traffic or turned toward the gritty storefronts, bolted to a sidewalk that had been painted to look like flagstones.

And on that afternoon more cyclists were riding on the sidewalks than in the protected bike lane. Alex, a CSUN student who said he rides a bike to get around the neighborhood, said the sidewalk is much safer, because cyclists in the bike lane can too easily be hit by cars near the corners, where the right-turn lane and bike lane overlap.

In a shopping center on the southeast corner of Reseda and Nordhoff, people sat at outdoor tables having coffee or dinner, and no one had anything good to say about the new street design.

“I hate it, it’s made traffic worse,” said one Northridge resident. Another said it was “much more dangerous” with parking spaces to the left of the bike lane leaving drivers to open their doors into the traffic.

Left turns into the shopping center are now illegal, so customers have to go around the block and drive north on Reseda to be on the right side of the street. “Who’s going to do that?” said a restaurant manager. “Everyone just makes an illegal left turn or goes somewhere else.”

A few yards away, customers were lined up for handmade ice cream sandwiches at a new store called Cream.

“I’d like to put in some benches,” said co-owner Mario Ramirez, indicating the walkway between his store and a row of parking spaces. “People seem to gather here.”

The early test results are in: People don’t want streetscapes and bike lanes. They want parking and ice cream.

Legislators Duel Over Impending Gas Tax Hike

Gas-Pump-blue-generic+flippedDemocratic legislators in the state Senate have brought Californians closer to new hikes on the cost of driving their cars. But the committee vote represented little more than a first step in a complex, intense negotiation between Republicans, Democrats and the man trying to stay influential but above the fray — Gov. Jerry Brown.

Republicans have resisted Democrats’ preferred approach, but California’s business lobby has pressed both parties to embrace new taxes and fees. “Last week, business organizations such as the California Chamber of Commerce and the Silicon Valley Leadership Group said any deal should seek to raise at least $6 billion annually by raising gas and diesel taxes and increasing vehicle registration and license fees,” the San Jose Mercury News reported.

Part of the rationale for increasing fees, instead of simply dialing up gas taxes, has centered around the growing popularity of hybrid and electric vehicles in California — and the state’s interest in squeezing revenue out of every car on the road. “We have these Teslas that are being sold and they don’t pay any gas tax,” complained state Sen. Jim Beall, D-San Jose, as CBS Sacramento noted.

Gas in California has remained higher on average than out-of-state, thanks to cap-and-trade fees and the state’s unique environmental rules about the blends of gasoline that must be sold. Current state taxes include an excise tax of 39 cents, between 30 and 42 cents in sales tax, and 10 cents for the cap-and-trade levy, as Watchdog Arena observed.

Brown stays secretive

At a recent news conference that left some observers hungry for detail scratching their heads, Brown refused to hint at a revenue source for the improvements. “I’m not going to say where the revenue’s going to come from, how we’re going to get it,” he said. “We’ll get it done, but I’m not going to put all my cards on the table this morning,” Brown said, according to ABC 7 News.

Brown was joined at the appearance by Assembly Speaker Toni Atkins, D-San Diego, who signaled separately that negotiations would be tough. “It will be a bumpy road, but our constituents expect us to work together and figure something out,” she toldthe San Francisco Chronicle.

To date, the governor has not let slip whether he would support or oppose a tax hike to make up the difference.

Dueling proposals

That raised the possibility that Republicans might get their way, scrounging up revenue from savings and budgetary jujitsu instead of tax increases. But GOP legislators have been keen on siphoning revenue away from California’s cap-and-trade program, which Brown had availed himself of previously in order to fund construction spending on the state’s much-debated high-speed rail project. That has drawn strenuous objections from Sacramento Democrats.

The current proposal advanced by Assembly Republicans “would raise more than $6 billion a year by eliminating thousands of state employees and unfilled positions and reallocating existing state money, both from the budget and from other projects,” the Chronicle noted, while the plan pushed by Beall would raise billions with a suite of increased gas taxes and fees, including an “annual road access charge of $35 a vehicle,” according to the paper.

It was Beall’s bill that cleared its first committee test in the Senate this week, with Democrats besting Republicans in a party line vote.

For now, just a few broad outlines of an agreement have come into focus. According to the Chronicle, both sides reject the option of a “one-time fix, such as a bond measure that would pile more debt on the state. Any money raised must be earmarked only for road and infrastructure repair, and protected against being siphoned into other parts of the state budget.” Plus, legislators agreed that expenditures should be clearly identified and made public, with some kind of oversight and monitoring built into the arrangement.

Originally published by CalWatchdog.com

More Pain at the Pump

Gas-Pump-blue-generic+flippedSacramento is about to launch a new attack in its ongoing war on drivers.

California’s 48.6 cent gas tax already ranks second out of 50 states –- the feds take another 18.4 cents — and when the hidden carbon tax, part of the cap-and-trade program, is factored in, our state leads the pack by a wide margin. But this is not nearly enough, according to the political class.

Sen. Jim Beall is building a coalition of both Democrats and Republicans in the Legislature to hike gas taxes along with vehicle license fees and registration.

The San Jose lawmaker’s Senate Bill 16 slams taxpayers in three ways. First, it would raise at least $3 billion annually by increasing the gas tax by another 10 cents a gallon.  Second, it would hike the vehicle license fee, which is based on value, by more than 50 percent over 5 years. Third, it would increase the cost to register a vehicle by over 80 percent.

Although the backers of the SB16 tax increase say it is vital to make up the claimed $59 billion backlog in roadway maintenance, some of the funds are slated to go to repaying transportation bonds that, when passed, were to be paid from the general fund. This means that not all of the new revenue will go to the stated intent of fixing roads and highways.

Whatever the actual dollar amount of the backlog in roadway maintenance, this shortfall is the result of previous diversions of gas tax and truck weight revenue to budget items that have no direct impact on road improvement, and Beall’s bill would allow this practice to continue.

It should not go unnoticed that the $59 billion estimated backlog approaches the $68 billion that the governor and Legislature want to spend on the bullet train. Quentin Kopp, former chairman of the California High-Speed Rail Authority, has become a strong critic, characterizing it as “low-speed rail” due to the changes that have been made to the original plan that voters were promised to convince them to provide seed money for the project in 2008. He adds that to be financially viable, high-speed trains need to run from 10 to 20 trains per hour, but due to the current plan, called a “blended system,” slower trains and bullet trains must share the same track, reducing the number of fast trains to about four per hour. And even supporters of the project as currently envisioned concede that the Los Angeles to San Francisco trip that voters were told would take about two-hours and forty minutes for a $50 fare, will likely take closer to 5 hours at nearly double the cost to the rider.

So, while Sacramento politicians and special interest insiders, including unions and construction companies, continue to push for billions of dollars of new spending on a high-speed rail system that is not expected to be completed before 2029, they expect drivers, fed up with bumping along on crumbling roads and highways, to pay more.

Gas prices in California are already tops in the nation. If taxes are increased again, every motorist should be given a railroad engineer’s cap compliments of Sacramento lawmakers and the governor because the extra they pay will free up money, which could have been used for roads, to be spent on their pet train.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Originally published by the HJTA.org

Air Board Asks Courts to Create New Tax

carbon-tax-1In a landmark case before the Third District Court of Appeal, the California Air Resources Board (ARB) recently argued for creation of an unprecedented tax doctrine that could raise billions of dollars in new revenues. The ARB described the new revenue not as a tax or a fee (or any other recognized revenue-raising mechanism), but as a “byproduct” of a regulatory program.

The case, California Chamber of Commerce v. California Air Resources Board, challenges the legality of the cap-and-trade auction ARB set up as part of its program to reduce greenhouse gas (GHG) emissions to meet goals outlined in AB 32, the climate change law.

CalChamber is arguing that (1) the ARB exceeded the authority the law granted it by reserving GHG allowances to itself and auctioning those allowances to GHG emitters to raise revenues, and (2) such an auction is a “tax” requiring a two-thirds vote of the Legislature, which was not obtained.

(CalChamber is not challenging AB 32 or the cap-and-trade mechanism itself, because the goals of AB 32 can be achieved effectively using cap and trade. In fact, the efficacy of cap and trade to meet the GHG reduction goals would be unaffected in the absence of the auction.)

The lawsuit aims to prevent the powerful regulatory agency from expanding its reach beyond the boundaries set by the Legislature, and to maintain the integrity of the revenue-raising rules of Proposition 13. But the ARB has raised the stakes even higher by suggesting that the revenues raised by the auction are neither taxes nor fees.

The auctions so far have raised nearly $1.6 billion in revenues that have been deposited into state coffers. The Legislative Analyst has estimated the auction will raise tens of billions more dollars by 2020.

The ARB instead claims that the auction is a legitimate exercise of its regulatory powers and that the billions in new revenues are “incidental” to that regulation. In fact, the ARB flatly states that the auction was not enacted for the purpose of increasing revenues; therefore, it is not a tax.

The Air Board had previously acknowledged that the auction revenues resided comfortably within the state’s tax system, and as “a non-distortionary source of proceeds” could be used “as a substitute for distortionary taxes such as income and sales taxes.”

The lead doctrine on determining whether a charge is a fee or a tax is the California Supreme Court decision in Sinclair Paint v. Board of Equalization. The court held that a regulatory fee is legitimate if (1) there is a reasonable relationship between the amount charged and the burdens imposed by the fee payer’s operations; (2) it is not used for unrelated revenue purposes; and (3) the remedial measures funded with the charge are caused by or connected to the fee payer’s operations. Lacking any of these factors, the charge is a tax.

Since it is apparent that the auction cannot meet these criteria, the ARB dismissed Sinclair’s relevance, stating that the “requirements that govern fees are not useful for reviewing other exercises of the police power.” Even though the ARB claims the revenues are incidental to a regulatory program, it declined to label them as “fees.”

In other words, the ARB has asked the court—in the case of fees imposed for regulatory purposes—to disregard the leading doctrine on regulatory fees.

To be sure, there are charges that government legitimately imposes that are neither fees nor taxes which fit comfortably within the Proposition 13 rubric: special assessments and development fees for infrastructure, charges for goods and services, fines and penalties for law breaking.

But the ARB has sought refuge in none of those time-tested revenue constructs. Instead, it has asked the court to invent a new, unique category of non-tax, non-fee, non-assessment, non-penalty, non-service charge that fits the auction revenue system.

The ARB is seeking a safe harbor for revenues “incidental to regulation” that it claims are not regulatory fees, and which will generate tens of billions of dollars for new spending programs that somehow are not taxes. In fact, next year the revenues from auctions will be one of the largest sources of state revenues—and bound to grow as the ARB allocates even more allowances to itself.

CalChamber has vigorously disputed this new doctrine, calling it “unprecedented, undemocratic and amorphous.” Proposition 13 and the Sinclair decision have limited and rationalized tax and fee doctrine for 37 years, setting out the rules that balance operational flexibility with accountability.

The Court of Appeal will hear oral arguments in this case later this year.

 is president of the California Foundation for Commerce and Education

Originally published by Fox and Hounds Daily

Cap-And-Trade Costs California Businesses $1 billion

California businesses paid a whopping $1 billion this year buying permits to comply with the state’s cap-and-trade law — the largest sale recorded since the state began regulating carbon dioxide in 2012.

Even with record permit sales, the $1 billion raised was well below market expectations. But environmentalists sold the auction as a huge success, because now oil and gas companies have to buy permits.

“Despite the oil industry’s fear mongering, the sky did not fall,” said Merrian Borgeson, a senior scientist at Natural Resources Defense Council. “California’s carbon market continues to hum along as expected, with this auction’s price right in line with previous auctions.”

Carbon emissions permits for 2015 only sold for $12.21 per metric ton, and permits for 2018 sold for $12.10 per ton. In total, the state sold 73.6 million permits for emissions in 2015 and 10.4 million permits for emissions in 2018.

“We are making progress toward a cleaner future,” Borgeson said. “Our clean energy policies cut dangerous emissions, boost the state’s economy, and drive investment in our most disadvantaged communities.”

But the record permit sales may not be the harbinger of good news that environmentalists and state regulators argue. As of this year, California expanded its cap-and-trade system to cover transportation fuels — meaning oil companies will have to buy carbon credits for the fuel they sell.

Before that, the state’s cap-and-trade law only covered several hundred industrial companies, like food processors, cement makers and other energy-intensive industries. Basically, the state forced more companies to buy permits and expanded the pool of permits — which means prices are lower than they would have been otherwise.

Also, California’s cap-and-trade system has been linked to Quebec’s emissions trading scheme to limit the economic impacts pricing carbon dioxide has on California residents. California officials are trying to convince other states to join their cap-and-trade plan to further disperse costs.

California passed its cap-and-trade law in 2006 under Republican Gov. Arnold Schwarzenegger. The point of the law is to reduce carbon dioxide emissions to 1990 levels by 2030. The law went into full effect in 2012, when the first carbon permit auctions were held.

State regulators are still in the process of implementing a second prong of the 2006 global warming law: a low-carbon fuel standard. This requires oil companies to reduce carbon emission from gasoline 10 percent by 2020 — though the rule is being rewritten in the wake of legal challenges.

But that’s not all. California lawmakers are intent on halving the use of petroleum in the next 15 years. State Democrats have proposed a highly contentious law which would remove 8 billion gallons of fuel from state markets.

The oil industry has come out swinging against the legislation, saying it’s nothing more than an attack on oil companies and jobs.

“Legislative mandates to force reductions in gasoline use are not climate change policies,” Catherine Reheis-Boyd, president of the Western States Petroleum Association, said in a statement. “They are attacks on an important industry in California designed to create conflict and controversy.”

“Achieving so radical a goal in so short a time will require the removal of 8 billion gallons of gasoline and diesel from our fuel supply – with no guarantees that something will be available to replace them,” Reheis-Boyd added.

Originally published by the Daily Caller News Foundation

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