The California Chamber of Commerce has just lost its case against the state’s cap-and-trade auction, with the news from the Los Angeles Times that the California Supreme Court has refused to hear an appeal from the state appellate court. This means the auction mechanism in the cap-and-trade program is valid at least through 2020.
As we’ve covered on this blog before (most recently with Ann’s post from last fall, which links to our other posts), industry plaintiffs had argued that the auction represented a tax that required two-thirds approval of the legislature, under Proposition 13. But the auction isn’t like a tax, the courts have now consistently and definitively ruled, allowing the current mechanism to continue through 2020.
After 2020, the auction may be subject to a different legal analysis under 2010’s voter-approved Proposition 26, which legally converted many “fees” to taxes and therefore extended the reach of the two-thirds bar. AB 32, the law that authorized the cap-and-trade program, passed in 2006 and therefore wasn’t subject to Proposition 26, which came later. Since AB 32 authorized the program specifically through 2020, it can now continue at least through that year without needing two-thirds vote in the legislature or facing further court challenges.
This is a significant win for the state for two reasons: first, it allows the auction to continue, which is a crucial feature for distributing allowances to pollute under the cap. It holds businesses economically accountable for on-site emissions reductions, rather than allowing them to get allowances for free (although there may be other, more convoluted ways that they could purchase auctions and avoid court challenges). Perhaps more importantly from a political perspective, the auction generates proceeds for the state that have been used to fund everything from high speed rail to transit and weatherization for low-income households.
Second, it means industry loses a bit of leverage to shape cap-and-trade going forward in the legislature, which is debating proposals to extend the program now. The case has loomed in the background on these debates, with industry potentially wielding it as a negotiation piece to extract concessions, implicitly if not explicitly. Coming on the heels of the passage of SB 32 and AB 197 last year, which directed more command-and-control type approaches to emissions reductions at regulated facilities, it represents another loss of leverage for industry going forward.
Meanwhile, cap-and-trade post-2020 debates are heating up at the Capitol, with the governor determined to extend the system before the August auction and solidify the program’s place through 2030, in part to ensure a continued revenue stream for high speed rail. Industry is now on board as well (although they’re trying to weaken the program as much as they can), as they’ve lost their fall back option of killing the auction completely in court and simultaneously face much more draconian command-and-control regulation if cap and trade doesn’t continue.
It makes me wonder what might have happened had the Obama Administration chose to use the Clean Air Act more aggressively back in 2009, which (if successful in court) would have made cap-and-trade at the federal level similarly more appealing for industry.
We’ll never know. But in the meantime, we can watch the political dynamic play out at the state level here in California, with one less card for industry to play at the negotiating table, courtesy of the state Supreme Court.
Malcolm Gladwell (author and reporter for the New Yorker) has an entertaining and informative podcast focused on the unjust public subsidies for fancy private golf clubs, particularly in Los Angeles. He talks about how much land they take up within the urban landscape that is otherwise starved for public parks.
Perhaps more damning, he discusses at length the tax subsidies these exclusive, wealthy country clubs receive, primarily due to Prop 13. At one point, he estimates that one of these expansive golf courses is sitting on land worth about $9 billion, which would have triggered property taxes of $90 million per year. But under Prop 13, the country club pays $200,000 per year.
An admitted golf-hater, Gladwell would ‘gladly’ see these spaces converted to public use.
My only quibble with his piece is that while urban Los Angeles is park-starved, it actually has a huge amount of open space, from the beach to the nearby mountains. Sure, not everyone has easy means to get to these locations, but they are otherwise transit-accessible and beautiful places that most cities around the country would love to have.
The podcast is definitely worth your time, whether you like golf or not.
Prop 13 is supposedly the third rail of California politics. The 1978 ballot measure effectively froze property taxes in the state and ultimately ensured that any new tax increases require a 2/3 vote, whether in the legislature or among local voters approving a new city or county tax measure. And there’s a good case to be made that it has ruined the state.
First, Prop 13 has badly distorted development patterns in the state — depressing new housing supply and worsening the environment. Why? It’s all about perverse incentives.
For longtime property owners, particularly commercial property owners, they pay so little in property taxes that they have no incentive to upgrade their properties. That means lots of downtown parcels that fall into neglect, as cruddy tenants can keep landlords happy with steady cash flows to meet low overhead from the minimal tax burden. Communities suffer from this blight and neglect.
And on the residential side, longtime homeowners have little incentive to downsize, further diminishing available housing supply for newcomers and young families and pushing them farther out into sprawl areas with long commutes.
Meanwhile, local government officials have little incentive to approve or zone for new housing, since it brings so little property tax revenue. Instead, they opt for commercial developments that promise sales tax revenue instead. It’s probably not a coincidence that California has been under-producing housing relative to population and job growth since Prop 13 was passed.
Second, Prop 13 makes it harder to provide cost-effective, equitable and sufficient government services. With the 2/3 hurdle, measures like local transportation taxes can sometimes lose by just a few thousand votes, even though say 66.5% of the voters approve. As a consequence, local governments sometimes can only provide poor service and are stuck with crumbling infrastructure. And when they do get measures passed, they’re often the product of extensive compromises to please everyone, leading to inefficient spending.
Prop 13 has also increased disparity among California’s communities. Since Prop 13 passed, California’s schools and basic services like fire departments have become more unequal, as poor communities struggle to fund them while rich communities can raise significant parcel taxes to cover them, in the face of dwindling property tax revenues.
Third, Prop 13 leads to significant injustices and inequalities among homeowners and businesses. As a recent Trulia study documented, as summarized by the San Francisco Chronicle:
Homeowners in expensive coastal cities such as Palo Alto and Los Altos, where median home values exceed $2 million, pay effective tax rates under 0.5 percent, while households in inland areas, like Beaumont and Arvin, where home values are under $265,000, have effective tax rates of more than 1.3 percent, Trulia said in its report.
This “cross-city variation” is a result of price appreciation and share of longtime residents, Trulia said. The more a home appreciates, the lower its effective tax rate becomes. The lower the rate, the more incentive there is to stay put.
And even within those communities, homeowners pay vastly different amounts of property taxes:
However, it also found that “substantial differences occur even among property owners of similar ages, incomes, and wealth.” Looking at Bay Area homeowners ages 45 to 55 years with homes worth $575,000 to $625,000 and incomes of $80,000 to $90,000, it found that their property tax payments in 2014 ranged from $1,350 to $7,500.
It all depends on when you bought, but young families could easily be paying five times as much in property taxes as a longtime homeowner next door.
Finally, on the inequality front, Prop 13 is really a giant subsidy for commercial property owners. Many pay practically nothing in property taxes compared to the value of their property, particularly since these properties can change hands via corporate buy-outs and mergers to avoid triggering a re-assessment and thus higher property tax rates. Disneyland may be the poster child for this perverse outcome.
In short, Prop 13 has been a disaster for California in terms of land use, equality and government efficacy. With a new super-majority in the California legislature, maybe now is the time for them to place a reform measure on the ballot, so the voters have a chance to undue this terrible policy.
