Budget, California, Transit Funding

Proposition 26, and its implications for transportation funding (Part 1)

Ever since voters passed Proposition 13 in 1978, California has been playing a game of cat and mouse.  Government would enact a charge, and someone would claim it was unconstitutional.  Courts, realizing that in spite of Prop 13 the government still needs money to function, would read Prop 13 narrowly, allowing new categories of government charges to pass through with a simple majority vote.  Other government agencies, excited to learn about a tested way to get around Prop 13, might try to stay on safe ground by enacting similar charges.  Some years later, voters would approve a new measure basically overriding those court decisions.  So then government is forced to get even more creative when enacting the next set of charges.  Those new charges are later challenged as being unconstitutional, there are more court decisions, and voters pass yet another proposition overriding them.  Rinse and repeat.  All in all, it’s a pretty awful way to go about lawmaking because it creates uncertainty, and it takes what should be a simple question and makes it completely convoluted.  Proposition 26 is the latest iteration of this madness.

Prop 26 is a topic that I was planning to write about before the election, but unfortunately I wasn’t able to get to it.  We know it passed — though it wouldn’t have, if only Prop 26 were subject to the same voter approval requirements that it seeks to impose.  Anyway, now we’re stuck with yet another set of amendments to the California Constitution that tie the hands of state and local governments, make it more difficult to raise necessary revenues, and make California even more of a broken state than it already was.  There will be far-reaching implications in many areas, including the state budget, but I thought I would go into some more detail here about the exact changes that Prop 26 has made, and what those changes might mean for the always challenging task of funding transportation in California.  At this early point in the process, some guesswork is required, and there are still open questions that may eventually be clarified in the courts.

What is a tax?

Prop 13 and related propositions have created a few decades of confusion over when a government charge is a tax requiring a 2/3 vote and when simple majority approval is good enough.  Part of the reason for the confusion is that until Prop 26, the word “tax” was not defined.  Proposition 218, which voters approved in 1996, changed voter approval procedures for local government charges, among other things.  Prop 218 defined “special taxes” requiring a supermajority vote and differentiated them from “general taxes,” for which a simple majority is sufficient.  But we didn’t really know what a “tax” was.  Now, thanks to Prop 26, we do.

Or rather, we know what it isn’t, because it’s defined in the negative.  There is short list of charges that aren’t taxes (more on that later).  And if the charge in question isn’t on that list?  Then it is a tax, and it needs a supermajority vote if levied for a specific purpose.  So if the state or local government wants to pass a charge with only a majority vote (or thinks it will fail to collect a supermajority of votes, as is a regular problem in the Legislature), it will have to try to shoehorn the proposed charges into one of these special categories.  The government also better be able to make a good case for whatever it does, because if the charge is eventually challenged, the burden of proof is on the government.

What was a fee (before Prop 26)?

Before Prop 26, government assessed regulatory fees, which need only a simple majority vote.  These are sometimes also called “Sinclair Paint fees,” named after the Supreme Court case that they’re most often associated with.  What happened there was that the Legislature established a program to provide medical services to children who were potential victims of lead poisoning.  The program was supposed to be funded by fees paid by anyone whose industry contributes to lead contamination.  Sinclair Paint Company was one such entity, but then protested that because Sinclair itself received no direct benefit from the fee, the fee was actually a tax in disguise.  The fee created a benefit for society at large, but no particular benefit accrued to Sinclair or others paying the fee.  

But the fee was still found to be valid, because the proceeds collected from the fee would essentially be used to “clean up” the damage caused by industry.  Regulatory fees could be charged to set up mitigation programs like this, and it wasn’t important that Sinclair didn’t directly benefit from the fee.  What was important?  Mainly this: First, that people paying the fee have somehow contributed to the problem that the fees were designed to solve, and second, that the government didn’t end up collecting more money than it needed to solve the problem.  Sounds pretty logical, right?   Even small children are taught that if they make a mess, they have to clean it up. 

What isn’t a tax (after Prop 26)?

However logical that might sound, it is exactly this type of mitigation fee for the public benefit that Prop 26 is designed to stifle.  Prop 26 says that if the government imposes a user charge for a specific government benefit, privilege, service, or product that is “granted directly to the payor” and that is “not provided to those not charged,” then the charge is not a tax.  The government can also recover the costs of issuing or investigating permits and licenses, and the fees collected are not a tax. 

There are a handful of other things that aren’t taxes, including fees to enter or use government property, and court-imposed fines.  Specific to local governments: development fees, assessments, and property-related fees are also not taxes.

And that’s basically it.  Everything else is a tax.  As you can see, Prop 26 is really a direct response to the Sinclair Paint regulatory fees endorsed by the Supreme Court.  Under Prop 26, those charges are now taxes, not fees, because they do not confer any direct benefit, privilege, service, or product only to the people paying the fee.  Rather, the money collected benefits the environment or society at large. 

Many fees that could once be passed with a simple majority are now classified as taxes under Prop 26 and will require a supermajority to pass.  In spite of voters also passing Proposition 25 this election — which enacts a very good policy, by allowing a simple majority of legislators to pass the state budget — Prop 26 may end up swallowing Prop 25, by making it even more difficult to find revenue sources needed to balance the budget.  It just goes to show that California is so broken that individual one-line bandage fixes, even if they are good ideas in and of themselves, aren’t good enough.  The entire structure of governance needs an overhaul from top to bottom.

A close accounting of benefits and burdens 

In deciding whether a charge is a tax, it’s necessary, but not sufficient, to ask whether the person paying benefits directly.  You also have to ask whether the people paying are the only beneficiaries.  If someone not paying still benefits, then the charge is a tax.  Also, you have to make sure that the fee is fair, taking into consideration the benefit they are receiving or the burden they place on the regulatory program.  And then, you also can’t collect more money than you need to run the program.

Here’s a real-life example.  The State Water Resources Control Board is the state agency that administers water rights and water quality.  The Legislature authorized the SWRCB to collect regulatory fees so that General Fund dollars could be directed elsewhere.  The SWRCB charged the permitholders it regulates — but the many water users in California who don’t have permits or licenses weren’t charged.  And yet, everyone benefitted, including those who didn’t pay the fees, because the fees funded the permit and enforcement work that helps manage the state’s waterways for all users.  This is the type of concern that Prop 26 makes more explicit.  If these charges were assessed now, they would be taxes under Prop 26.  It’s a little different from the Sinclair Paint fee, because here, the people paying the fees do benefit directly.  The problem is that people not paying also benefit, and there were other problems with the fee formula that made it unfair.

This suggests that, practically speaking, Prop 26 will require government agencies to have a strong understanding of the situation when taking the position that a charge is not a tax.  The agency should have a good estimate of how much it costs to run the program, and it should produce a fair, well-reasoned formula to allocate those costs among the entities that benefit from or burden the program.  In addition, the agency should be certain that only those paying the fee benefit from the program.  Otherwise, the agency runs the risk of having revenue cut off, if the charge turns out to be a tax supported only by a simple majority.

What does all this have to do with transportation funding?

I’ve probably rambled enough here already for one post.  Discussion of how all this relates to transportation will be deferred to Part 2, coming soon. 



10 thoughts on “Proposition 26, and its implications for transportation funding (Part 1)

  1. Great intro, I look forward to the implications for transportation (congestion pricing, etc.). Keep up the good work!

    Posted by Brant | 17 November 2010, 10:05 am
  2. Wow, what a mess.

    Posted by mikesonn | 17 November 2010, 10:26 am
  3. Technically there must be a work-around to make congestion pricing appear as a fee under Prop 26.

    The government can simply say that maintenance (street cleaning, road maintenance) of streets that are part of a congestion pricing area is an expense, thus the congestion pricing charge covers the expense of maintaining the streets. From that moment on, the money previously spent on maintenance can go into the general fund. One would argue that some may benefit from the streets without paying – cyclists, buses, etc. The city will have to then prove the impact on the roads that a single car has vs. a bicycle or a bus. The city may have to charge its public transit system as well, but then recoup that via the money previously spent on maintenance. In addition, the city can argue that cars traveling on congested roads increase pollution, thus increasing disease rate in the area, and count that as an expense that has to be mitigated.

    It may provide actually for some really interesting accounting and potentially for true transparency (since all this would have to be adjudicated) in how government charges and for what.

    I think with the example of polluters, the government can sponsor research that confirms a link between pollution and effect on government expense related to health cost, and worker productivity.

    Posted by Mario | 17 November 2010, 6:58 pm
  4. Considering political realities, it is possible that Prop 26 could be repealed or amended within the next few election cycles. It is just that the No prop 26 effort was nothing like the No on 23. If the new measure is framed in a political popular context, it is not impossible to pass.

    Prop 13 used to make all taxes harder to pass, but then voters changed the law to lower the threshold for school bonds.

    California electorates have conflicted feelings and are often exploited. In the same election they would support Democrats, vote against parental notification for abortions, yet vote to ban same sex marriage.

    Posted by Andy Chow | 19 November 2010, 2:32 pm
  5. Really good analysis, especially linking this to Prop. 13 — the origin of all of California’s problems!

    Posted by Marta | 5 January 2011, 1:22 pm
  6. Thanks, Marta. There will really also be a Part 2, things have just been really hectic – my apologies for the delay.

    Posted by Eric | 5 January 2011, 1:24 pm


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