The Economic and Allocations Advisory Committee released a landmark report January 11 recommending that the California Air Resources Board (CARB) adopt a cap-and-trade that would raise an estimated $143.3 billion between 2012 and 2020 and return most of the money to households. The report was recommended by committee without a final economic analysis of how the tax-like fee would impact the state, and without in-depth discussion of how the exaction might run afoul of the Sinclair decision.
Under a cap-and-trade program, revenue would be collected from "fees" imposed on major polluters, as identified by a list of entities required to report their emissions. The list of the state's largest polluters subject to a cap-and-trade exaction, already compiled by CARB, includes oil refineries, private and public utilities, farmers and University of California campuses, among others. Initial estimates indicate that the identified entities would be required to pay $143.3 billion between 2012 and 2020 under the program, unless they are able to reduce their emissions prior to implementation of the program.
During a January 7 address to the Senate Select Committee on Climate Change and AB 32 Implementation, Dallas Burtraw, a senior fellow at Resources for the Future and one of the 16 members serving on the advisory committee, explained that most consumers would be burdened by additional cost-of-living expenses. He said: "Often in the past people have thought about compensating shareholders or owners of firms. A case can be made for that, but many economic studies suggest that the vast majority of impacts actually fall upon consumers, not the owners of firms – maybe around an order of 8-to-1." Mr. Burtraw continued, "When it comes to compensating people, we should really be talking about households through dividends or tax cuts."
Along these lines, the committee recommended that households receive 75 percent of the funds raised through a cap-and-trade. Also, hoping to ensure that low-income households are not disproportionately impacted, the committee recommended that households with earnings below 150 percent of the poverty level be identified as low-income and given a guaranteed fraction of the funds.
To return 75 percent of the cap-and-trade revenue to households, the committee recommended using one of two approaches: a cap-and-dividend or a general tax cut. Under a cap-and-dividend, each household would be equally compensated in one lump-sum payment, possibly in the form of a tax rebate or an electronic transfer of funds into an individual's bank account. The committee said it was not certain if dividends allocated to the public would be taxable income.
The other option for returning cap-and-trade revenues would be to deposit the funds into the state general fund and then cut the income or sales tax rates. The committee's legal issues team noted that under a tax cut approach, it is uncertain if funds deposited into the general fund would increase the Proposition 98 funding guarantee for schools.
The advisory committee's report notes that a tax cut approach promotes "green tax reform," which taxes "bads," such as pollution, and relies less on "goods," such as work effort, savings or investment.
The legal issues section of the
report addresses tax and fee concerns and notes that if sales and income taxes are replaced with
cap-and-trade revenue, the legislative counsel believes that the Legislature
could approve such a proposal by a simple majority vote since, such a proposal
may be scored as revenue-neutral. The report notes that some legal observers
would disagree with the legislative counsel.
CARB believes that cap-and-trade revenues are fees. The advisory committee's report does mention the implications of Sinclair Paint Company v. State Board of Equalization, 15 Cal. 4th 866, 874 (1997), but does not look at the issue in depth. In the Sinclair decision, the California Supreme Court ruled that key differences exist between taxes and fees, and fees must be used to mitigate a problem created by the entity that pays the fee. On the Sinclair issue, the report includes the following discussion:
"… if a portion of the revenue proceeds from such an auction were used to fund dividends or a general reduction in tax rates for California residents, would such a direction of those proceeds pass legal muster under Sinclair?
"The Committee did not attempt to resolve such legal issues under Sinclair, beyond the general conclusions presented elsewhere in this report as to one policy option that seems likely to require supermajority approval by the Legislature. Rather, the Committee has formulated its policy recommendations without conducting detailed legal analysis under Sinclair, confident that the legal feasibility of these options as part of a future California cap-and-trade program will become clearer over time with further analysis by the ARB and its legal advisors whether or not there are further actions by the Legislature or the courts relevant to the issue."
In a November 18 meeting, during
early discussions of a cap-and-trade design, Committee Chair Larry Goulder said, "I don't think we should be concerned
with what the current legal restrictions are." Mr. Goulder
said that if the committee makes a recommendation that involves a legal
problem, it should include a caveat stating that the recommendation cannot be
acted on until the legal concerns are remedied.
Governor Arnold Schwarzenegger praised the work of the committee. In a prepared statement, he said: "I want to thank the Committee for its hard work and I have directed my staff to thoroughly review its recommendations. I continue to believe the best program will be one that returns value to the people through tax cuts, rebates or dividends, and I applaud the Committee for recognizing those options. I look forward to the Air Resources Board's assessment of these recommendations as it designs a cap-and-trade program to reduce greenhouse gas emissions at maximum benefit to state economic growth."
Under AB 32, the 2006 Global Warming Solutions Act, the state must reduce its greenhouse gas emissions to 1990 emissions levels by 2020. The legislation also gave CARB the authorization to prepare and adopt plans to achieve such goals. CARB established the advisory committee to design a cap-and-trade program and to analyze the economics of the program. CARB is expected to act upon the committee's recommendations in the coming months.
Cal-TaxReports, January 19, 2010
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