Roger Niello

Cap and Trade is an Illegal Tax

I was serving in the California State Assembly ten years ago when we debated whether to pass AB 32, the Global Warming Solutions Act. Other than the debate regarding the importance of reducing greenhouse gases and the economic impact of the proposed regulations, there were two provisions of the measure that caused me and many of my colleagues concern should AB 32 pass: a fee that the Air Resources Board (ARB) could implement to cover its costs under the measure and the allowance of a “market-based compliance mechanism”.

We were assured at the time that the fee would only cover ARB’s minor administrative costs of promulgating and implementing the necessary regulations. The market-based compliance mechanism was described as, and widely assumed to be, a system whereby companies could trade emission “allowances” among each other, with a declining overall emissions cap.

Now fast forward to 2016 and we find ARB has perverted these provisions into grotesque scheme that will extract up to $45 billion from California businesses and consumers to spend on many things that do not meet the requirements of AB 32. It has become, in fact, a huge tax without the benefit of the required two-thirds vote of the Legislature.

The objective of the law was very clear: reducing the state’s greenhouse gases to 1990 levels by the year 2020. And ARB was tasked with creating programs to meet that target.

But along the way ARB seemed to become more focused on raising revenue than on lowering emissions. Under its cap and trade program, ARB is forbidding companies from emitting any greenhouse gases unless they have bought an “allowance” at required auctions. What was originally thought to be a market where low-emitters would benefit by selling allowances to higher-emitters became also a way for EPA to extract huge sums of money by selling allowances it created from whole cloth.

So how is all of this money being spent? To further the objectives of AB 32? Not exactly. In the current legislative session, there have already been at least 25 measures collectively spending more than $6.5 billion in cap and trade revenue, many having little or nothing to do with AB 32. Many divert these AB 32 funds to a variety of General Fund appropriations typically funded by general tax revenues, like education, social services, parks and recreation, housing and even mosquito abatement. Spending this money on general fund expenditures unrelated to AB 32 makes these cap and trade extractions a tax.

The State Constitution requires a two-thirds vote of the Legislature or a vote of the people to approve a new tax. AB 32 was passed by just a simple majority of the Legislature. We have a clear constitutional violation here, putting in jeopardy all of the revenue raised and expenditures made.

So what does ARB say in defense? It sounds like a bad joke, but ARB actually says that cap and trade funds are merely a “byproduct” of its regulatory function and this shouldn’t be subject to any of the rules governing taxes or fees. This is a novel spin that would set a radical and very dangerous precedent. It would allow any unelected regulator to levy the equivalent of a tax on a business or a private citizen without legislative approval or a public vote merely if the regulator deems it to be “incidental” to its regulatory responsibility.

But if it is a joke, not everybody is laughing. Even the nonpartisan Legislative Analyst issued a report in January advising the Legislature to first approve ARB’s “byproduct” revenue by a two-thirds vote before spending any more of it.

When the vote was taken on AB 32 I did not support it. Not denying climate change, I felt the efforts to reduce greenhouse gases would have too negative an impact on California’s economy. But that was just the effects of the regulatory approach necessary to reign in greenhouse gas emissions. I never considered that ARB would devise a huge illegal tax on top of some burdensome regulatory requirements.

If ARB’s money train continues it will erode critical taxpayer protections under Proposition 13, making a mockery of the voters’ wishes for a two-thirds threshold. Further, the whole scheme destroys any credibility of California’s climate change programs that proponents of AB 32 desire, reducing the legislation to not much more than an illegal money-grab.

The Legislature can fix both problems. It can approve the revenue by a two-thirds vote and spend the money on programs with measurable, transparent, cost-effective and relevant results. Or it can direct ARB to cease the illegal tax.

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