In a recent column, I referred to SBX1-2, a dangerous legislative proposal, to define “excessive profits,” as setting a new speed record in California’s headlong rush toward Soviet-style central planning. Well, let’s add one more bad bill to the state’s perpetual march toward a collectivist state. Fortunately, this one may not be legal for long.
Like SBX1-2, Assembly Bill No. 205 from last year, bypassed many of the normal procedures for enacting legislation. It did this because it was a so-called “budget trailer bill.” While the “budget bill” is constitutionally mandated to be enacted by June 15th, it only passes by that date for one reason—so the legislators can continue to receive their paychecks. Moreover, after the enactment of the budget, there are so-called “junior budget bills” amending the fake June 15th budget, as well as last-minute “budget trailer bills” directing the spending of billions in ways that the budget bill itself did not direct.
AB 205, the “energy trailer bill,” received scant public attention and no meaningful public hearings were held. But its impacts are profound and not in a good way.
Following the new law’s mandates, California’s big utility companies have announced a radical change in the way they will charge customers for service. Soon, residential electricity charges will depend in part on the rate of the payer’s income. Specifically, electricity bills will have two components: a fixed infrastructure charge that varies with income and an electricity use charge, which would vary based on consumption. Next year, the CPUC will determine what charges are imposed, and on whom.
Not surprisingly, the announcement from Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric, has resulted in a huge negative reaction from taxpayers and the media – for good reason. Trying to shoehorn an income component into utility rates converts “ratepayers” into “taxpayers,” and Californians have had their fill of high taxes.
The difference between a tax and a fee is more than semantics. Taxes are imposed for generalized government services like education, public safety, transportation and even for a reasonable safety net for the less fortunate. But a “fee” or “charge” has always correlated to the receipt of a specific service. Californians readily understand the difference and have wholly embraced “cost of service” principles by approving several amendments to the California Constitution.
For example, immediately after Proposition 13 passed in 1978, voters approved the Gann Spending Limit (1979) to limit the growth of government spending to increases in population and inflation. The Gann definition of “proceeds of taxes,” subject to the spending cap, includes user fees, except when those fees “exceed the costs reasonably borne by that entity in providing the regulation, product, or service.”
Likewise, in 2010, California voters specifically approved language to clarify the difference between taxes and legitimate user fees. Proposition 26 provides that a tax does not include certain fees as long as the charge “does not exceed the reasonable costs to the State of conferring the benefit or granting the privilege to the payor.”
The income-based utility rates are not scheduled to be in effect until 2025, so ratepayers, taxpayers and voters will have an opportunity to correct this mistake though political means.
But even if politicians do nothing to stop this tax increase, backers of income-based utility rates have another problem.
A coalition of taxpayer and business organizations have already qualified the Taxpayer Protection and Government Accountability Act (TPA) for the 2024 ballot. Among its many provisions is not only further clarification of what a “tax” is, but also a provision that requires any tax to be approved by a legislative body rather than some administrative agency or other authority not directly accountable to voters. That includes the PUC. If the income-based utility rates are deemed to be taxes – an incontrovertible fact – then the tax would have to be approved by the California legislature. Moreover, since the TPA requires any statewide tax increase (this one authorized by AB 205) to be approved by the statewide electorate, as well as a two-thirds vote of both houses, voters, one way or another, will have the final say.
In short, this battle on behalf of California’s beleaguered taxpayers and ratepayers is not over. Not by a long shot.
Will Proposition 13 Save San Francisco?
Oh, the irony. San Francisco is perhaps the most progressive city in the United States, although Portland and Seattle might put up an argument. So how is it that the one thing that might save the City by the Bay from the fiscal abyss is Proposition 13, the iconic tax-cutting initiative backed by conservative Howard Jarvis and approved by voters in 1978?
No one disputes that San Francisco is in crisis. The city’s profligate spending and poor management has led to a myriad of ancillary problems. That the city planned to spend $1.7 million for a bathroom in a park may be the source of humorous derision, but it is an example of seriously dysfunctional governance. (Private donations for the restroom subsequently reduced the cost to the city).
A major structural problem is San Francisco’s diminishing population. As people leave the city, they take their tax dollars with them. The steepest decline occurred between 2019 and 2021 when the city lost 6.3 percent of its population, a rate of decline unprecedented for any major U.S. city. The only silver lining is that the rate of decline slowed to “only” half a percent from July 2021 to July 2022.
Making matters worse is the fact that downtown San Francisco has experienced the weakest recovery from the pandemic out of 62 North American cities, according to a San Francisco Chronicle article dated January 18, 2023. Its overreliance on high tech and finance, whose workers are able to work remotely, has morphed downtown into a ghost town. Office vacancies are at an all-time high and rents for office space are falling fast.
The exodus of high-wealth individuals and businesses has wreaked havoc on San Francisco’s budget, which is now projected to be in the hole by $780 million over the next two fiscal years.
So, with all this bad news, how is it that Proposition 13 can save San Francisco or at least slow down its rate of decline? Lost in all the discussion about spending challenges is the fact that the city is still projecting year-over-year increases in revenue. Much of that is due to how Proposition 13 works.
While providing security to homeowners, Proposition 13 also guarantees stable – and almost always increasing – revenue to local governments. Statewide, assessed value of property generally increases in the 4 to 5 percent range. And even in years when market values decrease, Proposition 13 acts as a shock absorber, stabilizing revenue because of the difference between taxable value and market value.
The two percent limit on annual increases in taxable value means that, for cities like San Francisco with historically big increases in market value, no overall reduction in tax assessments is required even when market values are dropping. Revenue to the city treasury is likely to remain stable. In fact, total assessed property in San Francisco from 2022 to 2023 increased 5.3% according to the California Board of Equalization Annual Report.
Proposition 13 has been characterized as “recession insurance” for local governments. Even with its problems, San Francisco can rely on a relatively stable stream of property tax revenue. Whether that will be sufficient will depend on whether the politicians can get spending under control. Raising taxes to “solve” budget problems just drives away more taxpayers and leaves a bigger hole in the city treasury.
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. For more information, visit www.hjta.org.