Legislative Analyst Says Prop 26 Increases Budget Deficit By $1 Billion

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By Artem Raskin
California Progress Report

If approved by voters in November, Proposition 26 will put a billion dollar dent in the state budget, according to the Legislative Analyst’s Office (LAO).

The LAO’s nonpartisan analysis released last week revealed that Proposition 26 would nullify the “Gas Tax Swap” approved by the legislature in March, and eliminate about one billion dollars annually in anticipated revenues from the general fund for schools and other programs.

Proposition 26 proponents, in contrast to the LAO findings, have claimed the measure isn't really about the deficit: “You can’t just say that if Prop 26 passes, the revenue is going to go down,” said Susan Shafer, the spokesperson for the Yes campaign on Prop 26. “This isn’t about addressing the budget deficit.”

Proposition 26 is funded principally by the oil, tobacco and alcohol industries to make it more difficult for state and local government to impose mitigation fees on business activities that cause harm to the environment or public health and safety. Under current law, a simple majority approval by state or local lawmakers is required to levy these fees. Proposition 26 would reclassify these fees as taxes, which would require approval by two-thirds of the legislature for state fees, or by a majority vote in an election for many local fees.

Examples of existing fees that would have required a two-thirds vote under Proposition 26 include fees on paint manufacturers to test children for exposure to lead paint, and fees on oil companies to enforce used oil recycling programs.  

Proposition 26 affects not only future fees, it imposes the two-thirds approval requirement on fees enacted in 2010. According to the Legislative Analyst's Office non-partisan analysis that was released by the Secretary of State, this clause would annul the Gas Tax Swap, enacted in March to alleviate the state’s budget woes. 

The official Ballot Title and Summary states that Proposition 26 will lead to “increased transportation program spending and increased General Fund costs of $1 billion annually.”

According to California State Board of Equalization, “The Gas Tax Swap is a combination of lowering the sales tax rate applicable to sales of motor vehicle fuel and simultaneously raising the state excise motor vehicle fuel tax, effective July 1, 2010.” State sales taxes on gasoline decrease from 8.25% to 2.25%; to compensate for this, “the state excise motor vehicle fuel tax goes up by $0.173 cents per gallon,” making the new tax $0.353 per gallon.

The swap allowed the Legislature to shift “about $1 billion of annual transportation bond costs from the state’s General Fund to its fuel tax funds (the General Fund is the state’s main funding source for schools, universities, prisons, health, and social services programs),” according to the LAO analysis.  “This action decreases the amount of money available for transportation programs, but helps the state balance its General Fund budget.”

Article 19 of the State Constitution mandates that “revenues from taxes imposed by the State on motor vehicle fuels for use in motor vehicles upon public streets and highways... shall be used for ... research, planning, construction, improvement, maintenance, and operation of public streets and highways... [and] public mass transit guideways.” Excise taxes, unlike sales taxes, are not bound by this article, which grants the Legislature the liberty of allocating money in ways which address the budget crisis.

Lawmakers took advantage of a provision of state law to enact the Gas Tax Swap by a simple majority vote. This provision allows a re-allocation of tax collections as long as the change does not increase the total amount of taxes collected in California. This provision of law does not guarantee that any single company or individual would not be paying a higher tax, which puts the Gas Tax Swap in conflict with Proposition 26.

“What happens,” explained Lenny Goldberg, the Executive Director of California Tax Reform Association, “is that some people will pay a little more and some people will pay a little less.” As a result, concludes the LAO Analysis, the clause in Proposition 26 banning revenue-neutral tax changes means that if Proposition 26 passes, the Gas Tax Swap, along with the billion dollars of revenues it delivers, is out the window.

Such a loss could threaten funding for education, health services, and public safety. The Legislature is currently struggling to close the $19 billion hole in the state budget, and a loss of another $1 billion in anticipated revenue to the General Fund would be most unwelcome.

In addition, the money that would be transferred away from transportation bond payments to the General Fund would be instrumental in improving public transit. The Gas Tax Swap “will provide critically-needed funding for the Bay Area’s transit agencies in these tough times — including $36 million for Muni, $26 million for BART, $15 million for VTA, and $13 million for AC Transit” reports the Transbay Blog.

The Metropolitan Transportation Commission adds that it would also stabilize the State Transit Assistance, since under this measure, funding “will come almost entirely from the diesel sales tax. This may reduce the Legislature’s temptation to divert these funds in the future.”

It is unlikely that the drafters of the proposition intended it to have such effect. “They wrote it before the deal came out, they were gathering signatures before the deal came out, but they wrote it in such a way that it adds a billion dollars to a deal that the governor signed off on” explains Goldberg.  

The LAO report highlights the unforeseen dangers of ballot measures written to apply retroactively, and it arms Proposition 26 opponents with the argument that the measure will add another billion dollar cut to education and other government services.

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Artem Raskin reports for the California Progress Report, and currently attends University of California at Davis.