Proposition 30 and the Cap-and-Trade Auction Funds

As we all know by now, Governor Brown’s Proposition 30 would temporarily increase the state sales tax rate for all taxpayers and the personal income tax (PIT) rates for upper-income taxpayers. It does this by increasing the state's sales tax (already about the highest in the country with rates over nine percent depending on local jurisdiction) by one-quarter cent for everyone for four years.

In addition, the proposition will raise the state's top PIT rates by one percent for single filers making more than $250,000, two percent for those earning more than $300,000 and three percent for those earning more than $500,000. When combined with the existing California "millionaires one percent surcharge," top PIT rates in the state would be 13.3 percent. The PIT tax increase would stay in effect for seven tax years through 2018 and then sunset with the highest rates falling back to 10.3 percent after that.

Its failure will likely trigger a lame-duck special session of the Legislature to re-think previous solutions to the budget crisis contained in the "Trigger" legislation that accompanied the 2012 budget.

The trigger cuts is the backup plan that requires spending reductions in the event that the voters reject Proposition 30. The trigger cuts would automatically reduce state spending by $6 billion in the event the proposition fails ($5.9 billion of this are cuts to K-12 and higher education). This was necessary in order to get Wall Street financiers to underwrite a multi-billion dollar revenue anticipation note (RAN) that Sacramento needed to finance the cash flow of the 2012 budget plan. RANs are used generally to meet state payroll and Proposition 98 obligations when the state cash flows are lowest. The RAN in this case must be paid back by June 30, 2013, and failure of Proposition 30 would make that impossible without the trigger cuts or additional sources of revenue.

Under this scenario, legislators would likely be called back to Sacramento on Monday, November 12, giving them two weeks before the Thanksgiving Day holiday to pass legislation reworking the cuts. The new incoming legislature will be sworn in on Monday December 3.

If we do have a special session, two things are likely to occur:

First, as far as budget cuts, somebody’s ox will get gored – badly, and two, Cap-and-Trade may end up being the only new source of revenue for the state.

Given the Legislative Analyst’s Office predictions of $500,000 to $3 billion in auction revenues for 2013, no matter how badly the cap-and-trade is constructed, the Governor is not likely to order the CARB to enact the LAO’s conclusions and provide 100 percent free allowances to regulated entities absent legal action to prevent the auction or delay cap-and-trade. But under AB 32, those revenues are supposed to be "untouchable" – used only for GHG reductions.

But consider Senate Bill 1018, a budget trailer bill that dealt with auction revenues that was signed by the Governor. The bill created The Greenhouse Gas Reduction Fund, a special fund in the State Treasury. As a special fund, notwithstanding any other law, ALL of the auction proceeds deposited in the fund are available to the State Controller for cash flow loans to the General Fund. This means that if this first auction is even marginally successful, it is almost a sure bet that the Governor will grab the proceeds as a cash flow loan. Under normal circumstances such loans are required to be paid back within the fiscal year. As these are not normal circumstances, we’ll have to wait and see whether the GHG Reduction Fund ends up being one big ATM for the state.

California League Of Food Producers