BACKGROUND

This proposition has two main parts. First, it addresses rules governing the approval of tax legislation. Secondly, it addresses regulatory issues regarding businesses, including environmental and safety issues, and the use of fees and/or charges to fund the cost of addressing the consequences of such issues, both retrospectively and prospectively.

Revenue Neutral Tax Legislation

Since Proposition 13’s two-thirds legislative vote requirement only applies to changes in state taxes enacted for the purpose of increasing revenues, efforts have focused on designing “revenue-neutral” tax legislation. Under this kind of legislation, specific taxpayers may have their taxes raised or lowered, but the net effect does not yield additional revenue. By carefully choosing which taxes are increased and decreased, additional revenue can be generated for the General Fund while special funds or programs suffer the offsetting decrease. Naturally, this approach is not easy to achieve.

One recent example occurred in March 2010. The Legislature passed (by a simple majority) fuel-tax legislation which lowered the sales tax rate for vehicle fuel and increased the fuel’s excise tax rate; the net effect of the legislation (known as the "Gas Tax Swap") was revenue neutral. The intent was to allow greater flexibility in allocating revenue among General Fund obligations, and to allocate a portion of the funds to the State Transit Assistance Program, which provides local transit agencies with funding for mass transportation programs. This conflicts with Proposition 26 because some taxpayers pay a higher fuel excise tax and the authorizing legislation was only majority-approved. If Proposition 26 passes, the Gas Tax Swap will have to be reintroduced and passed by the Legislature with a two-thirds vote, or it would be automatically repealed.

Regulatory Fees

There are three broad categories of fees and charges:

• User fees—such as state park entrance fees and garbage fees.
• Regulatory fees—such as fees on restaurants to pay for health inspections or fees on the purchase of beverage containers to support recycling programs. These pay for programs that place requirements on the activities of businesses or individuals to achieve particular public goals or help offset the public or environmental impact of certain activities.
• Property charges—such as charges imposed on property developers and assessments that pay for improvements and services that benefit property owners.

Over the years, there has been substantial disagreement about what should be characterized as fees/charges as opposed to taxes, particularly when the funds raised are used to pay for a program of broad public benefit. A real life example involves a regulatory fee imposed on businesses that made products containing lead; the fees were used to fund the screening of children at risk for lead poisoning, the monitoring of their treatment, and the identification of sources of lead contamination. This fee was challenged in court as a tax requiring a two-thirds vote rather than a fee requiring a simple majority vote. In an unanimous 1997 decision, Sinclair Paint Company v. State Board of Equalization, the California Supreme Court affirmed the characterization of this charge as a fee. The Court's decision suggested two criteria for the appropriateness of a fee imposed as part of the regulatory process: 1) it must not exceed the cost of providing services related to the remediation of the problem created by a particular product; and 2) there must be a reasonable connection between the social problems being remedied and the payer of the fee.

Proposition 23 on this ballot would suspend the provisions of AB 32, the Global Warming Solutions Act. However, if Proposition 23 is not approved, Proposition 26 could impact the implementation of AB 32. In order to meet AB32’s state greenhouse gas reduction targets, the California Air Resources Board was given the authority to impose fees on sources of greenhouse gas emissions to offset the administrative costs of implementing the legislation. If Proposition 26 passes, the implementation of these and similar future fees might become subject to the two-thirds vote requirement (thereby putting such implementation at risk) if the fees were found to exceed the state’s administrative costs.

The most vocal part of the opposition to Proposition 26 comes from those concerned that the two-thirds vote requirement would make it impossible to introduce regulatory fees payable by businesses whose operations or products have adverse environmental or public safety impacts for society. This will leave the cost of dealing with these adverse impacts on the general taxpayer.

PRIOR BALLOT MEASURES

In 1996, California voters passed Proposition 218, which allows local voters to approve a general-purpose tax by a majority vote. On the other hand, a local tax that is imposed for a specific purpose requires passage by a two-thirds vote. If Proposition 26 is approved by the voters, all such taxes would have to be approved by two-thirds of the electorate.

Proposition 26 is very similar to Proposition 37, a 2000 ballot measure that was defeated 48%-52%. It too would have reclassified certain fees as taxes, resulting in a two-thirds vote requirement.