California's New 'Balanced' Budget

California's Cap-and-Tax Grab

Democrats raid carbon-emissions auction revenue to finance more welfare spending.

WSJ Editorial, June 18, 2013

Democrats in Sacramento are taking a victory lap for balancing this year's budget without raising taxes (not counting the $6 billion retroactive hike voters approved at political gunpoint in November). The dirty little secret is they're instead tapping California's new cap-and-trade program.

California expects to generate $500 million this year from auctioning off permits to emit carbon, and between $2 billion and $14 billion annually by 2015. This rich new vein of revenues was supposed to flow to green programs (e.g., solar subsidies), but Governor Jerry Brown cut a deal with Democrats in the legislature to seize this year's proceeds to finance more generous welfare and Medicaid benefits. Environmentalists are suddenly stunned to discover that they're not exempt from Sacramento's generally accepted accounting principle of raiding internal accounts to backfill the budget.

Mr. Brown has vowed to repay the $500 million cap-and-trade "loan" in short order. But as a matter of law, he has until the California Air Resources Board (CARB) says it needs the cash to administer the cap-and-trade program. That may be never since CARB's expenditures are discretionary, and the quarterly auctions will produce gushers of revenues that guarantee the cap-and-trade fund never runs dry.

The board's chairwoman Mary Nichols, who's endorsing the raid, has tried to quell enraged environmentalists by reminding them that "the part about the cap-and-trade program that is reducing greenhouse gas emissions, it's the cap," and "not the revenue that we get from the allowances."

Good point, and one which businesses are making in a lawsuit that contends the state is levying an unconstitutional tax under the guise of a "regulatory fee." California's Prop. 13 (1978) requires a supermajority vote of the legislature to raise taxes. CARB circumvented this requirement in 2011 by setting up a state-run auction to sell permits and calling the profits "regulatory fees" that would be used to mitigate emissions.

But as the state Supreme Court underscored in its 1997 Sinclair Paint Co. opinion, regulatory fees cannot "exceed in amount the reasonable cost of providing the protective services for which the fees are charged" or be imposed for "unrelated revenue purposes."

California has never quantified the "reasonable cost" to protect the public from carbon emissions, and it's hard to argue that spending cap-and-trade dollars on welfare checks advances environmental objectives. The state doesn't need to auction off permits to reduce greenhouse gas emissions. It could achieve its emissions targets by giving away permits for free and ratcheting the cap down over time.

In short, California Democrats are proving that the real point of cap and trade is to give politicians another revenue stream for income redistribution while dodging accountability for raising taxes. That's worth keeping in mind when liberals resurrect the scheme for the entire U.S.