California Democrats Covet Carbon-Market Funds

If you believe California officials, you might think the state’s long-running economic and budgetary problems are over, thanks largely to the flood of money from voter-approved increases in already high income and sales taxes.

The Legislative Analyst’s Office is exuberant, releasing a budget report declaring, “The state’s economic recovery, prior budget cuts and the additional, temporary taxes provided by Proposition 30 have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges.”

Although the Golden State’s unemployment rate has fallen to 10.1 percent from its 12.4 percent peak in 2010, and the housing market is rebounding in some affluent areas, there are few reasons to believe the never-ending budget mess will soon be a memory. Officials in Sacramento seem unfamiliar with the saying from an 1866 New York court ruling: “No man’s life, liberty or property are safe while the Legislature is in session.” As soon as the California Senate and Assembly reconvene, they will busy themselves spending the newfound dollars on more programs championed by Democratic leaders.

“Given the Legislature’s history of quickly spending surpluses instead of banking them for a rainy day, we find the idea that there is a ‘strong possibility’ of multiple years of surpluses to be detached from reality,” said the U-T San Diego in an editorial.

Spending Plan

The “Pollyannish” projections extend beyond the impact of the gusher of new revenue from tax increases. The state has also counted on another resource to finance its dreamscape of generous public pensions, high-speed trains to nowhere and regulatory expansion.

Under a new global-warming law, the state is trying to reduce its carbon emissions to 1990 levels by 2020.

In late November, the California Air Resources Board held its first of these auctions, in which businesses such as oil refineries and utilities bid for credits that allow them to emit greenhouse gases. They must cut back their production or buy enough credits to cover all their emissions. Statewide emission caps will drop each year as California pushes businesses to produce fewer greenhouse gases or pay more to buy the declining number of credits for auction in this newly created government “marketplace.”

That is the plan anyway. “First cap-and-trade auction a bust for California budget,” read the headline in the Sacramento Bee. Budget planners expected that the state would receive $1 billion from the sale of credits, but the 2013 credits went for a low price and there was little demand for 2015 credits. As the Bee story explained, “The nonpartisan Legislative Analyst’s Office estimates that if trends hold in the February and May auctions, the state may only raise about $140 million in the first year.”

It’s unclear what this will mean for the state budget over the long term, given that the price of carbon futures will fluctuate like the stock market. And whatever one thinks of this new system, the state’s budget estimates are already going south, and the cap-and-trade system adds yet another unpredictable variable to a budget process that is famous for gimmicks and overly optimistic projections.

In the last legislative session, lawmakers passed bills detailing spending targets based on their auction expectations. “They outlined seven goals, ranging from job creation to public health, and required that at least 25 percent of funds benefit ‘disadvantaged’ communities,” the Bee reported. “At one point Brown suggested the money be tapped for high-speed rail construction, but lawmakers tabled that idea for two years.”

Reckless Spending

The cap-and-trade debacle is another reminder that California officials continue to pursue two destructive policies simultaneously: punishing wealth creation and business owners through higher taxes and additional regulations, while spending revenue faster than it comes in.

While they count on money from the auctions, California officials have imposed new costs on businesses, raised utility rates and put the state’s industrial products at a competitive disadvantage so that it can set an example for the world on how to reduce global temperatures. Democratic officials argue that the new green-energy model will energize the state’s business climate, but even the Air Resources Board admits that the state will suffer from what it terms jobs “leakage.”

The “leakage” might be a “floodage,” according to Dave Roberts, who reports for the website CalWatchdog. A study sponsored by pro-business groups estimates that the state will have 262,000 fewer jobs in 2020 because of the climate-change law. Roberts also cited a Boston Consulting Group finding that as many as 51,000 jobs might be lost due to refinery closings alone. California farmers and food processors are concerned that the rising state-mandated production costs will cause job losses as low-cost Chinese and Mexican processed-food imports take some of their business.

The California Chamber of Commerce filed a lawsuit in mid-November arguing that the cap-and-trade system amounts to an unconstitutional tax increase imposed by regulatory fiat rather than by a direct vote by the Legislature. Yet it’s unlikely that the cap-and-trade system will be ruled a tax per se, given that the climate-change legislation authorized it under the guise of market mechanisms. The law’s supporters note, too, that cap-and-trade isn’t exactly a tax, given that businesses could reduce their emissions rather than purchase allowances.

Even if the law is declared unconstitutional, the Democrats, who now have a two-thirds majority in both houses of the Legislature, can be expected to reaffirm the cap-and-trade system.

Although there may be some good news in the latest economic and budget figures for California, a new study by the website 24/7 Wall St. has ranked it as the country’s worst-run state. Unfortunately, with the newly emboldened Democratic supermajorities, the chance that this will change anytime soon is close to zero.

(Steven Greenhut, a contributor to Bloomberg View, is vice president of journalism at the Franklin Center for Government and Public Integrity. He is based in Sacramento, California. The opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.