Capitol Alert

Tax increases back on California’s agenda

California Gov. Jerry Brown speaks at a gathering of political, business and community leaders at the annual California Chamber of Commerce Host Breakfast in Sacramento, Calif., Thursday, May 28, 2015. (AP Photo/Rich Pedroncelli)
California Gov. Jerry Brown speaks at a gathering of political, business and community leaders at the annual California Chamber of Commerce Host Breakfast in Sacramento, Calif., Thursday, May 28, 2015. (AP Photo/Rich Pedroncelli) AP

Inheriting a budget deficit when he took office in 2011, Gov. Jerry Brown tried for months – and failed – to reach agreement with Republicans to put a tax measure on the ballot. He finally bypassed the Legislature and went directly to voters himself.

At the time, Brown said he “learned that the Republicans can’t vote for a tax.”

Four years later, Brown and Democratic lawmakers are placing taxes back on the agenda, seeking billions of dollars in new revenue to repair California’s dilapidated roadways and to fund the state’s expanding health care obligations.

Brown, who called special sessions of the Legislature last month to focus attention on the issues, wants at least $1.3 billion annually to help fund Medi-Cal and home-care services. The administration estimates the annual funding shortfall for road repairs is even higher, at about $5.7 billion.

If successful in the Legislature, Brown appears willing to consider signing tax increases without voter approval, saying recently that is an “open question.” When he ran for governor in 2010, Brown said he would not raise taxes without a vote of the people, but he declined to say during his re-election campaign if he would maintain that pledge.

“We have massive underfunding of our road maintenance program, and one way or another, we’re going to have to find some solutions,” said Brown, a fourth term Democrat.

The transportation and health care special sessions, with committees now cranking up, have breathed life into Democratic proposals to increase the gas tax or assess new fees on drivers, and – for health care – to expand a tax on managed care organizations.

But any tax increase will require at least some Republican support, because Democrats do not hold the supermajority status needed to pass a tax on their own in either the Senate or Assembly. In addition, with the growing prevalence of moderate Democrats in the Legislature, Brown cannot count on support from every member of his own party.

I think, at best, it’s 50-50, and I will be surprised if, at the end of the day, it comes together

Rob Lapsley, president of the California Business Roundtable

Roadwork funding has traditionally enjoyed broad support, both from Democratic politicians’ construction union allies and from Republican-friendly business groups that rely on the state’s roadways for commerce.

But paying to maintain California’s aging highway system has confounded Sacramento for years. The state’s gas tax last went up in 1994, and revenue has declined as vehicles have become more fuel-efficient. The Brown administration estimates the money it collects from the gas tax is now enough to fund only about $2.3 billion in road repairs each year.

Jim Earp, a member of the California Transportation Commission and executive consultant at the California Alliance for Jobs, a business and labor advocacy group, said Republicans and moderate Democrats are “nervous about voting for any kind of a tax or fee increase, but you know, I think there’s a feeling here that this is something we’ve got to do.”

“The bright side of this is that more of the Legislature and the governor ... are talking about transportation funding and fixing our roads than they have in many years, so that’s a good sign,” Earp said. “I’m more hopeful now than I have been in a long time that we can get it across the finish line.”

Neither Brown nor Democratic legislative leaders have settled on a specific transportation funding proposal. They could try to increase the gas tax or vehicle registration or license fees, or they could assess a new fee on all drivers, such as Assembly Speaker Toni Atkins, D-San Diego, proposed earlier this year.

“We’re in a period of our time now when (roadwork funding) is a priority,” Assembly Transportation Committee Chairman Jim Frazier, D-Oakley, told a small crowd at a recent forum in West Sacramento. “We’re going to get something done this year.”

If Republicans can be persuaded to raise taxes or fees for transportation, it will likely require significant concessions and a guarantee restricting the use of new money to transportation projects. In their initial objections to new taxes or fees, Assembly Republicans proposed using money instead from existing sources, including the state’s cap-and-trade program, money polluters pay to offset carbon emissions.

Republicans have also said the administration should repay about $900 million in loans taken from transportation accounts to support the state’s general fund in recent years.

“We are trying to be the voice of our taxpayers and the voice of our drivers,” said Assemblyman Jim Patterson, R-Fresno. “They’re saying we pay enough.”

Sen. Anthony Cannella, a Ceres Republican who was part of the “GOP 5” that negotiated with Brown before talks fell apart in 2011, said Republicans and moderate Democrats could find transportation funding palatable if it is construed as a “user fee,” not a tax, and if the measure included assessments on electric car owners, who pay little or no gas tax, among other conditions.

“We’re all using the roads, the roads are in poor shape, and users, I think it’s fair to say, should pay for the maintenance of the roads,” Cannella said. “We all see it. We’re stuck in traffic. It affects our quality of life.”

Cannella said any measure “has to be coupled with some ability to get projects moving quicker,” possibly through controversial exemptions from the California Environmental Quality Act.

“It’s going to be a very difficult vote for sure for everyone,” he said. “I think it’s going to be hard, but I think it’s going to be doable.”

Rob Lapsley, president of the California Business Roundtable, which like many business groups has said it would support increased transportation funding with conditions, was slightly less optimistic.

“I think, at best, it’s 50-50, and I will be surprised if, at the end of the day, it comes together,” he said. “That’s not to say there won’t be a tremendous amount of work. There is a tremendous amount of interest.”

While the prospect of a tax increase to fund transportation projects is uncertain, the odds of higher taxes emerging to fund health care appear even longer.

While transportation projects enjoy a broad constituency, the Legislature’s special session on health care involves a thicket of more complicated issues and competing interests.

Brown’s primary goal is to get lawmakers to approve a $1.7 billion tax on managed care organizations. About $1.1 billion would go to health plans that serve people enrolled in Medi-Cal, the state-federal health insurance program for the poor, and an estimated $226 million would pay to restore a cut in home-care service hours.

But many of Brown’s fellow Democrats want to use the special session to push a pair of proposals left undone in the just-completed budget process: raising Medi-Cal provider rates and allocating more money to programs for people with developmental disabilities.

To do that, some Democrats are considering proposals for new taxes on tobacco, soda or other products.

“I’m hopeful we’re going to get to an agreement, but it’s going to be very difficult,” said state Sen. Ed Hernandez, D-Azusa, who leads the special session committee working on the health issue.

Republicans criticize Democrats for seeking new taxes only weeks after approving a general fund spending plan almost $1 billion higher than that of the year ending June 30.

“It was a strategic move by the majority party and the governor to get major parts of the budget passed, and to leave other parts to trail along,” said state Sen. Jim Nielsen, R-Gerber, saying Republicans are wary of a “fast jam job” during the special session.

California has had some kind of tax on managed-care organizations for a decade, with support from Democrats and Republicans alike. Under the existing arrangement, health plans with Medi-Cal patients pay the tax, which in turn helps the state pull in more than $1 billion in federal money to offset state costs. The federal funds allow participating health plans to break even.

But the federal government has told California its approach is no longer acceptable. All health plans have to pay the tax, federal officials say, even commercial plans with few or no Medi-Cal patients. Under Brown’s proposal, those health plans would be hit with an estimated $658 million cost, which would likely be passed on to consumers.

Since January, neither Brown, the Legislature nor the managed-care industry has come up with a substitute tax that generates the same amount of money for state programs and has the support of health plans. Besides Medi-Cal, Brown wants the expanded tax to cover the expense of restoring home-care service hours.

“It is possible, but it is a very narrow path,” said Charles Bacchi, president and CEO of the California Association of Health Plans. “By their nature, you have to have winners and losers under the federal rules.”

Nielsen and other Republicans, meanwhile, have questioned the need for the special session in the first place because the current tax doesn’t expire until July 2016.

Potentially muddying the health tax waters, lawmakers will try to figure out a way to generate more money for a pair of largely unrelated issues: developmental disabilities and Medi-Cal provider rates.

“The governor realizes there needs to be a fix to that. What he’s not willing to do is use general fund money,” said Hernandez, chairman of the Senate Health Committee.

None of the possible higher taxes being talked about would raise anywhere close to enough money to cover the $6.5 billion estimated cost of raising Medi-Cal provider rates to Medicare levels, and other increases. Developmental disability money would add hundreds of millions more.

“You’re going to have to do a combination of taxes to get to that number,” Hernandez said.

Republicans, though, have rarely showed an appetite for such taxes. Past tobacco and soda tax proposals have failed in the Legislature and a sales-tax increase, approved as part of a February 2009 budget package during the depths of the recession, lasted only a few years.

Even if those proposals fail in the Legislature, however, they still might show up on an upcoming ballot. A coalition of labor and medical groups has committed $2 million to qualify a ballot initiative to raise California’s tobacco tax and use the revenue to raise Medi-Cal provider rates and other uses.

David Siders: 916-321-1215, @davidsiders

Possible tax hikes

A special session of the Legislature is looking at ways to finance road maintenance and higher health care costs. Some of the proposals:

Transportation funding options

  • Gasoline excise tax: $150 million per 1 cent increase
  • Diesel excise tax: $30 million per 1 cent increase
  • Vehicle registration fee: $33 million per $1 increase
  • Vehicle license fee: $3 billion to $3.5 billion per 1 percent increase
  • Vehicle weight fees: Depends on changes, but about $1 billion by doubling all rates.

Health funding options

  • Managed-care organization tax: $1.7 billion overall, with $1.1 billion for Medi-Cal and $226 million for home-care services
  • Tobacco tax: $600 million to $700 million for $1 per pack cigarette tax
  • Alcoholic tax: $200 million per 50 percent increase in current per-gallon tax rates
  • Soda tax: $1.7 billion from 1-cent tax per fluid ounce of specified sweetened beverages

Source: Legislative Analyst’s Office