Advancing a Free Society

“Paper or plastic?”

Or, if you are shopping in California in the near future: “E. Coli cloth or E. Coli compostable?”

More than 60 cities and counties in California – roughly one-seventh and one-third of the Golden State’s municipal districts and population, respectively – have moved swiftly to ban plastic bags in grocery stores. Meanwhile, two statewide bans are maneuvering their way through the Sacramento legislative process. Despite being much ballyhooed legislation for their environmental and, oddly enough, pro-business merits, a closer examination of the statewide single-use bag bans reveals what these laws actually are superfluous, posturing and potentially, dangerous.

In today’s “Spotlight” are AB 158 (Democratic Assemblyman Marc Levine) and SB 405 (Democratic Senator Alex Padilla), which as amended will: a) ban single-use bags starting on January 1, 2015 for large stores and January 1, 2016 for smaller stores; and b) require that reusable bags made available for purchase meet various requirements as certified by the CalRecycle program administered by the state’s Department of Resources Recycling and Recovery.

Much like the various cities and counties who have instituted their own single-use bag bans, Levine and Padilla cite the environmental effects of making and disposing of the roughly 14 billion plastic bags Californians use annually.  The environmental, and more specifically the pollution, argument is not only emotionally charged, but also plays well in the environmentally progressive Golden State.  However, Sen. Padilla has taken the argument one step further by arguing that his legislation is pro-business as it simplifies business compliance – rather than multiple dozens of different ban policies, businesses will only have to comply with one.

There are two problems with this concept: the need isn’t valid, and the changes, if enacted, have unintended yet terrible consequences.

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California currently has about 50,000 producing oil and gas wells scattered throughout the state, of which about 750 (or 1.5%) use hydraulic fracturing – “fracking”, for short.   While fracking has been used in California for over 60 years, the state is just now getting around to proposing regulations and legislation to govern the controversial drilling practice.

Recently, fracking has become the favorite punching bag for environmental activists and liberal prognosticators.  However, based on recent polling, the public is effectively split on whether it favors or opposes the practice.  Over the next few months the California State Legislature must struggle with two seemingly dispirit agendas:

1) environmentalists, who wish to end fracking in California because of over-blown environmental and health concerns;

2) economic growth proponents, who see fracking as a way to unleash an economic renaissance the state desperately needs.

In the “Spotlight” are eight pieces of introduced legislation that run the gamut of taxation, strict moratoriums, arcane regulation, and permitting and disclosure surrounding the fracking issue.

• Permitting and disclosure: SB 4 (introduced and amended by Democratic Senator Fran Pavley), AB 7 (Democratic Assemblyman Bob Wieckowski), AB 288 (Democratic Assemblyman Marc Levine),  AB 982 (Democratic Assemblyman Das Williams) would all allow the continued practice of fracking with a robust public disclosure and permitting process (with some variation).
• Moratoriums: AB 649 (Democratic Assemblyman Adrin Nazarian), AB 1301 (Democratic Assemblyman Richard Bloom), and AB 1323 (Democratic Assemblywoman Holly Mitchell) would all institute an immediate moratorium on the procedure pending commissioned scientific studies.  While not an overt moratorium, the intent of Democratic Senator Hannah-Beth Jackson’s SB 395, which would broadly define “produced water” and classify it as a hazardous waste material, is to effectively ban the fracking process.
• Taxation: Democratic Senator Noreen Evans’ SB 241 would impose a 9.9% oil severance tax on all oil extraction in California with the funds allocated to the UC, CSU, and Community Colleges systems as well as the Department of Parks and Recreation.

In addition to these pieces of legislation, California’s Department of Conservation/Division of Oil, Gas and Geothermal Resources has proposed a list of fracking regulations in 2012 that would institute “rules for storing and handling fracking fluids, well monitoring after fracking, and preventing water contamination,” as well as require the disclosure of the chemicals used in the fluid. The proposed regulations mimic closely Colorado’s fracking regulations, which were championed by Democratic Governor John Hickenlooper, the oil and natural gas industry, and environmentalists like Earthjustice.

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Following the passage of Proposition 30, California has the highest capital gains tax rate in the nation (13.3% for California; 33% state and federal combined) – second only to Denmark in the industrial world, for the matter.

The funny thing is this wasn’t supposed to be the case for all Californians. Recognizing the detrimental effects taxing capital gains at high rates has on investment, innovation, and risk-taking – largely because of the high elasticity of capital gains taxation – California in 1993 created a state qualified small business stock credit (QSBS) which allowed business owners with 80% of their employees and assets in California to exclude from state taxes 50% of their capital gains on stock, as long as the company was not worth in excess of $50 million.  This tax rule incentivized Silicon Valley venture capitalists to invest in risky tech start-ups as well as gave business owners a reason to maintain a vast majority of their operations in California.

Fast-forward now to August 2012 and the California Court of Appeals, in Cutler v. Franchise Tax Board, deeming the 80% requirement unconstitutional.  The FTB then declared the entire QSBS invalid and announced it would retroactively collect the remaining 50% for the years not covered by the statute of limitations (2008 and onward).  In December, the FTB notified about 2,000 such business owners that they owe the state back taxes totaling roughly $120 million, subject to increase due to interest accumulation.  This decision by the FTB runs dangerously close to a bill of attainder and in every essence is ex post facto law.

Today’s “Spotlight” looks at two pieces of legislation – AB 1203 (Republican Assemblyman Jeff Gorell) and SB 209 (Democratic Senator Ted Lieu) – which ensure that individuals who adhered to the law as it stood are not punished for their law-abiding actions because of the whims of an un-elected bureaucratic tax board.

AB 1203 prohibits the FTB from collecting interest or penalties on tax bills if they are related to back taxes resulting from a court decision. SB 209 will be amended to block retroactive tax bills.  The FTB claims it doesn’t have the administrative ability to fix the problem.  As Sen. Lieu states, “Our goal is to fix this problem. Since it can’t be done administratively, we’ll fix it legislatively.”

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This marks the first in a regular series examining legislation introduced by California lawmakers.

At first glance, minimum wage laws are popular concepts.  A recent Reason-Rupe poll found that 66% of Americans favor President Obama’s proposed 24% increase in the federal minimum wage to $9.00 per hour.  This matches the sentiment found in a recent NBC/Wall Street Journal poll (58% in favor) and a Pew Research Center/USA Today poll (70% in favor).  However, if educated about the effects of such policies, the public’s opinions shift; based on the Reason-Rupe poll (which asked a follow-up question stating one negative unintended consequence of minimum wage laws: employer layoffs), approval of a wage increase dropped to 37%.

In the “Spotlight” is AB 10, authored by Democratic Assemblyman Luis Alejo, which aims to increase California’s $8.00 per hour minimum wage.  The bill has four stages:

1) Increase the minimum wage 3% on January 1, 2014 to $8.25;

2) Increase it by 6% on January 1, 2015 to $8.75;

3) Increase it again by 6% to $9.25 on January 1, 2016, and;

4) Starting on January 1, 2017 (and every January 1^st thereafter), increase the minimum wage by the previous year’s California Consumer Price Index.

AB 10 would allow the California Industrial Welfare Commission to adjust the annual increase more than the California CPI, but would preclude it from decreasing (or increasing) the minimum wage in deflationary years.

Minimum wage laws all have the same intended goal: to reduce poverty. Proponents theorize that minimum wage increases will also boost employee morale thereby increasing business efficiency.  However, despite their initial popularity, such policies continue to fall short.

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On the eve of last month’s election, Tony Quinn, a former legislative staffer and California political commentator, predicted President Obama would win California by 14 points, which has been the average California Democratic Presidential advantage since 1992.

Quinn had good reason to forecast a 14-point win: of the eight majors public polls conducted in October, the average presidential spread was 16 points. All of this spelled relatively good news for the California Republican Party.

Of course, the actual results were quite different.

Based on election results as of November’s end, Mitt Romney trailed President Obama by 2.9 million votes (or 23%); Republican Senate challenger Elizabeth Emken trailed incumbent Dianne Feinstein by 3 million votes (a 25% spread).

The unpleasantness continues down-ticket.  Republicans won just 38% of the statewide congressional vote, losing a net of 4 seats and underperforming their primary statewide vote by 2%, even after adjusting for the difference between primary and general election turnout. Meanwhile, Democrats made the necessary gains to reach a 2/3^rd majority in both the state Senate and Assembly – the first time that’s happened in California in over a century.

The exit polls offer some context for why the polls (and hence, the predictions) were off-mark.  Across the board, segments of the Democratic coalition have seen relatively large increases in the voter composition; meanwhile, traditional Republican demographics have decreased and the GOP has failed to expand their coalition. Of the estimated 13 million voters who turned out, 56% were white, down 10% from 2004.  Asians and Latinos made up roughly 33% of the electorate in 2012, versus just 25% in 2004.  The overall electorate was much younger than previous years, with 54% being younger than 45 years old compared to 49% in 2004.  Voters 65 years old and older represented just 13% of voters on November 6, 11% less than eight years ago.

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