Monday, November 18, 2013

What's the Difference Between a Tax and a Regulatory Charge?

Functionally, there may be no difference at all. But legally, the difference can be acute. Last week, the California Superior Court for the County of Sacramento upheld (here) a regulation of the California Air Resources Board (CARB) requiring auctioning (rather than free allocation) of emissions allowances to regulated carbon emitters under AB32, California's "Global Warming Solutions Act" of 2006. The auctions are expected to raise $12 billion to $70 billion in revenues for the State over the life of the program, which (pursuant to other legislation) will be earmarked for programs to reduce greenhouse gas emissions throughout the state.

The California Chamber of Commerce and other plaintiffs claimed that the auctioning rules exceeded CARB's scope of authority under AB32 and violated California's Proposition 13, which requires a 2/3 supermajority vote of the legislature to increase state taxes for the purpose of raising revenues. The court concluded that the auctions were consistent with AB32 and did not violate Proposition 13 because they are not a tax but revenues generated by sales of valuable commodities (emissions allowances).

Needless to say, I'm am very pleased with the court's ruling, and hope it survives on appeal. I agree with its distinction between a tax and a sale, though it's clear that auctioning of emissions allowances functions just like a tax. In a way, it's ironic that Justice Roberts of the US Supreme Court had to work so hard to characterize the Affordable Care Act as a tax in order to preserve the legality of the "individual mandate" under the US Constitution, while in this case the California court had to avoid treating a very similar kind of instrument as a tax in order preserve its legality under the state constitution.

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