It was the "sleeper" ballot initiative of California's election season: Few paid heed to Proposition 26, besides the oil, tobacco and alcohol companies that funneled millions of dollars into promoting it in the final weeks of the campaign.
Now, from the Capitol in Sacramento to the boardrooms of county supervisors and city councils, lawmakers and lobbyists are scrambling to assess the fiscal and political effects of the measure, one of the most sweeping ballot-box initiatives in decades. Proposition 26 reclassifies most regulatory fees on industry as "taxes" requiring a two-thirds vote in government bodies or in public referendums, rather than a simple majority.
Approved by voters 53% to 47% on Nov. 2, it is aimed at multibillion-dollar statewide issues such as a per-barrel severance fee on oil and a cap-and-trade system for greenhouse gases. It's also aimed at local ordinances that add fees on cigarettes to pay for trash pickup and on alcohol to fund education and law enforcement programs.
Last week, the American Chemistry Council warned Los Angeles County supervisors that a proposed ordinance banning plastic grocery sacks and imposing a 10-cent fee on paper bags falls under the voting requirements of Proposition 26.
"We think it was a fair way to go," said Allan Zaremberg, chief executive of the California Chamber of Commerce, the biggest contributor to the Proposition 26 campaign. "It clarifies what is a tax and what is a fee. Right now, the public doesn't want any taxes."
Some simple charges are exempt, such as fees for marriage and fishing licenses, restaurant health inspections and property assessments.
But environmentalists and health advocates said the initiative makes it nearly impossible in the current political climate to boost industry fees for cleaning up air, water and toxic waste pollution; for curbing smoking and alcohol abuse; or for enacting new programs.
"California just got a lot harder to govern," said Bill Magavern, California director of the Sierra Club.
Proposition 26's TV campaign attacking "hidden taxes" caught many public interest groups unprepared. Hyper-focused on Proposition 23, the unsuccessful effort to suspend the state's global warming regulations, they were unable to pivot in time.
Environmentalists, unions and the Democratic Party scrambled to raise $6.6 million to fight Proposition 26, but proponents outspent them by 3 to 1.
In addition to its fee-to-tax redefinition, Proposition 26 contains a provision imposing a two-thirds vote on "revenue-neutral" tax swaps — a complex legislative maneuver that balances a tax increase with a tax decrease.
Because Proposition 26 applies retroactively to January, that provision, as the nonpartisan Legislative Analyst's Office warned before the election, repeals a fuel tax swap involving transportation bonds. And that blows a $1-billion hole in the current state budget.
But the provision's most obvious target is the perennial effort to enact a per-barrel severance tax on crude oil. California is the only major oil-producing state without an extraction tax. This year, Democratic legislators unsuccessfully sought to balance the budget by imposing a severance tax and coupling it with a gas-tax decrease.
Oil companies, led by Chevron, contributed $5 million to the Proposition 26 campaign, the most of any industry. If a severance tax were enacted, it would likely cost them as much as $1.2 billion a year.
Proposition 26 puts up roadblocks to such swaps by requiring a two-thirds vote on any statute that "results in any taxpayer paying a higher tax."
Other impacts of the initiative remain murky, such as the effect on California's ambitious global warming statute. known as AB 32. Under that law, the California Air Resources Board plans to adopt a cap-and-trade program for greenhouse gases, eventually auctioning pollution permits to companies.
Before the election, Proposition 26 opponents expressed fears that it could strangle the global warming law, while proponents downplayed the effects.
Now, the chamber of commerce's Zaremberg says, "auctioning carbon credits is a tax, and will probably have to go to the Legislature for a two-thirds vote. That was our position before Prop. 26 too."
And opponents appear to be backing away from warnings of dire consequences. Mary Nichols, the air board chairwoman, told reporters shortly after the election, "We do not believe our efforts will be derailed as a result of Proposition 26 passing. It's full speed ahead."
But she stopped short of saying that a two-thirds vote was not needed for cap-and-trade rules. "Undoubtedly there will be issues raised as a result of this passing," she said. "But the legal advice we're receiving is that our program is in good shape and we should proceed."
Kristin Eberhard, a lawyer for the Natural Resources Defense Council, wrote in a blog last week: "How will it impact AB 32? The answer: Not at all."
Assemblyman Jared Huffman (D-San Rafael) takes such post-election analysis with a grain of salt. "We're about to see an abrupt role reversal, where each side adopts their opponents' pre-election arguments … as we face litigation over which fees fall within the scope of this new law."
In October, Gov. Arnold Schwarzenegger vetoed a Huffman bill that would have lifted the cap on California's oil-spill prevention fee from five cents per barrel to six cents. The fund faces a projected $11-million deficit.
A UCLA law school report had predicted that the oil spill bill, which passed by a narrow majority, would require a two-thirds vote if it were reintroduced. Huffman isn't ready to acknowledge that yet.
Another 2010 Huffman bill that became law could face repeal. It assesses a fee on paint manufacturers to collect leftover paint, which is laden with toxic chemicals, and prevent it from contaminating landfills.
The industry supported his paint bill, Huffman said, but he has little hope it will gain the necessary two-thirds vote because of Republican opposition to any new taxes. The GOP controls more than one-third of the votes in the Legislature.
According to UCLA's analysis, 65% of the $197-million annual budget of the California Department of Toxic Substances Control is funded by industry fees of the kind targeted by Proposition 26. Fees to implement the state's new "green chemistry" initiative will probably face the two-thirds threshold.
"There are risks we haven't yet regulated seriously: nanotechnology chemicals, endocrine disrupters, pharmaceutical residues in our water," said Sean Hecht, director of UCLA's Environmental Law Center. "Prop. 26 will make it much tougher to make polluting industries deal with these emerging risks."
Last year, San Francisco slapped a litter fee of 20 cents per pack on cigarettes, and other counties have talked about doing the same. Eight localities assess fees on alcohol retailers, and San Francisco came close to doing so in September when supervisors voted to impose a fee on liquor wholesalers, designed to reimburse the city for alcohol-related hospital care, ambulance transport and prevention programs. It was vetoed by Mayor Gavin Newsom.
Besides the oil industry, alcohol companies led by Anheuser-Busch contributed $4.7 million to Proposition 26, and tobacco giant Philip Morris donated $2.25 million. Both industries want the two-thirds threshold to apply to local ordinances.
"Big Alcohol was afraid that it would catch on in other cities and counties," said Bruce Lee Livingston, executive director of the Marin Institute, a San Rafael-based group that has been lobbying for alcohol impact fees.
Anheuser-Busch, Chevron and Philip Morris referred inquiries to Beth Miller, a spokeswoman for the Proposition 26 campaign. "Fees have been levied at the local level that are actually taxes," she said, adding that these "hidden taxes" allow local governments to replenish their general funds and avoid spending cuts. Moreover, the fees are passed on to consumers, she said.
Will fees that once passed with a simple majority now manage to muster two-thirds? That issue will be fought out in the Legislature, in city councils, boards of supervisors and in voter referendums. And the losers will undoubtedly turn to the courts to dispute what constitutes a tax as opposed to a fee. Proposition 26, as the Sierra Club's Magavern put it, "is virtually a full-employment act for lawyers."