Lawmakers Hijack A Tax Cut To Create A Tax Increase—And They Won’t Own It

Tuesday, April 5, 2022
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Only in California could a tax cut bill turn into a tax increase. This all began when Assemblyman Kevin Kiley (R-Rocklin) saw how many Californians, particularly low- and middle-income families, were being hit hard by high gasoline prices. Assemblyman Kiley wrote Assembly Bill 1638, which created a simple way of reducing gasoline prices. The bill would have suspended the state’s 51-cent-per-gallon gasoline tax for six months. Standard economic analysis indicates that this would lower gas prices considerably at the pump and thus benefit consumers.

A few (the construction industry, in particular) objected to the bill, because these taxes are primarily used for construction and maintenance of the state’s roadways. But the bill called for using a fraction of the state’s $31 billion budget surplus to cover the lost revenue for roads. Because the bill included an urgency clause, this tax change could be implemented very quickly and thus help consumers immediately.   

Despite broad-based enthusiasm among Californians, Kiley couldn’t get his Democratic colleagues to give his bill a hearing. They had other ideas, including one plan created by Governor Newsom and alternate plans originating in the state legislature. These plans, which are neatly summarized and analyzed in my colleague Bill Whalen’s column from last week, amount to providing cash to drivers.  

But as Bill notes, these plans would include those who drive electric cars, and they also would benefit households who have many cars (including cars that are rarely driven).

But perhaps the worst reason to implement any of these plans is that it would be administered by the same government that hasn’t figured out how to pay unemployment insurance in a timely manner, while being hacked for unemployment fraud to the tune of $20 billion.

But a funny thing happened last week. Suddenly, the Democrats were willing to give Kiley’s bill a hearing. What gives? Well, what gives is that the bill was completely gutted and rewritten. The process didn’t go sideways, it went upside down. Just like that, the tax cut was gone, replaced by a tax hike. Assemblyman Alex Lee (D-San Jose) introduced a motion to amend Kiley’s bill, which began as (to paraphrase) “strike all current contents of the bill,” replacing it with a windfall profits tax whenever the price of gasoline relative to the price of crude oil is “abnormally high”.

Lee wants the Franchise Tax Board to figure out a time-varying tax rate to impose to keep the profit margin on a gallon of gasoline no higher than 30 cents per gallon. Really? Where does this 30 cents figure come from? And on whose profit would this be imposed? And what even constitutes “profit”? Lee doesn’t seem to have answers to these questions, at least yet, even though he feels qualified to write about them. He figures he can kick the can down the road to the California Energy Commission to figure all that out. The revenue from the tax would be rebated to consumers.   

Lee tweeted as follows: “Big oil don’t want the truth out there: that fossil fuel corporations dictate their own prices. They profit off of global instability and car dependency. So if they price gouge, why not have them repay the people?”

This tweet is truly cringeworthy, and not just because of the grammar but because of an elementary, but important, economics mistake. The economics error in this tweet is one that those who have completed one economics course would immediately identify.

No corporation “dictates” their own prices, not even a monopolist, and the state’s gasoline market is far from a monopoly. Prices are only dictated in command economies, such as China under Mao’s dictatorship. And invariably, dictators get this very wrong. How wrong? How about 30 million deaths from famine in China between 1959 and 1961 because of grossly flawed economic dictation?

But legislators’ economic illiteracy doesn’t stop here. A major complaint about Kiley’s proposal from Democrats is that there was no guarantee that postponing the state’s gasoline tax would save consumers any money. Again, one economics course would disabuse those of the myth that cutting the gas tax would not deliver lower gas prices and would also allow them to understand that imposing additional taxes would raise prices even further.

A more nuanced understanding of economics would highlight just how complex markets and corporations are, and that taking a couple of hours to dream up new taxes to “fix” the state’s energy issues will almost certainly backfire. Consider just how difficult it is to measure “excess” profits. Chevron is perhaps the dominant provider in California. Its net margins before the pandemic were about 10 percent. The net margin was about 10 percent in 2012, when crude oil prices were around $112 per barrel, and that same net margin was nearly identical in 2015, when the price of crude was under $44 per barrel.

Those margins became negative for 2020 and much of 2021, during the pandemic. So how much is the net margin, according to the latest data (end of the year 2021)? Just under 10 percent. Even if margins are temporarily higher than that now, competition will drive those margins down.

Upon finding out how his bill had been hijacked to turn a tax cut into a tax hike in the middle of the hearing, Assemblyman Kiley interjected and tried to withdraw his bill. But the Democratic majority would have none of this, calling him out of order. The committee voted along strict party lines, 8–4, and voila, Kiley’s tax cut becomes Lee’s tax hike. And the most nefarious part of this is that the bill still belongs to Kiley, as he was its originator.

Kiley was chastised for breaking parliamentary procedure during the hearing when he first found out about the hijacking. But adhering to parliamentary rules is based on a shared principle of respect, transparency, and open communication. Kiley and the Republicans were clearly hoodwinked by this, and it is hard to believe that anyone would think that what happened to Kiley’s bill passes for common-sense decency among people who work together, ostensibly in the best interests of their constituents. Shame on the leadership of this committee.

At the end of this, all Kiley could say was, “This is your government, folks, right here. Absolutely disgraceful.”  At a time when many, particularly progressive legislators, adhere to the principles of “diversity, equity, and inclusivity,” the state’s legislative bodies are about as far away from these principles as one could imagine.

Democratic Assemblywoman Laura Friedman (Burbank), who leads the transportation committee, felt it necessary to continue to criticize the Republicans after the successful hijacking. “I am a little appalled and shocked that you all are so appalled and shocked by this. This is exactly our process—that we debate a problem [and] what the solution is going to be. We didn’t invent any of this procedure. This is longstanding procedure about what we do in committee.” 

The Democrats have supermajorities in both state legislative houses. There is no debate. There is one-party rule, with Republicans having to live with what Democrats decide, while hoping that they can sometimes reach more moderate colleagues across the aisle with their ideas. Political competition is needed, because as is the case everywhere else in life, competition leads to better outcomes. As far as procedure goes, procedural rules work efficiently when they are not abused. But this is an obvious case of abuse.

Californians, many of whom are struggling, deserve better than “gotcha” political games and badly designed economic policies. But this is business as usual in California, and this won’t change until voters demand it.