How the Prop 8 Ruling Threatens Prop 13 (and other future tax reforms)

California's ballot initiative process is vital to Californians and helps ensure that the will of the people is expressed, even when California politicians are uncooperative.  Over the years, ballot initiatives have been proposed and passed that have advanced both liberal and conservative causes.  In each of these cases, the initiative process was the only way to advance these issues as the legislature would not, or could not, pass effective legislation. 

While the recent Supreme Court case on Proposition 8 may have advanced gay marriage, its unintended consequence is to put into question the sustainability and power of future ballot initiatives.  Justice Scalia ruled, in essence, that the defenders of the Prop 8 initiative did not have standing to sue because only the State of California had standing to defend Prop 8 from attacks.  While Gov. Brown and Kamala Harris, the State A.G., put up a begrudging defense of Prop 8 at the trial level, they opted not to appeal the trial court decision finding Prop 8 unconstitutional.  Defenders of Prop 8 then stepped in and decided to appeal.  The California Supreme Court held that clearly, the Prop 8 defenders had standing and could appeal the decision and were essentially representing the interests of the State. 

Unfortunately, Justice Scalia's holding now weakens almost any ballot initiative--especially those that the Governor and Attorney General personally dislike. Consider the following hypothetical.  A homeowner sues alleging that Prop 13 violates their equal protection because their neighbor who bought their home 50 years ago pays much less than they do for their new home, despite the fact the homes are identical and have the same value.  Although merit less, the Governor and state AG could opt to not defend the suit.  All of a sudden, an injunction is issued finding Prop 13 to be unconstitutional.  The State decides it won't pursue an appeal and the defenders of Prop 13 have no standing in federal court to pursue an appeal either.

In a single opinion, Justice Scalia was able to do something many California politicians have been trying to do for year--weaken the initiative process. 

Fresno Water Fight--CSA 51 Goes Down

On July 17th,  certain Fresno county island residents voted on CSA 51--which was a proposal to build water pipe lines bringing tap water to some 432 county homeowners in a low-yield water area.  Each of these residents would then be assessed approximately $54,000 in additional property taxes for the construction costs.  If passed, homeowners would be afforded the option to pay up front, or over the course of 30 years.

It is my understanding that the unofficial vote tally is 251 against, 97 in favor.

The vote reminds me of a recent Supreme Court case, Armour v. City of Indianapolis, where Indianapolis constructed a sewer system for a neighborhood and financed it through a tax assessment of around $9,300 per parcel.  Owners could pay it in a single lump sum or over the course of 30 years.  Several years after the assessment, the city decided to issue bonds to cover the costs and the city forgave the unpaid installments, but refused to refund any part of the upfront payments made by some 38 owners.  The Supreme Court ruled that equal protection was not violated by the city's decision to treat these taxpayers unequally.  Why?  Because it was rationally related to the city's legitimate objective of avoiding administrative inconvenience.  

Mandate Constitutional--3.8% Investment Tax Now On Its Way

From the WSJ on the implications of the Supreme Court's health care decision:

It really is happening.
Until this week, investors were waiting to see what the Supreme Court would do about the 3.8 percentage-point surtax on investment income, part of President Obama's health-care overhaul. The IRS hasn't yet released guidance on the new tax.
So when the court affirmed the law on Thursday, investors—and tax advisers—started scrambling.
The new tax, which Congress passed in 2010, affects the net investment income of most joint filers with adjusted gross income of more than $250,000 ($200,000 for single filers). Starting on Jan. 1, 2013, the tax rates on long-term capital gains and dividends for these earners will jump from their current historic low of 15% to 18.8%, assuming Congress extends the current law.
If, on the other hand, Congress allows the tax rates set in 2001 and 2003 to expire on Dec. 31—an unlikely scenario, according to many experts—the top rate on capital gains will rise to 23.8% and the top rate on dividends will nearly triple, to 43.4%.
Whatever the fate of the 2001-03 tax rates, advisers are telling clients to start making moves to minimize the new levy. ...
Here are answers to some basic questions about the tax:

• How does the 3.8% tax on investment income work?

• How is "investment income" defined?

• What are some examples of when the tax would and wouldn't apply?

• How would the 3.8% tax apply to the sale of a principal residence?

• What happens if a taxpayer has adjusted gross income above the threshold that is then reduced by a large itemized deduction—such as for medical expenses or a charitable gift?

• Does the 3.8% tax apply to trusts and estates?

• Doesn't the health-care law also have an extra payroll tax for higher earners?

Today it's a penalty...tomorrow a tax?

There were quite a few interesting exchanges today during day one of the Supreme Court's hearing on the health care reform act and whether the individual mandate penalty was or was not a "tax". 

The government was boxed into a difficult position because it had to argue for purposes of the AIA that the individual mandate penalty wasn’t a tax, but tomorrow it will take the exact opposite position and say Congress passed the law under its taxing authority. Its position is further complicated by the fact that the administration still wants the court to consider the law jurisdictional, or binding on all federal courts.
At one point Breyer corrected U.S. Solicitor General Donald Verilli after Verilli had repeatedly referred to a “tax.”
“Why do you keep saying `tax’?” Breyer asked. Verrilli then referred to the “tax penalty.”
“The penalty,” Breyer insisted.
“Right, that’s right,” Verilli said.