Sunday, August 23, 2020

Water Blueprint proposes a valley wide sales tax to fund their irrigation water plan. Is it equitable? Is it feasible?

 Earlier this month, CSU-Fresno hosted the event "Funding Water Infrastructure in the San Joaquin Valley." The vast majority of the event was focused on the so-called "Water Blueprint for the San Joaquin Valley," a high profile new investment plan for irrigation water.

At the event, the Blueprint rolled out a proposed funding plan - the centerpiece of which is a proposed 0.5% special sales tax in the 8 counties of the San Joaquin Valley.  While the sales tax would provide the vast majority of funding for the Blueprint's multi-billion investment strategy, the funding plan also includes a modest $4 per acre foot charge on water users and hoped for matching funds from the state and federal government.  In most years, the Blueprint projects the sales tax would generate 7 times more revenue than water user fees. 

The sales tax is a bold new idea in water finance, but not a good one as proposed.  It is inequitable across geography and income.  It probably isn't politically feasible either, despite the optimistic spin from a new poll presented at the event.  Below, I briefly discuss these issues and suggest some changes to the Water Blueprint to improve the equity and political prospects of their proposal.

Geographical Inequity - Taxes North San Joaquin Valley Counties Without Benefit

The tax is proposed for 8 counties, although the Blueprint plan only provides benefits to 5 counties from Madera south to Kern. The proposal would get 1/3 of its revenue from the North San Joaquin Valley counties while providing zero benefits to them - and potentially harm San Joaquin County's Delta region.

The Blueprint can correct this problem by dropping the 3 northern counties from their proposal, and leaders in the North San Joaquin Valley should demand that they do so.

I have argued for years that San Joaquin, Stanislaus, and Merced counties are ill-served by the 8-county region often used in state planning efforts.  The Blueprint, which has gained some influence with state leaders, is an excellent example of this problem.

Geographical Inequity - Benefits Wealthy Out-of-Valley Landowners 

In a previous post, I have pointed out that the biggest beneficiaries of the Blueprint agenda are farm owners, not poor farmworkers as much of the Blueprint PR claims.  Many of those farm owners, especially the wealthiest ones, live in wealthy communities far from the Valley.  These individuals can afford to pay for their own water infrastructure, and certainly shouldn't be subsidized by a sales tax imposed on the Valley's cash-strapped households.

The Blueprint can fix this adjusting their financial plan such that user fees are charged at full cost. The sales tax revenue would be used to provide water rate assistance to water users who live within 50 miles of their farm.  Income and acreage limits on the recipients of the sales tax funded water rate assistance should also be considered.

Inequity Across Industries - Agriculture Is Exempt From Sales Tax, But Other Industries Pay

There are many exemptions to sales tax, most notably to services and food.  Farming inputs and supplies are also exempt from sales tax, whereas most non-agricultural businesses in the Valley pay sales taxes.  It is bold for the Blueprint to propose a special sales tax benefit for an industry that already has an exemption from paying sales tax.

Income Inequity - Regressive Sales Tax Primarily Benefits Well-Off Landowners

The primary general argument against sales taxes are that they are regressive.  Lower-income households pay a higher share of their income in sales taxes than higher-income households.  The situation is the same here, and it is particularly problematic in this case as the largest beneficiary of the tax are the owners of farms - who generally have above average incomes in the Valley and include some truly rich out-of-Valley landowners as described above.

The Blueprint can improve this inequity by including funding to repair unsafe drinking water systems in the Valley to their plan.  The tax is still regressive, but funding clean drinking water with its proceeds will at least direct more of the benefits to low-income communities.

Political Feasibility - Will it Pass?

The Valley is not an easy place to get voter approval for a tax increase.  And as a special tax, I believe the Blueprint proposal would require a 2/3 vote to pass.  That's a tough hurdle, and the poll results are interesting if reliable.

First, while the poll focused on the sales tax proposal - in the one question that presented both a "water consumption tax surcharge based on use" and a "special sales tax" - respondents favored the use charge over the sales tax by a nearly 2-to-1 margin.  My read on this is that a proposal as I suggested above - user charges to cover the full cost with special tax revenue to defray costs to local users meeting residency, income and acreage restrictions - would be seen as more equitable and popular to Valley voters.

Second, the poll had a note of positive news for the sales tax: 69% of the respondents said they would be "very likely" or "somewhat likely" to support a special sales tax for water.  Is this poll reliable?  Is there really that much support?  A look at the last voter poll the Institute for Leadership and Public Policy did in cooperation with Valley water users suggests there polling may be too optimistic.

In October 2018, a few weeks before the vote on the Proposition 3 water bond, the same group released a poll of likely voters in the 8 San Joaquin Valley counties that found the following support for Prop 3. 64% Yes, 10% No, and 26% Don't Know.  In reality, 50.1% of voters in the 8 counties voted No, so their polling of Valley voters missed by an enormous margin in 2018.

I believe the Blueprint's special sales tax will lose big as proposed.  It might have a chance if the Blueprint adjust it to be more equitable in the following ways.

  • Eliminate the 3 North San Joaquin Valley counties.
  • Add funding for safe drinking water in disadvantaged communities.
  • Propose a full cost user charge with the sales tax to defray expenses for non-wealthy water users who live in the Valley.

1 comment:

  1. Dr. Michael: I was impressed by your 8/23/20 blog post on the proposed SJV sales tax increase. It was carefully argued and well written. I like your proposals on how to improve the effectiveness and equity of the original proposal by the Water Blueprint supporters. I could only think of two points that you did not make in your post which would have supported your arguments against the sales tax increase:
    1. The large majority of the surface water used by agriculture in the five-county Blueprint area is already subsidized by taxpayers. Do wealthy farmland owners in that area need or deserve another taxpayer-funded subsidy, especially one that would be regressive?
    2. While many of those who would benefit most from the proposed sales-tax increase are indeed “Wealthy Out-of-Valley Landowners,” you could have mentioned that many of those prosperous farmland owners are actually large corporations. Many of those corporations are headquartered outside the San Joaquin Valley, because their principal owners live outside the Valley. And some of these large agricultural corporations are effectively working with State and local government agencies, local water districts, and farming groups to invest in projects to reduce their regions' dependence on imported water. This is being done thru the Integrated Regional Water Management process, helped by significant voter-approved bond funding. Economists and public finance authorities generally recommend that long-term public works projects be financed by bonds, not from sales tax receipts. - Jim Rich