Gavin Newsom speaks after being sworn in as California governor in 2019.
(Kent Nishimura / Los Angeles Times)
The 1970s were a long time ago. It might be hard to imagine, or remember, what it was like back then. So, I’ll paint you a picture: Inflation was skyrocketing, costs were soaring, Iran was in turmoil and the United States was in proxy war with Russia over the latter’s invasion of a neighboring nation.
Now that I think about it, I guess it isn’t so hard to imagine. The 2020s have a lot in common with the 1970s. So, here’s another blast from the Disco-laden past that’s apparently making a comeback: Price controls.
The state Legislature recently reconvened for the 2023-24 session. It also convened a special session to go after oil and gas companies for what the governor calls “price gouging.” The special session only lasted about three minutes, the members voted to reconvene it in January, when it will apparently run “concurrently” with the regular session (proving it to be the election stunt we knew it was), but it did give Gov. Gavin Newsom the cover to introduce his proposal to the Legislature.
The governor’s proposal would impose a “maximum gross gasoline refining margin” of a yet-to-be-determined number of cents per gallon. If a refiner exceeds the margin, the California Energy Commission can impose a civil penalty that will be deposited into the Price Gouging Penalty Fund that will supposedly refund the money back to consumers.
There are a lot of issues with this proposal, the first of which is that price controls simply don’t work. It’s basic economics. As David R. Henderson, a research fellow with the Hoover Institution, wrote just this year, “Prices are an indicator of underlying economic phenomena, namely supply and demand.”
Without price balancing supply and demand, buyers will demand more than they did at the free-market price and sellers will supply less. But we don’t need an economist to tell us that — the 1970s proved it. Price controls led to shortages and rationing, a greater dependence on foreign oil and, ironically, higher prices.
There is also a question of whether this “civil penalty” is, in fact, a tax. When Newsom first introduced the idea in October he referred to his proposal several times as a “windfall tax.” But somewhere between then and when he unveiled his proposal earlier this month, his tax had become a “penalty.” The reason for this is clear: thanks to Proposition 13, any tax increase must be approved by two-thirds of the Legislature.
Even with Democratic supermajorities in both houses, getting two-thirds of them to sign on to such a radical proposal was going to be a tough sell. Many that represent oil- and gas-producing areas, like in the Central Valley and along the Central Coast, have seen their districts grow more competitive and killing good-paying jobs doesn’t win you votes.
A penalty, however, only requires a simple majority vote to pass. That would give Democrats in tougher districts room to sit this one out. But then calling it a penalty for the sake of political expediency doesn’t make it one. In 2010 taxpayer advocates joined with the business community to put Proposition 26 on the ballot specifically to address the abuse of tax hikes disguised as other forms of government exactions.
In order to qualify as exempt, Newsom’s “penalty” would have to be adjudicated to be a “fine, penalty or other monetary charge imposed by the judicial branch of government or the state, as a result of a violation of law.” Whether the tax could survive a legal challenge may be up to the courts.
But even if it survives a legal challenge, what the governor is attempting is frightening and worse than a political stunt. The governor who presides over the fourth largest economy in the world is trying to give government the power to decide whether profits from free enterprise are excessive and to declare those profits “a violation of law.”
If this gets through the Legislature, it won’t stop with oil companies. California could declare “excessive” profits in any business — from health care to supermarkets to car dealerships — and give itself the power to redistribute the money through “civil penalties.”
That policy would be perfectly at home in the old Soviet Russia, but it has no place in California.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.