Earmarked Taxes: California's Legal Diversion?

Earmarking is the practice of setting aside particular money for a specific purpose. In California, earmarked taxes have been implemented as a policy strategy to increase funding for behavioral health services. While California tax law generally conforms to the Internal Revenue Code (IRC), there are differences, and California is not bound by changes to certain sections of the IRC. For example, California has implemented an additional 1% tax on all household income exceeding $1 million, which is earmarked for behavioral health services. However, there have been instances where earmarked funds have been diverted to other purposes, such as in the case of the California Cannabis Tax Fund, where a significant portion of the 60% cannabis tax allotment for youth education and prevention programs was diverted to subsidize childcare.

Earmarking in California: Cannabis tax fund

Earmarking is the practice of setting aside money for a specific purpose. In the context of government, it refers to how governments budget their spending, often involving the appropriation of taxpayer funds to individual practices.

In California, tax law generally conforms to the Internal Revenue Code (IRC) with some modifications. The state imposes a 15% excise tax on cannabis retailers, which is used to cover regulatory and research costs. Subsequently, 60% of the revenue is directed towards anti-drug programs for children. The remaining balance is allocated to the state's general fund.

The practice of earmarking cannabis tax revenue is not unique to California. For instance, in Colorado, the wholesale tax revenue from cannabis sales is directed towards the Building Excellent Schools Today (BEST) fund, with the first $40 million earmarked for constructing new schools. In Delaware, all marijuana tax revenue goes to the Marijuana Regulation Fund, with 7% credited to the Justice Reinvestment Fund to improve the quality of life for communities impacted by the prohibition of marijuana.

The earmarking of cannabis tax revenue is a controversial topic. Some argue that it can be a form of corruption, allowing power brokers to squander taxpayer money. However, others defend the practice, claiming that it can help build majorities and ensure that funds are allocated to specific projects or programs, such as public health-related prevention programs.

Earmarked taxes for behavioral health services

Earmarking is the practice of setting aside particular money for a specific purpose. In the context of governments, it refers to how they budget their spending. Earmarked taxes for behavioral health services are a policy strategy that has been implemented in several jurisdictions to increase funding for behavioral health systems.

California is one such jurisdiction that has implemented earmarked taxes for behavioral health services. The state's Mental Health Services Act (also known as Proposition 63) was signed into law in 2005 and increased the income tax rate by 1.0 percentage points for households with annual incomes exceeding $1 million. This additional 1% tax on taxable portions of annual household income exceeding $1 million is collected by the state and allocated to all counties, with the revenue generated being spent at the county level. The tax generated >$2.7 billion in fiscal year 2021 (about $70 per capita), with the revenue spent across specific categories, including stigma-reduction initiatives. The California Department of Health Care Services and the California Mental Health Services Oversight and Accountability Commission monitor the spending and use of these funds.

The impact of California's earmarked taxes for behavioral health services has been assessed through surveys of professionals involved in tax implementation. The results indicate that the taxes are generally regarded positively, with a large majority agreeing that they increased funding for services and were helpful. Additionally, a larger proportion of California respondents compared to Washington State respondents (which has a similar tax in place) felt that the earmarked taxes increased public awareness about behavioral health and reduced stigma surrounding it. However, a greater number of California respondents also found the tax reporting requirements to be complicated and felt that the taxes led to unjustified scrutiny of behavioral health services and systems.

While earmarked taxes for behavioral health services have the potential to increase funding and improve access to services, there is limited guidance and research available for policymakers and other stakeholders to refer to when considering or implementing such taxes. This highlights the need for further study and the development of best practices in this area.

California's conformity to the Internal Revenue Code

California's tax laws generally conform to the Internal Revenue Code (IRC), with some modifications. The state's conformity to the IRC is outlined in the Conformity Act of 2015, which was enacted on September 30, 2015, changing California's specified date of conformity to the IRC from January 1, 2009, to January 1, 2015.

The Internal Revenue Code (IRC) is the body of federal tax laws that govern how individuals and businesses are taxed in the United States. It is administered by the Internal Revenue Service (IRS), which is the federal agency responsible for enforcing tax laws and collecting taxes.

States can conform to the IRC in different ways, either on a "rolling" or "static" basis when computing their tax base. A rolling conformity state, like California, adopts the provisions of the IRC as they are enacted by the federal government. This means that California's tax laws are generally up-to-date with the IRC, and any changes made to the IRC are reflected in California's tax laws.

However, it is important to note that there are still differences between California's tax laws and federal tax laws. Certain areas of conformity and non-conformity are discussed in the affected tax forms' instructions and California's Supplemental Guidelines to California Adjustments (Publication 1001).

The concept of earmarking, or setting aside specific funds for a particular project, can come into play when discussing tax laws and how funds are allocated. While not directly related to California's conformity to the IRC, earmarking is a practice that can impact how tax revenues are spent once they are collected.

California's automatic conformity to federal tax changes

California's tax laws are generally in conformity with the Internal Revenue Code (IRC), with some modifications. California's conformity date to the IRC was updated from January 1, 2009, to January 1, 2015, with the enactment of Assembly Bill 154, the Conformity Act of 2015. This means that California's tax laws are automatically updated to conform to any changes made to the IRC before January 1, 2015.

However, it is important to note that there are still differences between California's tax laws and federal tax laws. These differences arise because California does not automatically conform to all changes made to the IRC after its specified conformity date. Instead, the Legislature revises state law as it deems appropriate, and some state laws are enacted to suit particular state needs with no federal counterpart.

When analyzing the impact of federal tax legislation on state taxes, taxpayers must consider each state's level of conformity to the IRC. States with static conformity may have different tax treatments from federal tax laws if an IRC provision was added or amended after the state's conformity date. On the other hand, states with rolling conformity automatically follow the version of the IRC in effect for the current tax year, avoiding differences between federal and state tax laws.

California is considered a state with static conformity to the IRC as of January 1, 2015. Therefore, California generally does not automatically follow federal tax legislative changes enacted after its conformity date, such as those included in the TCJA (Tax Cuts and Jobs Act). Instead, California enacts specific legislation to decouple from or follow these federal tax changes as it sees fit.

Earmarking as a form of corruption

Earmarking, also known as "pork-barrel spending" or "pork", is a controversial practice that has been labelled as a form of corruption. It refers to the process of setting aside particular funds for a specific purpose, which can apply to both individuals and organisations. In the context of US politics, earmarking has been used by parties to win support for contentious votes by offering or threatening to revoke funds for projects in specific districts. This form of earmarking is seen as a way for power brokers to trade in the fortunes of their constituents and waste taxpayers' money.

The most well-known example of this is the "Bridge to Nowhere", a $398 million bridge that would have connected an island with 50 residents and an airport to a larger island with the city of Ketchikan, Alaska. In 2005, members of Congress attempted to defund the bridge and redirect the money to rebuild a bridge destroyed by Hurricane Katrina, but Senator Ted Stevens of Alaska threatened to resign if the earmark was cancelled. While the bridge was never built, funds for a road leading to it continued to be allocated, resulting in a three-mile highway to nowhere.

Earmarking has evolved alongside the expansion of federal programs and the increasing complexity of the national budget, particularly during the post-World War II era of economic growth and infrastructure development. This period highlighted the dual nature of earmarking: its potential for targeted investments in critical infrastructure, as well as the risk of misuse and influence of special interests. The latter part of the 20th century and early 21st century saw growing scrutiny of earmarking practices due to high-profile cases of corruption and perceptions of "pork-barrel" spending.

Despite the controversy, some commentators have argued for the restoration of earmarking. They believe that it plays an essential role in building majorities and that banning it would not significantly change the perception of Congress as corrupt, especially considering the simultaneous loosening of campaign finance laws. Additionally, they argue that the costs of earmarking are negligible compared to the costs of gridlock, and that members of Congress are more accountable than bureaucrats in deciding how to allocate funds.

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