California Rush Budget Plan Probably Unconstitutional: Depends on Calling Gas Tax a Tax One Day, and a Fee the Next
December 18, 2008
California legislators and tax activists are in a flurry today after Democratic assembly leaders announced a sudden effort to pass a new budget plan to close the state’s enormous shortfall. Here’s how the Los Angeles Times summarized the proposal:
California’s Democratic leaders were planning a vote today on a brazen proposal to raise gas, sales and income taxes through a series of legal maneuvers that would bypass the Legislature’s minority Republicans.
The Democratic gambit, announced Wednesday, would raise $9.3 billion to ease the state’s fiscal crisis by increasing sales taxes by three-fourths of a cent and gas taxes by 13 cents a gallon, starting in February. The plan would add a surcharge of 2.5% to everyone’s 2009 state income tax bill.
It would also require businesses to withhold taxes on payments above $600 made to independent contractors, as they are now required to do with salaried employees.
In addition, the Democrats said they would cut $7.3 billion from schools, healthcare and other programs. Their package would total $18 billion and nearly halve the state’s budget shortfall, projected to reach $41.8 billion in the next 18 months.
Both the Assembly and Senate planned to vote on the package today.
On the face of it, it looks like a broad-based tax increase that hits everyone, along with some dramatic spending cuts. Going a bit deeper, however:
The proposal would employ an arcane loophole in state law that lets legislators pass a tax bill with a simple majority vote — if the bill does not raise more revenue.
The Democrats intend to do two things: eliminate some existing fees, including those on gasoline, and substitute tax increases that would include a 9.9% levy on oil extraction and the income tax surcharge.
Under the proposal, the Democrats would then reimpose the gas fees at higher levels; fees can be raised with simple majority votes. The gas money would go to roads and transportation. The net effect would be billions of dollars in new revenue for the state.
In short, we eliminate the gas tax and raise a bunch of other taxes so that it balances out, and is therefore not a net tax increase (new taxes – gas tax = zero) and doesn’t need a two-thirds vote. Then, when that’s all done, we’ll raise the gas tax but call it a “fee,” since fee increases don’t need two-thirds. So, the gas tax is first called a tax (since the taxes must zero each other out), and then it’s called a fee (to avoid the two-thirds rule).
This plan is absurd and probably unconstitutional. I will concede that it’s at least arguable whether a revenue-neutral plan qualifies as a “tax increase” necessitating a two-thirds vote. But the gas tax is either a tax or a fee, and that shouldn’t change depending on political expediency. Pick one or the other. I would argue that under California court rulings, it’s a tax because its purpose is to raise general revenue for general spending and not to provide a service to particular paying users. If it’s a tax it therefore cannot be increased without a two-thirds vote under California’s constitution.
Here’s the law, from a forthcoming Tax Foundation brief:
In 1996, California voters passed Proposition 218, adding Articles XIII C and XIII D to the California Constitution. These provisions define the terms “general tax” and “special tax.” See Cal. Const. art. XIII C, § 1 (defining “general tax” as “any tax imposed for general governmental purposes” and “special tax” as “any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund”). Local government general taxes may not be imposed, extended, or increased without approval by a majority of the electorate. See Cal. Const. art. XIII C, § 2(b)-(c). Local government special taxes may not be imposed, extended, or increased without approval by two-thirds of the electorate. See Cal. Const. art. XIII C, § 2(d). Fees (defined as anything other than a tax or ad valorem charge) may be imposed by local governments without voter approval as an outgrowth of inherent health-safety-welfare regulatory power, unless it is imposed on an ad valorem basis on property, in which case it must be approved either by a majority of the district’s property owners or two-thirds of the district’s electorate. See Cal. Const. art. XIII D § 4. See also Bay Area Cellular Telephone Co. v. City of Union City, (2008) 162 Cal. App.4th 686, 694, quoting Kern County Farm Bureau v. County of Kern (1993) 19 Cal.App.4th 1416, 1421 (“Special taxes must be distinguished from regulatory fees imposed under the police power, which are not subject to the constitutional provision [since they are not taxes at all]. Special taxes do not encompass fees charged to particular individuals in connection with regulatory activities or services when those fees do not exceed the reasonable cost of providing the service or activity for which the fee is charged, and are not levied for unrelated revenue purposes.”).
To effectuate Proposition 218’s purpose of limiting tax increases disguised as “fee” increases, see Historical Notes, 2A West’s Ann. Cal. Const. (2004 supp.) foll. art. XIIIC, § 1 (“[L]ocal governments have subjected taxpayers to excessive tax, assessment, fee and charge increases that not only frustrate the purposes of voter approval for tax increases, but also threaten the economic security of all Californians and the California economy itself.”), a strong constitutional and judicial framework distinguishing between general taxes, special taxes, and fees has developed. “In general, taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or privilege granted.” Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, 874, 937 P.2d 1350. “Special taxes do not encompass fees charged to particular individuals in connection with regulatory activities or services when those fees do not exceed the reasonable cost of providing the service or activity for which the fee is charged, and are not levied for unrelated revenue purposes.” Bay Area Cellular, 162 Cal. App.4th at 694, citing Kern County Farm Bureau v. County of Kern, (1993) 19 Cal. App.4th 1416, 1421. User fees, whereby a user pays a charge “generally related to the actual goods or services provided” as “payment for a specific commodity purchased,” are not taxes. Id. at 845, citing Isaac v. City of Los Angeles (1998) 66 Cal.App.4th 586, 596-97.
The tax/fee distinction is important nationally not only because of taxpayer protections in state constitutions like California’s, but also for delineating the federal/state balance in the Tax Injunction Act. California’s framework, generally describing taxes (both general and specific) as assessments imposed with the purpose of non-incidentally raising revenue for general spending, and fees as assessments imposed with the purpose of recovering some or all of the cost of providing regulation or a tangible service to the person paying it, is echoed by other courts around the country. See, e.g., San Juan Cellular Tel. Co. v. Pub. Serv. Comm’n of Puerto Rico, 967 F.2d 683, 685 (1st Cir. 1992) (adopting a three-part test identifying taxes by evaluating (1) the entity that imposes the assessment, (2) the parties upon whom the assessment is imposed, and (3) whether the assessment is expended for general public purposes (tax) or used for the regulation or benefit of the parties upon whom the assessment is imposed (fee)); State v. Medeiros, 973 P.2d 736, 741-45 (Haw. 1999) (labeling a charge as not a tax only if it (1) applies to the direct beneficiary of a particular service, (2) is allocated directly to defraying the costs of providing the service, and (3) is reasonably proportionate to the benefit received); Safety Net for Abused Persons v. Segura, 692 So.2d 1038, 1041 (La. 1997) (“[A] tax is a charge that is unrelated to or materially exceeds the special benefits conferred upon those assessed.”); Holmdel Builders Ass’n v. Township of Holmdel, 583 A.2d 277, 293 (N.J. 1990) (“If the primary purpose of the fee is to raise general revenue, it is a tax. If, however, the primary purpose is to reimburse the municipality for services reasonably related to development, it is a permissible regulatory exaction.”). The tax/fee distinction is important not only for taxpayer protections in state constitutions but also for delineating the federal-state balance such as with the Tax Injunction Act. See also Massachusetts v. United States, 435 U.S. 444, 466-67 (1978) (distinguishing a fee from a tax where the charge is “based on a fair approximation of use of the system, and [is] structured to produce revenues that will not exceed the total cost . . . of the benefits to be supplied. . . .”); Valero Terrestrial Corp. v. Caffrey, 205 F.3d 130, 134 (4th Cir. 2000) (applying San Juan Cellular to determine if a charge “qualifies” as a tax, or otherwise it is a fee); Neinast v. Texas, 217 F.3d 275 (5th Cir. 2000) (applying San Juan Cellular); Hedgepeth v. Tennessee, 215 F.3d 608, 612 (6th Cir. 2000) (describing San Juan Cellular as the “leading decision” used for “the definition of the term ‘tax'”); Bidart Bros. v. California Apple Comm’n, 73 F.3d 925, 931 (9th Cir. 1996) (applying San Juan Cellular test to “determin[e] whether an assessment is a tax”); Chicago and Nw. Transp. Co. v. Webster Co. Bd. of Supervisors, 71 F.3d 265, 267 (8th Cir. 1995) (“[A] government levy is a tax if it raises revenue to spend for the general public welfare.”); Brock v. WMATA, 796 F.2d 481, 488 (D.C. Cir. 1986) (“A levy is properly defined as a ‘tax’ . . . when its principal purpose is to raise revenues.”); Time Warner Entertainment-Advance/Newhouse P’ship v. City of Lincoln, 360 F. Supp.2d 1012, 1016-17 (D. Neb. 2005) (stating that the San Juan Cellular test faithfully applies Blackstone’s description of taxation); Nat’l R.R. Passenger Corp. v. City of New York, 695 F. Supp. 1570, 1575 (S.D.N.Y. 1988) (“A tax need not have any relation to governmental costs. . . . A user fee, on the other hand, must be no greater than the government’s costs.”); Roger D. Colton & Michael F. Sheehan, Raising Local Government Revenue Through Utility Franchise Charges: If the Fee Fits, Foot It, 21 Urb. Law. 55, 63 (1989) (“If the primary intent is to raise revenues, a measure is more likely to be considered a ‘tax.’ If the level of the fee is totally divorced from any cost-basis, it is more likely to be deemed a ‘tax.'”).
Faced with the question of whether a charge is a general tax, special tax, or fee, one should consider whether the purpose of the charge is regulatory or to recover the cost of providing a service to the payor (in which case it is a fee) or whether the purpose of the charge is to non-incidentally raise revenue for general spending (in which case it is a tax). If the former is true then the charge is a fee, and if the latter is true then the charge is a tax. Additional questions must then be asked in applying other provisions of the California’s Constitution. If the Court determines that the charge is a tax, the Court must ask whether it is a general tax (where the revenue is not earmarked for a specific purpose) or a special tax (where the revenue is earmarked for a specific purpose). If the Court determines that the charge is a fee, the Court must ask whether or not it is imposed on an ad valorem basis on property.