As state lawmakers search for solutions to address California’s significant projected budget deficit, many in the business community are concerned that tax increase proposals will be on the rise.
Ironically, a proposed legislative tax increase forthrightly identified as a tax increase is not the most threatening type of proposal to taxpayers.
More pernicious is the tax increase proposal that is called a “fee.”
Proposition 13 established an important taxpayer protection in the California Constitution: a requirement that tax increases be approved by a two-thirds vote of the Legislature.
By contrast, fee proposals require only a majority vote for approval.
Ensuring that a so-called “fee” is in fact a fee rather than a tax is a crucial analysis that taxpayers ought to conduct for every such proposal.
Many legislative proposals labeled as “fees” are actually tax increases. These usually span a wide range of subjects, including transportation, the environment, health care, real estate and telecommunications.
Sometimes, designating a tax as a fee is a strategy to bypass the two-thirds vote requirement. Other times, a wrong or questionable designation is due to controversy or confusion over the distinction between taxes and fees.
Unfortunately, post-Proposition 13 court decisions muddled the tax vs. fee distinction. One such landmark decision, Sinclair Paint v. State Board of Equalization, involved an assessment imposed under the Childhood Lead Poisoning Prevention Act on manufacturers considered to be contributors to environmental lead contamination. Passed by a majority vote of the Legislature, the act created a “fee” to fund health care, research and education programs related to children at risk of lead poisoning.
The California Supreme Court ruled the assessment was a fee, not a tax, because there was sufficient connection between it and the adverse effects it was meant to “mitigate.” The court broadly held that regulatory agencies can impose fees under their “police power” (rather than taxing power), including fees to remedy or mitigate societal effects generated by an industry’s products.
The California Chamber of Commerce, many taxpayers, and others in the business community said the expansiveness and vagueness of the Sinclair decision undermined Proposition 13. In the decade since Sinclair, controversy over the distinction between taxes and fees has resurfaced, often in the legislative and court arenas.
Nevertheless, certain principles from Sinclair and other tax vs. fee cases can provide guidance for determining whether a monetary assessment is a tax rather than a fee.
The CalChamber has distilled these principles into three “Cs”:
• Connection: Is there a reasonable connection between the proposed assessment and the program or service it is supposed to fund?
Did those who must pay the assessment cause the need the assessment claims to address? Are individuals who did not cause the need specifically exempted?
An illustration of missing causal connection would be a proposed 25-cent surcharge on every beer or wine drink in a restaurant to fund law enforcement efforts against alcohol-related crimes. Since not every beer and wine drinker is going to commit a crime, even those who didn’t create the need for law enforcement are funding the service. This blanket surcharge is likely a tax.
• Cost: Does the amount of the assessment reflect the reasonable cost of providing the government services?
A proposed assessment should not exceed the amount reasonably necessary to cover the costs of the proposed government program. If it costs the government $20 to perform the service, the fee should not be $40.
• Controls: Are there adequate controls to ensure program funding is limited to the assessment monies, and are assessment monies limited to funding the program?
For example, legislation establishing a program should specify that the program’s sole funding source is the assessment revenue and no other, such as the General Fund. Otherwise, there is no safeguard for connection and cost principles.
The more “no” answers the analysis shows for the three “Cs,” the more likely the assessment is a tax, even if labeled a fee.
It is important to apply the tax vs. fee analysis at the local level also. Local “fee” proposals can sometimes be more onerous and pervasive, and improperly bypass the Constitution’s requirement that most special taxes be approved by two-thirds of voters.
The budget deficit projections mean “fee” proposals are likely to be more prevalent than ever as state and local policymakers search for new revenues. The CalChamber strongly encourages business and other taxpayers to be vigilant about whether any proposed monetary “fee” is in fact a tax that should be subject to Proposition 13’s two-thirds vote requirement.