When is a fee a tax?
Proposition 26 on the November ballot attempts to answer that question. Opponents say the business, anti-tax group backed measure defines a “fee” too narrowly and that doing so will cost the state at least $1 billion in revenue.
Backers counter that the Democratic dominated Legislature is trying to use fees, which can be passed on a majority vote, as “hidden taxes” that increase the costs of doing business in the state and grow government spending.
“If we are going to attract jobs to California, businesses need the certainty of a stable tax structure, not the constant exposure to unending revenue gimmicks,” said Allan Zaremberg, CEO of the California Chamber of Commerce, in a statement supporting Propositon 26. “Voters have said ‘enough is enough’ to higher taxes and fees. Passage of this measure will help end the politicians’ deceptive practice of labeling taxes as fees so they can be passed with a simple majority vote.”
Both state and local governments impose various taxes and fees.
Taxes – income, sales, bank and corporation, for example – pay for general public services like schools and prisons.
Fees cover the cost of a specific service, such as charging to get a fishing license.Fees are imposed on developers for everything from sewer hook-up to traffic mitigation. California’s state parks charge a fee for entrance and camping. There are fees on cans and bottles to help boost recycling. Local governments charge to conduct health and safety inspections. A number of industries pay fees to cover the government’s costs of regulating them.
Proposition 26 would make some of what are now fees into taxes. Mainly, the ballot measure affects fees “that government imposes to address health, environmental or other societal or economic concerns,” according the explanation of the proposition by the legislative Analyst which will appear in voter pamphlets.
So, for example, a fee for a cosmetology license, would still be a fee but a fee imposed on oil companies to pay for oil recycling programs would now be a tax because it has a broader impact than covering the costs of service provided to the payer of the fee.
As a result of Proposition 13, the landmark property tax initiative approved by voters in 1978, tax increases require a two-thirds vote of both houses of the Legislature. Fees, however, do not.
Proposition 26 amends Proposition 13 in the state constitution to expand the definition of taxes.
The section of Proposition 13 imposing the two-thirds vote requirement for taxes says this: “From and after the effective date of this article, any changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or change sin methods of computation must by imposed by an act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature.”
Proposition 26 would change the beginning of the paragraph to “any change in state statute which results in any taxpayer paying a higher tax” would be subject to the two-thirds vote requirement. That change in law would end the ability of the Legislature to pass by majority vote “revenue-neutral” bills, measures that increase some taxes but decrease others for a net zero fiscal impact.
One of the more common “revenue-neutral” bills the Legislature passes is bringing California tax law into conformity with changes made in the federal system. “Under Proposition 26, it would take a two-thirds vote to keep our tax system aligned to any federal law change that is a tax increase even if it was part of a bill that on balance was revenue neutral,” said Jean Ross, executive director of the California Budget Project. “And if the state doesn’t pattern our laws after the feds, real people’s lives will get really complicated.”
By narrowing the definition of a fee, increases in the fees that pay for the cost of most of the state’s environmental programs – including implementation of AB 32, the state’s landmark global warming reduction law – would require a two-thirds vote.
Currently, there are fees on companies that handle or dispose of hazardous waste. Increases in those fees would require a two-thirds vote under Proposition 26. So would higher fees on alcohol retailers that cities use to pay for enforcement of liquor laws.
Ross and others worry that Proposition 26’s language is so broad that other assessments could be considered a tax. “A a creative lawyer could say, ‘What about an increase in the minimum wage? That would increase taxes. Is that a two-thirds bill? Building codes, environmental regulations that require people buy certain types of equipment that is more costly. Does that all then become a two-thirds vote?” Ross said.
Backers of Proposition 26 say they are simply narrowing the law to prevent abuses by lawmakers using fees as “hidden taxes.”
It has been a long-standing complaint since a 1991 law in which paint makers and other businesses that make products containing lead were assessed a fee to screen children for lead poisoning. The Sinclair Paint Company sued saying the fee was actually a tax because it benefited the public, not the businesses paying it. A 1997 ruling by the California Supreme Court ruled the charge was a fee but laid out criteria for what constitutes a fee.
Chief among them is that there must be a “nexus” between the fee payer and the use of the fee revenue. Since then numerous legislative proposals have pushed the limits of the Sinclair ruling. A tax on alcohol to pay for emergency room costs since accidents caused by drunk drivers contribute to medical costs. A tax on tobacco products to pay for health programs.