Fees v. Taxes: More Than An Academic Debate
The Governor should avoid harming taxpayers…
[by Jon Coupal] 1/17/06

Among tax experts and policy wonks, there has always been a debate about what constitutes a "fee" as opposed to a "tax." The general public might have some vague notion of a difference between the two but, more times than not, they just don't care. If a citizen pays a $10 "fee" for something, that $10 has left his or her wallet just as surely as if they had paid a $10 tax.

However, ever since 1978 with the passage of Proposition 13, the distinction between "fees" and "taxes" has had a significant legal consequence. Certain vote requirements -- either in the California Legislature for state taxes or public votes at the local level -- are triggered by "taxes" and are rarely triggered by fees. The most important of these requirements at the state level is that a tax increase requires a two-thirds vote of each house of the Legislature, meaning that Republicans can effectively block them. A "fee" increase, however, requires only a simple majority vote meaning that the majority party can impose such revenue increases and fiscal conservatives must rely on a gubernatorial veto.

But now the debate has transcended both the academic and legal arenas and is squarely in the California political arena. Governor Schwarzenegger has repeatedly stated that he will not raise taxes. However, his ambitious spending plan also contains a number of proposed "fee" increases. If these "fees" are viewed as merely taxes in disguise, then the Governor's shaky credibility with the taxpayer community will take another hit. Fiscally conservative Republicans, already distressed about the huge amount of debt and spending the Governor is seeking, will abandon him in droves if he raises taxes.

So, is the Governor proposing tax increases?

Both taxes and fees are, in fact, exercises of a government's "taxing" power broadly construed, a power deemed inherent in both nations and states. But there are differences. A "tax" is imposed as an incident of some action -- earning income, purchasing consumer goods -- that is totally divorced from the purposes for which the money will be spent. A "fee," on the other hand, is justified by some service provided to the fee payer. A classic example is a toll bridge. You want to cross the bridge? Pay the toll.

There is also an element of proportionality relative to fees. In other words, if a fee payer receives more benefit, they pay a higher fee. Getting back to our bridge example, an 18-wheeler inflicts more wear and tear on structures and surfaces so, typically, trucks pay a higher toll.

This element of proportionality also applies to so-called "benefit assessments" on property. An assessment is a levy above the normal one-percent "ad valorem" tax and is frequently used to finance capital improvements that directly benefit adjacent properties. Streets, sidewalks and sewer lines are frequently financed this way. However, such levies are supported -- when done correctly -- by detailed engineering reports that specify the proportional benefit to specific parcels. If one parcel is benefited more, then the property owner will rightfully be assessed a higher amount.

One of the Governor's specific proposals for flood protection and water storage is the imposition of a "fee" to be collected by water retailers on water users in California. This proposed levy is projected to raise $5 billion from homeowners and businesses in the state. The amount of the levy would be $3 for homeowners and $5 for industrial properties, not every year, but every month. Other classes of properties also would have to pay but two things are clear: The fee structure appears pulled out of thin air and homeowners would take the hardest hit.

That this so-called "fee" is nothing more than a tax is beyond debate. There is no effort to proportion the amount of the levy to any benefits conferred to fee payers. The "fee" is not voluntary, imposed only when taxpayers choose to engage in an activity triggering a fee: If you own property, you get hit. The "fee" is not imposed in a limited geographic area to finance improvements of a local nature. It is a statewide levy. In short, it is a statewide tax increase on the magnitude of $5 billion.

This $5 billion tax increase is cause enough to create a backlash among homeowners and taxpayers. But the Governor's plans also include a substantial weakening of the Right to Vote On Taxes Act, passed as Proposition 218 in 1996. We are still trying to figure out what is to be gained by attacking the rights of taxpayers merely to vote on proposed revenue increases.

How this all shakes out remains to be seen. We are hopeful that those elements of the Governor's proposals that hurt taxpayers are withdrawn quickly. If not, it is going to be a long year for the man who was elected to restore fiscal integrity in California. CRO

copyright 2006 Howard Jarvis Taxpayers association

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