On Spokane's Prop. 2, understanding taxes vs. fees

January 16, 2013

On February 12, Spokane voters will decide whether a taxpayer safeguard voters have already approved at the state level should apply to the city of Spokane.

Proposition 2 would require a majority plus one vote of the city council to raise any taxes.

In a recent Op-Ed piece in the Spokesman-Review, Council President Ben Stuckart and Councilwoman Amber Waldref expressed confusion over the difference between a fee and a tax.

Here is some information from the Deptartment of Revenue that explains the difference and which I hope will be helpful in the debate over Proposition 2:

"Generally, '[i]f the primary purpose is to raise revenue used for the desired public benefit, the charges are a tax. If the primary purpose is to regulate the fee payers -- by providing them with a targeted service or alleviating a burden to which they contribute -- that would suggest that the charge is an incidental tool of regulation.'  'If the money must be allocated only to the authorized purpose, the charge is more likely to represent a fee rather than a tax.'  And '[i]f no [factor three] relationship exists, the charge is probably a tax in fee’s clothing.'"  

Characteristic

Tax

Fee

Purpose

To raise revenue

To regulate for public welfare or to charge as a user fee

Application

Applied uniformly in the taxing district

Applied to persons receiving services or for the cost of   off-setting the regulatory burden incurred by the fee payer

Use of funds

General use, for public benefit

Specific use and directly related to the regulatory purpose

Even if something is clearly a fee, it can become a de facto tax increase if the funds are swept for general spending purposes. This is why "dedicated" accounts should become truly dedicated and not easily swept.

A recent ruling by the U.S. Government Accountability Office (GAO) provides a good cheat sheet to use. In a ruling declaring California's E-Waste Recycling Fee is in fact a tax and not a fee, GAO found (legal citations omitted):

"The Supreme Court has described a tax as an 'enforced contribution to provide for the support of government.' However, a fee charged by a state or political subdivision for a service rendered or convenience provided is a permissible fee and not a tax. Regulatory fees are assessed against an identifiable class of persons as part of a regulatory scheme to defray the cost of regulating the particular business or activity engaged in by such persons (e.g., permit and license fees).

Distinguishing a tax from a fee for service requires careful analysis because the line between tax and fee can be a blurry one. In determining whether a charge is a tax or fee, the nomenclature is not determinative, and the inquiry must focus on explicit factual circumstances. One court has described a classic tax as one satisfying a three-part inquiry—an assessment that (1) is imposed by a legislature upon many, or all, citizens, and (2) raises money that (3) is spent for the benefit of the entire community.

On the other hand, a classic regulatory fee is imposed by an agency upon those subject to its regulation, may serve regulatory purposes, and may raise money to be placed in a special fund to help defray the agency’s regulation related expenses. When the characteristic of a charge places it somewhere between a tax and a fee, the most important factor becomes the purpose underlying the statute or regulation imposing the charge in question. If the ultimate use of the revenue benefits the general public, then the charge will be considered a tax; the charge will more likely be considered a fee if the revenue’s benefits are narrowly circumscribed."