By Cori Badgley and William W. Abbott
After the passage of Proposition 13 in 1978, public entities shifted funding strategies to backfill for the loss of property tax revenue. Proposition 13, codified as article XIII A of the California Constitution, provided that state and local governments are prohibited from imposing special taxes unless the tax is approved by a “two-thirds vote of the qualified electors.” Article XIII A forced the courts to wrestle with the question of how to define special tax as compared to a regulatory fee. Early cases addressed section 4 of article XIII A, which concerned local governments. It was not until 1997 that the California Supreme Court had the opportunity to address the distinction between special taxes and regulatory fees in the context of state agencies. This article summarizes the evolution of the fine line between regulatory fees and special taxes.
In Pennell v. City of San Jose (1986) 42 Cal.3d 365, the Supreme Court held that a local rent control ordinance was a regulatory fee and not a special tax. The ordinance allowed landlords to raise rent using one of four methods, and the landlords were permitted to choose the method resulting in the highest rent. The method in dispute allowed an increase of rent that was “reasonable under the circumstances.” In evaluating reasonableness, the city took seven factors into account, one of which was the hardship to a tenant. The landlord plaintiffs argued that this factor amounted to a special tax on those landlords whose tenants would suffer hardships.
In order to evaluate whether the ordinance imposed a special tax violating article XIII A(4) or a regulatory fee, the court used the test enunciated by an earlier appellate court in United Business Commission v. City of San Diego (4th Dist. 1979) 91 Cal.App.3d 156. Namely, the Pennell court asked whether the fee exceeded “the sum reasonably necessary to cover the costs of the regulatory purpose sought.” If the fee did not bear a reasonable relationship to the regulatory program’s costs, it was not a regulatory fee but a special tax. In Pennell, the court found that although the same result could be accomplished through a tax for general revenue purposes, the ordinance addressed “the same purpose in a more precise fashion.” Pennell, 42 Cal.3d at 374. The court also concluded the city did not have to show that the fee benefited the landlords in order to be a regulatory fee. Since the amount of the fee bore a reasonable relationship to its purpose, the court held that the ordinance imposed a valid regulatory fee.
Following Pennell, the courts next addressed the question of whether a fee collected for the indirect costs of pollution based on the amount of emissions discharged by a stationary pollution source was a regulatory fee or a special tax. In San Diego Gas & Electric Company v. San Diego County Air Pollution Control District (4th Dist. 1988) 203 Cal.App.3d 1132, the appellate court began by stating the test adopted in Pennell requiring the fee to not exceed the sum reasonably necessary to cover the costs and went on to explain what the government entity had to show in order to satisfy this test: “(1) the estimated costs of the service or regulatory activity, and (2) the basis for determining the manner in which the costs are apportioned, so that charges allocated to a payor bear a fair and reasonable relationship to the payor’s burdens on or benefits from the regulatory activity.” Id. at 1145.
In applying this test, the court found that although the indirect costs of pollution were difficult to calculate, the local government’s method of using the amount of emissions from stationary sources achieved the purpose behind Proposition 13. The fees bore a reasonable relationship to the costs of the regulatory program. Therefore, the fees were regulatory in nature and not subject to article XIII A(4)’s requirements.
In 1997, the Supreme Court finally faced the regulatory/special tax dichotomy in the context of a state entity. In Sinclair Paint Company v. State Board of Equalization (1997) 15 Cal.4th 866, the court addressed the constitutionality of the Childhood Lead Poisoning Prevention Act of 1991, specifically the provisions requiring manufacturers of lead-based products to pay fees to support the program. The fees were collected by the Department of Health Services. As this was the first case involving a state agency, the court began by discussing the proper interpretation of “special taxes” and “regulatory fees.” The court found that the interpretation of section 4 of article XIII A that applied to local government was instructive and analyzed the fees under the framework set forth in Pennell and San Diego Gas & Electric Company. The court stated that if incidental revenue was collected above the amount necessary to administer the program, this did not amount to a fee that exceeded the costs reasonably necessary to achieve the regulatory purpose. In applying these tests, the court held that the fees were regulatory in nature because a reasonable relationship existed between the fee’s purpose (aiding in the prevention of childhood lead poisoning) and the amount of fees collected.
Following Sinclair Paint Company, an appellate court addressed two issues that had not yet been resolved in the area of regulatory fees at the state level – 1) whether a state agency had to have an independent regulatory program in order to impose a regulatory fee, and 2) whether the proportionality of the relationship between costs and fees collected had to be assessed on an individual basis. California Association of Professional Scientists v. Department of Fish and Game (3d Dist. 2000) 79 Cal.App.4th 935 (“CAPS”) involved fees imposed by the Department of Fish and Game to recoup the costs of its role in the environmental review process. Although the Department did not have an independent regulatory program, the court found that the fees were still regulatory in nature because the Department was assisting in environmental review, which was a regulatory program. Additionally, the court found that flat fees imposed according to the type of environmental document satisfied the reasonable relationship requirement. An individual finding of proportionality does not have to be made on a project by project basis; instead, the court applied a “flexible assessment of proportionality” test that evaluated proportionality on a cumulative basis. After finding that the fees collected amounted to less than the costs to the Department, the court upheld the fees imposed as valid regulatory fees.
Currently, there is a case before the California Supreme Court that should give further incite into what constitutes a reasonable relationship between the amount of a fee and the costs of a regulatory program. California Farm Bureau Federation v. State Water Resources Control Board will address a statute authorizing the State Water Resources Control Board (“SWRCB”) to adopt a fee schedule for annual fees to be paid by the holders of water rights permits. These fees were meant to replace much of the State funding that previously supported the water rights permit program. SWRCB had to implement the fee schedule and raise $4.4 million within a year’s time to cover the costs of the program. In adopting a fee schedule, SWRCB estimated that 40 percent of permit holders would not pay the fee. Federal government entities accounted for a portion of the 40 percent because they were entitled to sovereign immunity. The remaining permit holders in the 40 percent group consisted of SWRCB’s estimation of the number of individuals who would fail to pay the fee as required. When adopting the fee, SWRCB elected to spread the $4.4 million over 60 percent of the permit holders.
The trial court held that the statute and the fee schedule adopted by SWRCB constituted valid regulatory fees. The Third Appellate District agreed that the statute was constitutional, but the appellate court found that the fee schedule did not allocate the costs proportionally, and therefore, the regulations were unconstitutional. Now the case has been granted review by the Supreme Court. We will keep you updated on this case and how it affects the regulatory fee/special tax dichotomy.
Cori Badgley is a clerk and Bill Abbott is a partner with Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, environmental and planning issues contact Abbott & Kindermann at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.