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Proposition 37 — McGeorge School of Law
Home > Publications > California Initiative Review > Past Initiatives (Before November 2005) > 2000 November Initiatives > Proposition 37
The Continuing Debate in California
Over What Constitutes a Tax
By Marcy L. Lechner
Social Science Professional Clear Credential, California State Univ. Sacramento 1994
B.A., Political Science, University of California at Davis, 1991
No one likes to pay taxes, but this November, California voters will be asked to decide who should pay mitigation costs associated with pollution and other nuisances, the industry causing the problem or the taxpayers at large. On November 7, 2000, Californians will vote on Proposition 37, dubbed the "Two-Thirds Vote Preservation Act", put on the ballot by business groups, including the California Chamber of Commerce, California Taxpayers Association, and California Manufacturers and Technology Association.
Opponents claim Proposition 37 is an attempt by big business to further restrict state and local governments' ability to hold industry responsible for the social and economic costs of their activities; but supporters contend that Proposition 37's aim is to force governments to comply with Proposition 13's voter imposed mandate - a two-thirds vote requirement to enact new taxes.
Proposition 37 will amend the California Constitution to redefine certain fees as taxes. By redefining fees as taxes, the legislature and local government entities will have to meet the two-thirds vote requirements imposed under 1978's Proposition 13. Obtaining super-majority approval for a measure, especially a tax measure, at any level of government, is a difficult if not impossible task. If state and local governments fail to meet the two-thirds vote requirement, they will be stripped of any power to impose fees on businesses to "monitor, study or mitigate the societal or economic effects of an activity."
This year's anti-tax ballot measure is familiar to many Californians. California's anti-tax attitude dates back to 1978, when California voters adopted Proposition 13 by a majority vote. Proposition 13 provided the impetus for a nationwide tax revolt, as other states followed suit by enacting similar restrictive tax legislation. Once enacted, Proposition 13 amended the state constitution to severely restrict government's ability to impose property taxes for revenue purposes. Proposition 13 also imposed super-majority requirements upon state and local governments in order to exact new taxes from the public. Tax law in California has not been the same since, as courts struggle to interpret Proposition 13's various provisions. Deciding which fees are actually taxes and which are simply fees has become a recurring chore in California since 1978. While taxes are subject to Proposition 13's two-thirds mandate, legitimate fees are not, and may be enacted by a simple majority vote.
Attempts by state and local governments to characterize certain exactions as fees have been met with increasing resistance from the business community and professional organizations. While the purpose of Proposition 13 was to severely restrict state and local taxing powers, since 1978, various court decisions have watered down many of Proposition 13's provisions. In essence, California courts have provided state and local governments with a series of loopholes, allowing them to circumvent Proposition 13's two-thirds requirement. Since the passage and subsequent watering down of Proposition 13, California voters have seen anti-tax initiatives on the ballot at least two times, with propositions 62 in 1986 and 218 in 1996. This year's "Two-Thirds Vote Preservation Act" is yet another attempt to modify the legal construction of Proposition 13.
While Proposition 37 backers say that the measure is straight forward and will clean up any disagreement over the definition of "taxes" generated by Proposition 13 litigation, it is anticipated that this measure too will end up in the courts. While not posing any constitutional concerns, the language in Proposition 37 is ambiguous, which will force the courts to interpret its provisions.
The fiscal impact of Proposition 37 is uncertain, as it depends on judicial construction of its provisions and future actions taken by state and local governments. By enacting broad regulatory programs, governments may be able to avoid having fees reclassified as taxes. Alternatively, if the measure does result in reclassifying mitigation fees as taxes, the fiscal impact on state and local governments could be significant. Before examining the complicated legal and political issues surrounding the Proposition 37 debate, it is necessary to first explore the judicial development of tax law in the post-Proposition 13 era.
In order to understand the implications of this year's Proposition 37, it is necessary to put this anti-tax measure into proper perspective. Proposition 37 can only be fully understood within the context of California's tax law. In general, taxes are used to fund public services, like schools and the courts, while fees pay for services or programs benefiting individuals or businesses. (California Official Voter Information Guide 2000, at 28 [hereinafter Guide].) There are two different types of fees, "user fees" and "regulatory fees." User fees are the types of fees paid at park entrances and for garbage collection. (Id.) With these types of fees, the user pays the cost of the service, i.e., if you want to go to the park, you pay to use it. In contrast, regulatory fees include fees such as smog checks, which are paid to benefit the public at large, i.e., providing cleaner air for all Californians. (Id.)
California voters approved Proposition 13 by a majority vote in 1978. Prior to Proposition 13, property taxes provided the main revenue source for local governments, including cities, counties and special districts. (Id. at 1333-34.) Proposition 13 was placed on the ballot to severely restrict state and local governments ability to impose new taxes. (Id. at 1334.) At the time, California was enjoying a high period of economic growth. If Proposition 13 had not passed, the state budget surplus would have reached $10 billion by 1979. (Jonathon Schwartz, Prisoner of Proposition 13: Sales Taxes, Property Taxes, and the Fiscalization of Municipal Land Use Decisions, 71 S. Cal. L. Rev 183,186 [1997].) Even with a huge budget surplus, however, the state legislature refused to spend or refund excess tax dollars. (Koyama, supra at 1336.) Taxpayers forced the legislature's hand at the ballot with Proposition 13. The initiative was intended to provide effective property tax relief and reduce government waste. (California Voters Pamphlet, 56-58, [June 6, 1978].) In 1977-1978, the fiscal year before Proposition 13, property taxes in California were 51% above the national norm; just one year after its enactment, property taxes in California dropped to 27% below the national norm. (Koyama, supra, at 1336.)
Proposition 13 amended the state constitution, providing four major provisions embodied in article XIIIA. Section 1 of Proposition 13 limits real property tax rates. (Cal. Const. art. XIIIA §1[West 2000].) Section 2 limits real property assessments. (Cal. Const. art. XIIIA §2 [West 2000].) Section 3 of Proposition 13 provides that "any changes in state taxes enacted for the purpose of increasing revenue" be approved by two-thirds of the state legislature. (Cal. Const. art. XIIIA §3 [West 2000].) Section 4 imposes similar limitations on local governments, including cities, counties and special districts, prohibiting any new "special taxes" that are not approved by two-thirds of the local electorate. (Cal. Const. art. XIIIA § 4 [West 2000].)
While the language and intent of Proposition 13 may have appeared clear to California voters, litigation following its enactment has been endless. Since 1978, California courts have judicially construed its various provisions. Deciding what constitutes a "tax" has become a recurring chore as local governments struggle to find new sources of funding to replace lost property tax revenues depleted by Proposition 13.
The fiscal impact of Proposition 13.
Just a few years after its enactment, local governments began experiencing Proposition 13's impact. In the year immediately following its enactment, property tax revenues declined by 51%, resulting in a $5.9 billion dollar loss. (Koyama, supra, at 1339.) Cities, counties and special districts were hit the hardest, since they relied primarily on property taxes prior to Proposition 13. (Id. at 1338-1340.)
To replace lost revenues, the state legislature initiated a "bail-out" program, providing local governments with grants and loans. To soften Proposition 13's impact, the California Legislature gave local governments $4.2 billion in the 1978-1979 fiscal year; $4.9 billion the following year; and $5.5 billion in the 1980-1981 fiscal year. (Id. at 1340.) Effectively, the bailout satisfied the voters - it provided them with necessary property tax relief, while still maintaining public services. However, nobody anticipated the economic downfall that hit California in the early 1980's. When the recession hit, California was forced to make drastic cutbacks, leaving local governments in a state of financial crisis. (Id. at 1340-1341.) By 1985, the Assembly Office of Research reported that "the quality of the functions performed by local jurisdictions has deteriorated." (Assembly Office of Research, California State Legislature, California State and Local Tax Systems, 245 [July 1985].)
Municipalities are still feeling the effect of Proposition 13 today. Since local governments cannot always rely on the state to bail them out, cities, counties and special districts have had to find other sources of revenue. By relying on non-taxing levies, i.e., regulatory fees, licenses and permits, local governments can circumvent Proposition 13's two-thirds vote requirements and impose new fees by a simple majority vote. Since the constitution prohibits the legislature from repealing Proposition 13, local taxing authorities have relied on the courts to restrict Proposition 13's application. Supporters of this year's Proposition 37 contend that this initiative will stop these practices by reaffirming Proposition 13's two-thirds mandate.
Proposition 13 survives a major challenge.
After its enactment, Proposition 13 was immediately challenged as unconstitutional. (Amador Valley Joint Union High School District v. State Board of Equalization, 22 Cal.3d 208 [1978].) In this case, the California Supreme Court upheld Proposition 13 against a broad range of constitutional challenges, finding, among others, that Proposition 13 was a valid exercise of initiative power and did not violate the Equal Protection clause or the single-subject rule. (Id. at 222, 243.) While Proposition 13 was upheld in its entirety, the legal battle did not end there. Since the Amador decision, subsequent courts have applied and interpreted Proposition 13's various provisions. These decisions provide interpretative authority on what constitutes a "special district", a "special tax", and a "regulatory fee", all critical issues for deciding which exactions are subject to Proposition 13's two-thirds mandate.
Proposition 13's applicability to special districts.
A Los Angeles case was the first case to provide interpretive authority on the revolutionary tax measure, delivering the first blow to Proposition 13. Following the enactment of Proposition 13, the Los Angeles County Transportation Commission (LACTC) adopted a sales tax by a 54% majority vote in November 1980. (LACTC v. Richmond, 31 Cal.3d 197, 200 [1982].) Mr. Richmond, Executive Director of the LACTC refused to implement the new tax, since it did not meet section 4 of Proposition 13's two-thirds vote requirements. Section 4 prohibits "cities, counties and special districts" from imposing "special taxes" without a two-thirds vote. (Cal. Const. art. XIIIA §4[West 2000].) However, the California Supreme Court found that the LACTC was not a special district and did not need to meet the two-thirds requirement. The court reasoned, "in view of the fundamentally undemocratic nature" of a two-thirds requirement, section 4 "must be strictly construed and ambiguities resolved in favor of permitting voters" to enact special taxes by a simple majority. (Richmond, 31 Cal. 3d at 205.) Essentially, the court ignored Proposition 13's mandate.
The Richmond decision interpreted "special districts" to apply only to districts authorized to impose ad valorem property taxes. (Id. at 205.) The court reasoned that the purpose of Proposition 13 was to limit local government's power to replace lost property tax revenues; since the LACTC did not possess the power to levy such taxes, it was exempt from Proposition 13's two-thirds requirement. (Id. at 213; see also, Derek Cole, Implementing Proposition 218: Will the Curtain Finally Close on Property Tax Reform in California, 29 McGeorge L. Rev. 745 [1998].)
While the California Supreme Court in Richmond defined a "special district" as a district previously empowered to levy property taxes, other courts have not applied this narrow interpretation (Cole, supra, at 743-744.) Since Richmond, various appellate courts have relied on an "essential control" test, finding a special district where an agency is controlled by one or more cities or counties that otherwise would be subject to § 4's super-majority mandate. (Rider v. San Diego, 1 Cal.4th 111 [1991].) If the court finds that an agency is a special district and has imposed a tax by a simple majority, the court invalidates the tax. Applying the essential control test, local governments have been less successful at circumventing §4's provisions (Cole, supra, at 744.) Courts have struck down various taxes: finding that a regional justice commission which operated jails and courthouses was a special district, as it was serving a primary function of municipal government (Howard Jarvis Taxpayers Assn. v. State Bd. of Equalization, 20 Cal. App.4th 1598, 1604 [1993].); school districts are special districts, even when not controlled by the city or county (Hoogasian Flowers v. State Board of Equalization, 28 Cal. Rptr. 2d 686 [1994].); a library district which sought to impose a $29 annual property tax is a special district (Citadel Library District v. Bloodgood, 237 Cal. Rptr. 649 [1987].); and a county improvement authority is a special district since repairs and improvements are traditionally performed by the county (Monterey Peninsula Taxpayers' Assn. V. Monterey, 8 Cal. App. 4th 1520 [1992].)
Under the rule established by the state's highest court in Richmond, local governments were empowered to create new agencies to carry on traditional city and county functions, and enact new taxes by a simple majority. They were able to do this under the court's narrow definition of a "special district." However, since then, some appellate courts have retreated from this position, making it more difficult for local governments to circumvent section 4 of Proposition 13. The battle over what is or is not a special district is an issue that is now rarely litigated (Cole, supra, at 743-745.)
Proposition 13's applicability to special taxes.
While the loophole created by Richmond is no longer a significant threat to Proposition 13's goals, because of subsequent decisions, the court's interpretation of "special taxes" in section 4 poses other problems. Proposition 13's section 4 allows local governments to impose "special taxes" by a two-thirds vote. However, if the same entity imposes a "general tax," it can be accomplished by a simple majority. In City of San Francisco v. Farrell, the court upheld the city's payroll and gross receipts tax, finding that it was not a special tax. (City of San Francisco v. Farrell, 32 Cal. App. 3d. 47 [1982].) The court interpreted the language "special tax" to be a tax used for a particular purpose. (Id. at 57.) In Farrell, the payroll tax was not raised for a specific purpose, rather proceeds were to be deposited into the city's general fund and used for general revenue purposes. Under the Farrell ruling, a city or county could impose a "general tax", one used for the purpose of increasing revenue, by a simple majority.
Subsequent courts have upheld various exactions, holding them to be general taxes (Cole, supra, at 745.) Assessments on property or similar business charges, in amounts which reasonably reflect the amount of improvement conferred, are not special taxes (Evans v. City of San Jose, 3 Cal.App. 4th 728, 735-739 [1992].); development fees assessed in return for building permits are not special taxes if the fee bears a reasonable relationship to the development's probable costs (Shapell Industries, Inc. v. Governing Board, 1 Cal.App 4th 240 [1991].); regulatory fees in amounts necessary to carry out the regulations' purpose are not special taxes despite the absence of any perceived benefit (Pennell v. City of San Jose, 42 Cal. 3d 365, 375 [1986].) This line of cases gave local governments the power to raise revenue to replace depleted Proposition 13 funds by placing the new tax into the general fund. Subsequently, these cases have been partially restricted in their application, due to voter approval of Proposition 62 in 1986 and Proposition 218 in 1996. (Cole, supra at 745.)
Proposition 13's applicability to regulatory fees.
In 1997, the California Supreme Court dealt another blow to Proposition 13's two-thirds vote requirements, finding that regulatory fees were not taxes, and can be imposed by a simple majority. (Sinclair Paint Co. v. State Board of Equalization, 15 Cal.4th 866 [1997].) As pertaining to local governments, while previous cases already exempted regulatory fees from Proposition 13 section 4's two-thirds requirement, Sinclair Paint was the first case to provide the same exemption under section 3 for state taxes. The case stemmed from a law passed by the state legislature in 1991. In 1991, the legislature passed the Childhood Lead Poisoning Prevention Act, signed into law by former Governor Pete Wilson. The Act provided medical screening and evaluation for children considered potential victims of lead poisoning. These lead-poisoning detection services were entirely funded by fees imposed on manufacturers and others who contributed to lead contamination in the environment. Rather than requiring the taxpayers at large to fund these essential medical services, the legislature decided to make polluters pay for the harm caused by their activity. (Id. at 870.) The Act provided medical screening and services to children who were potentially exposed to lead. This program was entirely supported by fees assessed on manufacturers and others contributing to environmental lead contamination. (Id.) Since the Legislature imposed the fee to mitigate the adverse effects of those who would potentially pollute the environment with lead contamination, the court found it was not a tax, but a legitimate expression of the state's police power.
Under this decision, states are free to impose a fee on cigarette retailers and use the money to provide health services for people with smoking related illnesses (Guide at 28.) Using the reasoning of the court in Sinclair Paint, this regulatory fee on cigarette retailers could be imposed by a simple majority vote. According to the Proposition 37 campaign, this decision directly contradicts Proposition 13's two-thirds requirement.
Tax initiatives since Proposition 13
While tax law in the post-Proposition 13 era has been largely determined by the courts, California voters have responded to judicial interpretations of Proposition 13 on at least two occasions. Since Proposition 13 passed in 1978, Californians have approved two other anti-tax measures, Proposition 62 in 1986 and Proposition 218 in 1996.
Proposition 62 was passed in response to the Farrell decision. Under that decision, a local government could circumvent Proposition 13's two-thirds requirement by passing a "general tax." The Farrell court concluded that Proposition 13 only mandated a super-majority vote for "special taxes." The public disagreed. Supporters of Proposition 62 argued that it would bring back the peoples' rights which had been taken away by the court in Farrell. (Cole, supra at 749-751.) Proposition 62 defined special taxes and general taxes in order to restrict the court's ability to judicially construe their meanings. By clearly defining the differences between these two types of taxes, local governments were prohibited from imposing either type of tax without a two-thirds vote of the local electorate.
A few years later, Proposition 218 was enacted to "close a 'loophole' that allow[ed] politicians to raise taxes without voter approval." (Cole, supra, at 750-751.) At that time, Proposition 218 supporters argued that state and local governments were circumventing Proposition 13's two-thirds requirement by calling taxes "assessments" or "fees." Proposition 218 enacted two provisions of the state constitution, articles XIIIC and XIIID. (Id. at 751.) These new constitutional provisions curtailed "the ability of local governments to raise revenue from any source by specifying "levy assessment" procedures." (Id.)
While both of these initiatives attempted to overturn Proposition 13's judicial construction, some would say that they failed to do so. Today the courts still cannot agree on which fees to consider taxes and which fees to consider legitimate fees. This year's anti-tax initiative aims at closing a loophole - a court imposed loophole that allows government to impose "hidden taxes" by a majority vote. Proposition 37 supporters contend that this new measure will finally close the door on California's debate over the meaning of the word "tax."
B. Changes Proposed by Proposition 37
Restrictions on state government fees.
Essentially, Proposition 37 will reclassify certain fees, enacted after July 1, 1999, as taxes subjecting them to the two-thirds majority requirements imposed under sections 3 and 4 of Proposition 13. The July provision was added to prevent a potential rush of new fee proposals before the November election. (Steven Capps, Tax Measure Gets Ballot Spot, Sacramento Bee, June 21, 2000 at A1.) Specifically, the proponents of this initiative claim that it will directly overturn the court's decision in Sinclair Paint. (Id.). The first part of the act amends section 3 of Proposition 13 to redefine certain fees as state taxes (Guide at 70.). The fees which will be defined as state taxes are fees which fit into either one of the two following categories:
Fees without a regulatory obligation - "compulsory fees to monitor, study or mitigate the social or economic effects of an activity, and which impose no significant regulatory obligation on the fee payor's activity, other than payment of the fee", will be defined as a state tax; and
Fees which exceed the cost of regulation - "regulatory fees that exceed the reasonable cost of regulating the activity for which the fee is charged" will also be defined as a state tax (this is essentially the current law). (Id.)
This provision of the act also provides that the two-thirds vote requirement, otherwise applicable to the above fees, will not apply in case of:
Inflation - any fee increase caused by inflation, or
Increased Workload - any fee increase caused by an increased workload, as long as the increased workload is not the result of expansion of the class of activity to which the fee applied prior to July 1, 1999. (Id.)
A hypothetical example illustrates the effect of Proposition 37 on state fees: under existing law, the California could require businesses that sell cigarettes to pay into a fund used to provide health services to people with smoking-related illnesses. (Id. at 29.) Currently, the state legislature could impose this "regulatory fee" on cigarette retailers after agreeing to do so by a majority vote. However, under Proposition 37, if the state does not also require other significant duties of businesses who sell cigarettes, the charge would be considered an invalid tax, because it was passed by a majority vote, not a two-thirds vote.
This tax measure would affect few, if any, existing fees. Regulatory fees, paid by doctors, architects and other professionals to state boards responsible for oversight, will not be affected. (Capps, supra, at A12.) The measure is prospective, aimed at preventing state and local governments from acting in the future to impose general, industry-wide fees, like the fee imposed in Sinclair Paint. While there have been previous negotiations between business representatives and members of the legislature to overturn the Sinclair Paint decision, Proposition 37 is the first effort to make it this far.
Restrictions on local government fees.
The second main provision of the measure amends article XIIIC of California's State Constitution, which provides definitions for key terms used in article XIII. Essentially, this provision of Proposition 37 places the same restrictions on local governments that will be placed on the state government. Cities, counties and special districts will be prohibited from imposing a fee to "monitor, study or mitigate" social and economic impacts of certain activities, unless they get a majority or two-thirds vote of the local electorate. (Guide at 70.)
How will the courts interpret the language of this new act if challenged in court? In the cases following Proposition 13's enactment, the courts, in interpreting its provisions, applied traditional rules of construction. From Amador Valley in 1978, to Sinclair Paint in 1997, the courts have stated that language should be interpreted in accordance with the "natural and ordinary meaning of the words"; the literal language may be disregarded to avoid "absurd results"; and the language must receive a "practical common-sense construction which will meet changed conditions and growing needs of the people." (Amador, 22 Cal.3d 245-346 [1978].) Where, as here, a provision is adopted by initiative, any ambiguity may be resolved by referring to ballot summary, arguments and analysis presented to the voters, and interpretation through contemporaneous legislation.
What is a "regulatory obligation"?
Without a two-thirds vote, if the fee does not impose a "significant regulatory obligation" other than payment of the fee, Proposition 37 will specifically prohibit state and local fees imposed to "monitor, study or mitigate the societal or economic effects of an activity." This language is ambiguous and begs litigation. In the Sinclair Paint case, the court held that the mitigation fee imposed on lead polluters was "regulatory" in nature. (Sinclair, 15 Cal. 4th 866 at 877.) The $97,825 worth of fees Sinclair Paint Company paid "regulat[ed] future conduct by deterring the manufacture, distribution or sale of dangerous products." (Id.) In essence, the court held that payment of an industry-wide imposed fee was a regulation in and of itself. Proposition 37 appears to effectively overturn this construction, because the payment of a fee, by itself, is not enough to constitute a "regulatory obligation." While Proposition 37 fails to define a "regulatory obligation", it includes additional duties imposed on businesses, including "requiring a business to change the way it makes a product or provides a service." (Guide at 29.) However, if this language is ambiguous, the court may turn to information relied on by the voters. The purposes of Proposition 37, contained in section 2 of the measure, declares that the initiative is aimed at narrowing the Sinclair Paint definition of a fee. However, the issue of what is a regulatory obligation will more than likely have to be resolved by the courts. If the courts adopt a broad interpretation of what a regulatory obligation is, the impact of Proposition 37 could be very minimal; but if the courts take on a more narrow definition, the effect could be significant. (Legislative Analyst's Office, California State Legislature, Letter to Bill Lockyer, Attorney General, [March 11, 1999].
What is a "reasonable cost"?
Not contrary to current law, Proposition 37 provides that a permissible regulatory fee must be "reasonable." Specifically, Proposition 37 provides that a fee will be reclassified as a tax if it "exceed(s) the reasonable cost of regulating the activity for which the fee is charged." Even in the Sinclair Paint case, the court observed that regulatory fees may be imposed only "if the fees do not exceed the reasonably necessary expense of the regulatory effort." (Sinclair, 15 Cal 4th 866 at 880.) The problem according to Proposition 37 backers: Sinclair Paint's reasoning makes little sense. How can there be an expense for a "regulatory effort" where there is no actual direct regulation?
However, even before the Sinclair Paint decision in 1997, the question of what constitutes a reasonable fee was constantly litigated, and such litigation will likely continue. Historically, the courts give broad discretion to taxing authorities to develop formulas to impose regulatory fees. For a fee to survive, it is not necessary that the taxing jurisdiction uses a precise cost-fee ratio and flexible fee structures are permissible. The language in Proposition 37 does nothing to clear up ambiguity in the amount of fees that may be charged. Courts will be forced to answer this question on an ad hoc basis. Plaintiffs challenging the amount of a fee, as opposed to the constitutionality of a fee, will have to continue to rely on traditional approaches. They may argue:
Excess Costs - that the amount of fees paid exceed the reasonable cost of providing the protective services for which the fees were charged, (Pennell v. City of San Jose, 42 Cal.3d 365, 375 [1986]); or
Unrelated Purpose - that the fees were levied for an unrelated revenue purpose, (Id.); or
No Relationship - that no clear "nexus" or relationship exists between its products/activities and the social or economic burdens, (San Diego Gas & Electric Co. v. San Diego County, 91 Cal. App. 3d 156, 166-168, [1979].)
Proposition 37 does not appear to raise any constitutional concerns, either under state or federal constitutions. The initiative power encompasses the ability to propose constitutional amendments on topics that are the proper subject of legislation. (Cal. Const. art. II §8(a) [West 2000].) Proposition 37 narrowly applies to a specific area of law, the reclassification of certain fees as taxes, therefore, it does not violate the single-subject restriction on the initiative power. (Cal. Const. art. II §§8(d) and 12 [West 2000].) While the courts have previously disagreed on the constitutionality of requiring voter approval of all taxes, Proposition 218 remedied this problem by writing peoples' taxing authority into the state constitution.
The fiscal impact of reclassifying certain fees as taxes is the main fiscal concern raised by this measure. The Legislative Analyst's Office reports that the fiscal impact of Proposition 37 is uncertain, as it depends on judicial construction of its language, as well as future actions by state and local governments. (Legislative Analyst's Office, California State Legislature, Letter to Bill Lockyer, Attorney General, [March 11, 1999]. As mentioned in the section on drafting issues, if the courts apply a broad construction to the phrase "regulatory obligation", the fiscal impact will be minimal; but if the converse is true, Proposition 37 could have a significant effect on funding sources, especially at the local government level. (Id.) In addition to judicial construction of this initiative, the fiscal impact also depends on future voting patterns of the legislature and local electorates. For example, if the newly defined fees pass with the higher voting requirement, Proposition 37 will have a minimal impact. (Guide at 29.) Finally, if government imposes a fee along with a significant "regulatory obligation" on the fee payor, the fee would not be defined as a tax. (Id.) Thus, the initiative would have little impact.
However, assuming the measure results in reclassifying future state and local government fees into taxes, the potential inability of governments to obtain the necessary two-thirds approval would cause decreasing revenue bases to fund public services. While this potential reduction is unknown, it could range from minimal to significant, depending on the factors discussed above. (Letter from Legislative Analyst's Office to Bill Lockyer, Attorney General, supra, [March 11, 1999].)
The proposal is backed by a coalition representing taxpayers, farmers and businesses, including alcohol, tobacco, and oil companies, as well as the California Chamber of Commerce, the California Taxpayers Association and the California Manufacturers and Technology Association, among others. Environmental groups and local governments oppose the anti-tax measure. (Capps, supra, at A12.) Opponents of Proposition 37 include the California League of Conservation Voters, Californians Against Waste, Coalition for Clean Air, and the California Tax Reform Association (Taxpayers Against Polluter Protection, Fact Sheet on the "2/3 Vote Protection Act" [visited July 13, 2000] <http://www.polluterprotection.com>.)
Proponents placed the measure on the ballot to prevent government from imposing industry-wide fees in order to fund public services. They claim that such services, like screening children for lead poisoning, should be supported by public taxes, rather than singling out an entire industry and imposing fees on companies without requiring proof of causation. Such regulatory fees, like an industry-wide fee on airlines whose increased flights cause noise pollution, are "hidden taxes." Larry McCarthy, President of the California Taxpayers Association, claims that tax funding for public services provides more accountability, largely due to the two-thirds vote requirement, allowing "more focus and more involvement on the part of the greater public." (Capps, supra, at A12.)
Proposition 37 supporters criticize the Sinclair Paint decision, saying that it subjects them to fees that may not even be connected to regulating their industry. (Id. at A12.) Fred Maine, Attorney with the California Chamber of Commerce, urges voters to approve Proposition 37. He says, "The contention that industry is trying to pollute for free is simply not true" (Telephone interview with Fred Maine, Chamber of Commerce Attorney, [July 13, 2000].) Rather, Maine explains, Proposition 37 still holds polluters responsible, because individuals who are harmed by a company's products or activities can still bring an individual lawsuit against a specific company, and governments can still impose regulatory fees. The catch, Maine says, "Is that with Proposition 37, the government will have to actually regulate the industry, not just require an entire industry to pay a fee, like in Sinclair Paint, and say that's equal to regulation." (Id.)
However, opponents of the measure argue that this act is "a big solution in search of a problem," claiming that there is no widespread use of fees to pay for public services. (Capps, supra, at A12.) Lenny Goldberg, Executive Director of California Tax Reform Association, contends that Proposition 37 is "total paranoia." (Telephone interview with Lenny Goldberg, Executive Director of California Tax Reform Association [July 12, 2000].) Opponents also worry that, since the initiative is broadly written, local governments will be precluded from raising parking lot fees at the airport hourly parking lot, and a variety of other "fee-user" supported activities. (Capps, supra, at A12.) The fear is that under the new definition of taxes, a "variety of fees intended to make responsible parties pay for cleaning up after themselves would be virtually impossible to enact. (Taxpayers Against Polluter Protection, Fact Sheet on the "2/3 Vote Preservation Act", [visited July 13, 2000] <www.polluterprotection.com.>.) Opponents of the measure give a list of fees that may be affected by Proposition 37, including disposal fees for tire disposal in the wake of fires, the state's oil-spill prevention fund, or fees on refiners to pay for MTBE clean-up. (Id. at 3.)
Whose perception is more accurate largely depends on how Proposition 37 is interpreted by the courts, and whether or not governments enact regulatory programs to accompany any newly imposed fees. What is certain, however, is that it will be more difficult to put money into a clean-up or pollution abatement fund, including recycling fees, such as those used to dispose of tires and oil. (Id. at 3.) Moreover, the measure is replete with ambiguous language, which is certain to result in litigation.
Opponents suggest that Proposition 37 could have a negative environmental impact throughout the state. The measure could severely restrict the ability to monitor or study the social impact of activities such as hazardous material spills and illegal waste disposal. Requiring two "yes" votes for every "no" vote will make it much harder to enact pollution abatement fees; or worse, local governments will be encouraged to develop new layers of bureaucracy to comply with Proposition 37's regulatory requirements.
Since the Proposition 13 initiated taxpayer revolt in 1978, courts have struggled to distinguish taxes from legitimate fees. While regulatory fees and assessments can generally be imposed by a simple majority vote, taxes require a two-thirds vote of the state legislature or the local electorate. Current law allows state and local governments broad discretion in establishing fees and charges. One general restriction is that the fee must relate to a benefit conferred, like a user fee for recreational park users, or a burden imposed, like an emission program for air pollution. (Letter from Legislative Analyst's Office to Bill Lockyer, Attorney General, supra, [March 11, 1999].)
Proposition 37 seeks to expand the definition of the word "tax," by saying that certain compulsory fees which do not impose a "significant regulatory burden," are taxes. By reclassifying these fees as taxes, state and local governments will have to meet the two-thirds vote requirement imposed by Proposition 13. The impact of this measure on public services is unclear, as it depends on how the courts interpret Proposition 37's provisions, and whether or not governments move to enact broad regulatory programs. However, if approved by the voters, Proposition 37 could result in shifting the burden of oil spill clean up and pollution abatement from the offending industries to consumers. In the end, California will come no closer to determining what constitutes a "tax."