Opinion ID: 1852239
Heading Depth: 1
Heading Rank: 2

Heading: Is the Fee an Illegal Tax?

Text: The plaintiff claims that the parks fee is an illegal tax. The City asserts that the fee is a valid impact fee that is authorized under the City's broad home-rule power. An impact fee is generally a monetary payment assessed as a condition of the issuance of a building permit or plat approval. Country Joe, Inc. v. City of Eagan, 560 N.W.2d 681, 685 (Minn.1997). It is typically used to finance `large-scale, off-site public facilities and services necessary to serve new development.' Id. (citation omitted). Courts concluding that such fees are valid have usually required that the fee be `in an amount which is proportionate to the need for the public facilities generated by [the] new development.' Id. (citation omitted); accord Hollywood, Inc. v. Broward County, 431 So.2d 606, 611 (Fla.Dist.Ct.App.1983). Such fees have been lauded by local governments in recent years as a welcome means to `shift a portion of the cost of providing capital facilities to serve new growth from the general tax base to the new development generating the demand for the facilities.' Country Joe, Inc., 560 N.W.2d at 684-85 (citation omitted). Although some states have enabling legislation authorizing local government to charge impact fees, e.g., Home Builders Ass'n v. City of Scottsdale, 187 Ariz. 479, 930 P.2d 993, 994 (1997); N. Ill. Home Builders Ass'n, Inc. v. County of DuPage, 165 Ill.2d 25, 208 Ill.Dec. 328, 649 N.E.2d 384, 387 (1995), Iowa does not. Therefore, the City must justify the parks fee at issue here as an exercise of its police power. We turn now to a review of Iowa law with respect to the police power of municipalities and the scope of their taxing authority.
In 1968 the State of Iowa amended its constitution to give municipalities home rule authority. See Iowa Const, art. Ill, § 38A. Under the home rule amendment, a city has the power and authority, not inconsistent with the laws of the general assembly, to determine [its] local affairs and government, except that [it does] not have power to levy any tax unless expressly authorized by the general assembly. Id. (emphasis added); see also Iowa Code §§ 364.2(2) (1997) (A city may exercise its general powers subject only to limitations expressly imposed by a state or city law.),.3(4) (A city may not levy a tax unless specifically authorized by a state law.). The principle of home rule authority is further clarified in the Iowa Code, which provides: A city may, except as expressly limited by the Constitution, and if not inconsistent with the laws of the general assembly, exercise any power and perform any function it deems appropriate ... to preserve and improve the peace, safety, health, welfare, comfort, and convenience of its residents. Id. § 364.1. An action taken pursuant to this provision is an exercise of a city's police power. See Kelley v. Story County Sheriff, 611 N.W.2d 475, 481 (Iowa 2000); Gravert v. Nebergall, 539 N.W.2d 184, 186 (Iowa 1995). To summarize the scope of home rule authority in Iowa, a city has broad police powers, but it cannot impose taxes without express authorization from the legislature. The City argues that its parks fee is an appropriate incident of the exercise of its police power to promote the public's health, comfort and welfare. The plaintiff does not challenge the City's authority to build parks; clearly, parks improve the welfare and comfort of city residents. Rather, the plaintiff claims that the financing for parks must come from the City's general fund and not through the imposition of an unauthorized tax on developers and homebuilders. See generally Iowa Code § 384.3 (requiring, in general, that [a]ll moneys received for city government purposes from taxes and other sources must be credited to the general fund of the city). In order to resolve this dispute, we must determine the nature of the parks fee. We begin by examining the differences between taxes and fees. This court has defined a tax as a charge to pay the cost of government without regard to special benefits conferred. In re Shurtz's Will, 242 Iowa 448, 454, 46 N.W.2d 559, 562 (1951); accord Newman v. City of Indianola, 232 N.W.2d 568, 573 (Iowa 1975). In other words, taxes are for the primary purpose of raising revenue. See City of Hawarden v. US W. Communications, Inc., 590 N.W.2d 504, 507 (Iowa 1999). If the fee at issue here is determined to be a tax, it would fall within the category of an excise taxa tax imposed on a transaction or as a condition to the exercise of a privilege. See Waters Landing Ltd. P'ship v. Montgomery County, 337 Md. 15, 650 A.2d 712, 716-17 (1994) (holding that development impact tax was an excise tax, not a property tax or a personal property tax); 9 Beth A. Buday & Julie Rozwadowski, The Law of Municipal Corporations § 26.18, at 50 (3d ed., rev.vol.1995) (stating that a tax imposed as a condition of licensure is an excise tax, not a property tax) [hereinafter The Law of Municipal Corporations ]; see also Cedar Valley Leasing v. Iowa Dep't of Revenue, 274 N.W.2d 357, 361 (Iowa 1979) (defining excise tax as a tax on a transaction or the privilege to conduct the transaction); Black's Law Dictionary 563 (6th ed.1990) (defining excise tax as [a] tax imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege). That is because, notwithstanding its relationship to real property, the fee is transaction based; it is made a condition of obtaining plat approval or a building permit. See Waters Landing Ltd. P'ship, 650 A.2d at 717; 71 Am. Jur.2d State and Local Taxation § 22, at 318 (2000) (stating that an excise tax does not become a property tax because it is proportioned in amount to the value of the property used in connection with the occupation, privilege, or act which is taxed). [2] We find no legislative authority for cities to impose an excise tax on developers or builders. Amicus curiae, the Iowa League of Cities, argues that the City's authority to charge a parks fee can be derived from its statutory authority to condition plat approval on the installation of public improvements. See Iowa Code § 354.8 (allowing city to requir[e] the installation of public improvements in conjunction with approval of a subdivision); see also Blumenthal Inv. Trusts, 636 N.W.2d at 266. Even if we assume that the term public improvements as used in section 354.8 encompasses parks, the League's argument fails. The League overlooks the fact that the city ordinance at issue here does not require a developer to construct a park; it imposes a monetary fee. This distinction is significant under Iowa home rule principles because if the fee is a tax, there must be express legislative authority for imposing the tax. Although the League advances practical and sound reasons for allowing a City to require a monetary exaction from a developer in lieu of a dedication of parkland, the decision to extend that power to local government is for the legislature, not this court. Clearly, the legislature did not do so in section 354.8; that statute does not expressly permit local government to require payment of a tax as a condition of subdivision approval. Consequently, if the parks fee is a tax, it is not authorized by section 354.8. Having examined the sources and scope of the City's taxing authority, we now examine its authority to charge fees under its police power. Before municipalities had home rule authority, this court had interpreted the regulatory authority granted by statute to cities to include the power to charge a fee to meet the expenses of the city in exercising its regulatory authority. Felt v. City of Des Moines, 247 Iowa 1269, 1273, 78 N.W.2d 857, 859 (1956) (holding that fee charged to cover city's expenses in exercising its statutory authority was a proper incident to the authority granted under the statute); see City of Pella v. Fowler, 215 Iowa 90, 98, 244 N.W. 734, 738 (1932); Solberg v. Davenport, 211 Iowa 612, 617, 232 N.W. 477, 480 (1930). The same principle applies with respect to a city's home rule authority: a city may charge a fee to cover its administrative expenses in exercising its police power. Thus, the reasonable cost of inspecting, licensing, supervising, or otherwise regulating an activity may be imposed on those engaging in the activity in the form of a license fee, permit fee, or franchise fee. See City of Hawarden, 590 N.W.2d at 506-07. In addition to regulatory fees, a municipality may charge a citizen when it provides a service to that citizen. See Newman, 232 N.W.2d at 573. The rather narrow range of fees permitted by our cases is consistent with our long-standing definition of a tax. As noted above, a tax is a charge to pay the cost of government without regard to special benefits conferred. In re Shurtz's Will, 242 Iowa at 454, 46 N.W.2d at 562 (emphasis added). Consistent with this definition, the regulatory and service fees permitted under Iowa law are based on a special benefit conferred on the person paying the fee. In the regulatory context, fees enable the government to administer a particular activity or occupation to the peculiar benefit of those engaged in that activity or occupation. Therefore, fees designed to cover the administrative expense of regulating a particular activity, occupation, or transaction are not taxes. Similarly, when one pays for a service such as admission to the municipal swimming pool, one has received a special benefitadmission to the pooland so the admission fee is not a tax. In summary, because the fee at issue here does not fall within the authorized taxing authority of the City, it is proper only if it qualifies as a regulatory fee or service fee. To qualify as one of these permissible fees, the parks fee must cover the administrative expenses of the city in regulating residential development or be compensation for a specific benefit or service conferred on those paying the fee. We now turn to an analysis of whether the parks fee is an unauthorized tax or a permissible fee.
We first consider whether the parks fee is a regulatory fee. We do not think it is. The fees charged under the city ordinance are not based on the cost of regulating development or issuing building permits, but rather are based on the impact the development of the property owner's land will have on the public infrastructure. Because the fee has no relation to the expenses of the city in approving subdivision plats or building permits, it cannot be justified as an incident of the exercise of its police powers. See City of Hawarden, 590 N.W.2d at 507 (distinguishing a fee from a tax by focusing on whether the fee is reasonably related to and does not exceed the city's necessary and probable administrative and regulatory expenses); Solberg, 211 Iowa at 617, 232 N.W. at 480 (stating that where charge is imposed in the exercise of the police power, the amount which may be exacted may include and must be limited and measured by the necessary or probable expense of issuing the license and such inspection, regulation, and supervision as ... may be lawful and necessary (emphasis added)); City of Pella, 215 Iowa at 98, 244 N.W. at 738 (holding that franchise fee calculated as a percentage of the franchisee's gross earnings was not proper because the exaction was not based on the cost of regulation or supervision); 9 The Law of Municipal Corporations § 26.15, at 42 (stating that fee permitted as an incident of police regulatory power is only as will legitimately assist in regulation and will not exceed the necessary or probable expense of issuing the license and of inspecting and regulating the business or other subject that it covers); see also E. Diversified Props., Inc. v. Montgomery County, 319 Md. 45, 570 A.2d 850, 855 (1990) (holding that impact fee was not a regulatory fee where it was not charged to defray expenses of the development regulatory process). The City attempts to justify its parks fee on the basis that the monies raised are spent solely on neighborhood parks to the benefit of developers and homebuilders whose activities generate the need for such facilities. We do not think the fee can be supported on this basis either. First of all, a neighborhood park is not provided specifically to the residents of a development or even the neighborhood in which it is located. A neighborhood park is available for general public use and benefits the entire community. See Wielepski v. Harford County, 98 Md.App. 721, 635 A.2d 43, 47 (1994) (noting road improvements benefit the public in general, so fee charged to bordering property to pay for improvements cannot be justified on basis that improvements benefit that particular property), vacated on other grounds by Harford County v. Wielepski, 336 Md. 281, 648 A.2d 192, 193 (1994); cf. Milton O. & Phyllis A. Thorson Revocable Estate Trust v. City of West Des Moines, 531 N.W.2d 647, 650 (Iowa Ct.App.1995) (noting in the context of special assessment that public improvement usually confers special benefits to property owners and a general benefit to the city and its residents). Therefore, if the fee is to be justified under the City's police power as conferring a special benefit, it must provide some benefit to nearby property beyond the mere existence of the park. See E. Diversified Props., Inc., 570 A.2d at 855 (noting that [t]he relationship between the fee and the benefit to the property owner necessary for the measure to be regulatory in effect is not just that the property owner receive some benefit from the improvement); cf. Goodell v. City of Clinton, 193 N.W.2d 91, 95 (Iowa 1971) (holding in special assessment case that benefits accruing to the public at large are not special benefits that may be assessed against individual properties). We think one could hypothesize that a special benefit is conferred by the construction of a neighborhood park in the form of increased property values or salability resulting from the park's proximity. Cf. Milton O. & Phyllis A. Thorson Revocable Estate Trust, 531 N.W.2d. at 650 (noting distinction between general community benefit and special benefit of public improvement in context of special assessment). But even if we assume that developers and homebuilders who pay the parks fee receive a special, economic benefit from the building of neighborhood parks, we still cannot sustain the fee as an exercise of the City's police power. That is because the fee is not premised on the special benefits bestowed on developers and builders nor limited to the value of those special benefits. Rather, the fee is based on the cost of building the neighborhood parks, an expense representing the general benefit to the community at large. Therefore, the parks fee is not based on special benefits conferred on the property owners so as to fall outside the definition of a tax. See E. Diversified Props., Inc., 570 A.2d at 855 (holding that impact fee was not a regulatory fee where it was not based on the service provided to the property owner); Haugen v. Gleason, 226 Or. 99, 359 P.2d 108, 111 (1961) (holding fee charged as condition of plat approval was an illegal tax because the fees were not required to be used for the direct benefit of the regulated subdivision). To conclude otherwise would in essence permit the City to assess property for a public improvement without regard to the limitations on its taxing authority under chapter 384. See generally 9 The Law of Municipal Corporations § 26.18, at 50 (noting that unless it is shown that the fee collected is devoted to the cost of regulation, there would be nothing to distinguish a revenue ordinance from a police ordinance). In reaching our conclusion that the parks fee cannot be sustained under the City's police power, we have considered the cases cited by the City from other jurisdictions wherein courts have upheld impact fees similar to the fee before us. Notwithstanding those cases, Iowa statutory and case law is clear and well established with respect to the powers of local government. The home rule amendment, while giving local government broad authority to promote the peace, safety, health, welfare, comfort, and convenience of its residents, did not bestow such broad powers with respect to the financing of local government activities. A municipality may charge a fee to cover the cost of regulation or the cost of providing a service, but beyond that the municipality must have specific authorization from the legislature to raise revenue for general city purposes. In contrast, in the cases upon which the City relies, the state legislatures had either adopted an enabling statute permitting local government to charge impact fees, or the taxing power of local government was not as severely circumscribed under state law as it is in Iowa. E.g., Home Builders Ass'n, 930 P.2d at 995 (state statute allowed impact fee); N. Ill. Home Builders Ass'n, Inc., 649 N.E.2d at 30-31 (same); McCarthy v. City of Leawood, 257 Kan. 566, 894 P.2d 836, 839 (1995) (Kansas home rule provision granted cities power to levy taxes, excises, fees, charges and other exactions unless prohibited by legislative enactment). Although in a few cases the statutory framework was similar to that present here, e.g., Coulter v. City of Rawlins, 662 P.2d 888 (Wyo.1983), we do not find such cases persuasive. It is our belief the courts in those cases erroneously implied local authority to impose a revenue-raising impact fee as an incident of local government's regulatory powers. See 8 Eugene McQuillin, The Law of Municipal Corporations § 25.118.50, at 384 (3d ed., rev.vol.2000) (stating in the absence of legislative intent, municipalities cannot depart from traditionally authorized methods of financing public facilities so as to allocate the costs of substantial public projects among new developments on the basis of their anticipated impact). In essence, they have recognized an implied power to tax, a notion antithetical to Iowa's home rule principles. See Iowa Code § 364.3(4) (A city may not levy a tax unless specifically authorized by a state law.); accord Haugen, 359 P.2d at 111 (noting that [t]he power to tax is never inferred, nor is it inherent in local government). In summary, the cases in which courts have upheld impact fees are either distinguishable or unconvincing. Therefore, we decline to follow them.
We conclude the parks fee is a tax because it is a charge to pay the cost of government without regard to special benefits conferred. In re Shurtz's Will, 242 Iowa at 454, 46 N.W.2d at 562. The fee is not compensation for a direct service to the developer or homebuilder paying the fee, nor is it intended to cover the administrative costs of the City. To the contrary the fee is, pure and simple, a measure to raise revenue for public infrastructure. See Idaho Bldg. Contractors Ass'n v. City of Coeur d'Alene, 126 Idaho 740, 890 P.2d 326, 330 (1995) (holding that an impact fee was a tax because it served the purpose of providing funding for public services at large, and not to the individual assessed); Hillis Homes, Inc. v. Snohomish County, 97 Wash.2d 804, 650 P.2d 193, 196 (1982) (ruling that an impact fee was an illegal tax because the primary purpose of the fee was to offset the costs of providing specified services rather than to regulate development); 9 The Law of Municipal Corporations § 26.17, at 48 (stating if the charge exceeds the expense of issuance of a license and costs of regulation, it is a tax). Because such a tax has not been expressly authorized by the legislature, the City was without authority to impose it. Accordingly, we affirm the district court's declaratory judgment that the mandatory park dedication fee imposed by the City's ordinance is illegal. See 9 The Law of Municipal Corporations § 26.32.20, at 97 (Permit fees exacted for revenue-raising purposes or to offset the cost of general governmental functions are invalid.). Likewise, we affirm the court's grant of an injunction preventing the future collection of such fees.