Water Rate Hike in Rural Town Becomes Tax Battle Royale

A small California town tried to fix its water tank and wound up in the state’s high court.

Mossbrae Falls near Dunsmuir, California.

SAN FRANCISCO (CN) — A referendum challenging a rural northern California town’s water rate hike rests on whether the California Supreme Court considers it a tax or a fee.

Since 1911, California’s constitution has exempted “tax levies” from the people’s referendum.

It’s an exemption that Dunsmuir, a town of about 1,600 residents in Siskiyou County, is trying to apply to its aging water system. In 2016, the town decided to begin increasing water rates over a six-year period to replace the town’s 105-year-old water storage tank, along with miles of sewer pipes that have fallen into disrepair.

Dunsmuir resident and local business owner Leslie Wilde petitioned the state court to compel the town to hold an election on a referendum measure. The state court rejected her petition but was overturned on appeal in 2018.

The appellate court found the town electorate has the right to challenge the new water rates under Proposition 218, a constitutional initiative passed by California voters in 1996 that limits the ways in which local governments can create or increase taxes.

But at oral argument Tuesday, the justices on California’s highest court were less interested in Proposition 218 than the California Constitution’s tax levy exemption. 

Justice Leondra Kruger asked Dunsmuir’s lawyers to set Proposition 218 aside and focus on the constitution’s referendum exemption for statutes providing for tax levies.

“The tax levy within that meaning historically has been very broad. It’s a matter of securing money that is needed for essential government services,” Dunsmuir City Attorney John Kenny said.

“It is important in this case to distinguish the difference between taxes assessments and fees?” Justice Ming Chin asked.

“With respect to proposition 218 I don’t think so,” Kenny answered.

If the distinction seems like a quibble, it’s not. Courts have historically recognized that taxes are exempt from referenda because they can impede state and local governments from providing essential services, and Dunsmuir believes water delivery is precisely that. 

But attorney Tim Bittle with the Howard Jarvis Taxpayers Association said the water rate is not a tax levy but a property-related user fee that can be challenged through a referendum.

Bittle said a tax levy is a specific term of art used “as a limited exception to the people’s broad referendum power, not a broad exemption to the people’s limited referendum power.”

He added that historically, the California Supreme Court enforced the distinction between taxes and fees “by invalidating excessive fees as disguised taxes.”

Kruger said accepting Bittle’s rationale could lead to “a little bit of a peculiar result, which would be a fee that is not excessive would be subject to referendum, but a fee that is excessive would be exempt.”

“That is an interesting quagmire,” Bittle said. “If the fee was excessive, so that the argument applied that it was an unauthorized tax in that it did not receive voter approval, it would be litigated rather than referended.”

“I do not think that it being excessive would disqualify it from the referendum power, but whether or not it was excessive was something that would be litigated later,” he clarified.

Michael Colantuono, an attorney representing the town, ran with Kruger’s observation.

“It’s a little irrational to import modern distinctions and property-related fees into the work of 1911, because you end up protecting illegal fees and subjecting to referendum those that are lawful,” he said. 

Colantuono said voters in 1911 knew what they were doing when they approved Article II, Section 9 of the California Constitution, making an exception to referendum for “statutes providing for tax levies,” and that they intended the definition of tax levy to be read broadly.

“The voters in 1911 had a broad understanding of the tax levies that were being protected from referendum. They were trying to fend off the overreaching Southern Pacific railroad and labor,” he said.  “That broad definition makes sense in terms of what they were trying to accomplish.”

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