Interpreting State Fiscal Constitutions: A Modest Proposal

Abstract

The fiscal constitutions of many states limit the ability of governments to raise taxes. These same constitutions typically do not impose similar limits on the ability of governments to impose a fee, say a building permit fee. But what if a locality chose to levy a gigantic building permit fee and used the proceeds to fund general services? Such a fee would – and should – be considered a “hidden tax” and thus subject to the same limitations as ordinary taxes.

But how high is too high when it comes to fees? In many cases – say fees for water use – the fees must be set high enough to fund major capital expenditures or there will not be a water system to provide water. And should higher fees for excessive use of water be a problem – after all the marginal cost of the additional water is no higher for an excessive user? If tiered pricing is a problem, then there might not be any water left in the water system. What about basic service for poorer users at a discount; does not the provision of such a service mean that other ratepayers are paying too much? But if poorer users would not use the service at all if charged market rates, why might it not be perfectly rational to charge them less if the marginal cost of the additional services was very low? Do we think that airplane passengers who pay full price are subsidizing a customer who pays less for an empty seat on a plane about to leave?

Courts are not well situated to answer these questions, but in some states the courts seem to have taken the position that the constitutional distinction between taxes and fees leaves them no choice but to undertake searching substantive review of the fees set by state and local governments. In this Article I argue that there is another – better – way, namely for courts to engage in procedural review of the ratemaking process. Such review has real teeth and is well within judicial competence. Most importantly, as I demonstrate, requiring such review is actually a better interpretation of these fiscal provisions.

Keywords: Taxes versus Fees, State Fiscal Constitutions, Tax and Expenditure Limitations, Direct Democracy