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Exemptions May Limit Local Impacts of Prop. 26

When voters emerge from the ballot box in California, you never know what the consequences are going to be.

Proposition 26 – the new state ban on fees – certainly seems as though it would have wide-ranging impact, not just on planning and development but on government operations in California in general.  Yet Proposition 26 lets impact fees off the hook and is aimed pretty narrowly at one particular court case. At the same time, Prop. 26 turns the whole idea of fees and taxes upside down, and it is already playing havoc with many pieces of legislation passed this year, including the gas tax/sales tax swap.

The bottom line is that Proposition 26 shouldn't have a huge impact on planning and development in California. But it might – because it significantly alters the way the courts must view taxes and fees.

Proposition 26 redefines "any levy, charge, or exaction of any kind" as a tax. It requires a two-thirds majority vote of the Legislature for any state fees and two-thirds voter approval for any local fees. It does, however, exempt seven pretty broad categories of fees, including development impact fees, fees for service (such as a recreation program), entry fees, and fees "imposed for a specific benefit conferred or privilege granted directly" – which ought to cover fees for planning permits.

Proposition 26 was promoted by taxpayer advocates as a way to close a loophole in Proposition 218, the 1996 initiative that required a vote for property assessments. Proposition 218 was, in turn, an initiative promoted by taxpayer advocates to close a loophole in Proposition 13.

Even though the Yes on 26 campaign portrayed the measure as an almost comic broadside against fees in general (with an actor playing a legislator saying, "I just love ‘fees'"), the measure itself is aimed narrowly at a court ruling – just as Proposition 218 was.

Sinclair Paint Co. v. Board of Equalization was a 1997 court ruling that upheld regulatory fees on manufacturers of lead paint to pay for programs to assist children subject to lead poisoning. The intent of Prop. 26 is to outlaw fees imposed generally on an industry to pay for the mitigation of problems created by that industry's products, without tying the fees to specific impacts. In a nutshell, Proposition 26 takes the "special benefit" language from assessments and applies them to fees.

Given the fact that local governments in California are already expected to calculate overall costs and fair-share costs anyway, Proposition 26 should not disrupt daily life too much. Impact fees are exempt but they are already covered by other laws requiring developers to pay their fair share. So far as planning fees are concerned, most local governments already do cost analyses periodically and adjust their fees accordingly.

But Proposition 26 does target fees not tied to a specific benefit or service – like the polluter fees upheld in Sinclair Paint. This could be disruptive and push the cost of many semi-targeted government programs back onto the taxpayers. 

"Proposition 26 requires proportionality accounting on an individual user basis," says Bill Higgins, land use lobbyist for the League of California Cities.

Take, for example, the practice of levying a general plan fee on development permit applicants – one way that cities and counties in California pay for general plan updates. A general plan fee is generally calculated as a percentage of the project's cost or volume (units, square footage). How a general plan update specifically benefits a development applicant is anybody's guess. Similarly, Proposition 26 may threaten the Coastal Commission's practice of charging fees to developers, homeowners, oil companies, and other permit applicants in order to mitigate the impact of change along the coast generally. 

One interpretation of Proposition 26 is that it creates the latest business development opportunity for nexus consultants – fiscal experts who work for local governments calculating the "nexus" between the cost of a government program and the benefit or impact of that program on specific landowners, developers, or other applicants.

More broadly, however, Proposition 26 is a game-changer in the sense that it implies that any charge from the government is a tax – unless that government can prove that it is not a tax as defined by Proposition 26. This provision will surely cause local governments to spend a lot of time and effort examining all fees to see whether they are exempt. Conversely, it will also provide an opening for taxpayer advocates in arguing that a wide variety of fees are really taxes.

There's one other class of fees that could be thrown out under Proposition 26: fees adopted by the Legislature after Proposition 26 was placed on the ballot but did not get a two-thirds vote for passage. One example is AB 401, by Sen. Lois Wolk (D-Davis) that levied fees on renewable energy plants to defray regulatory costs.

Also caught in this legislative vise is the complicated gas-tax/sales-tax swap from last spring, which could be unraveled by the combined passage of Prop. 26 and Prop. 22, which protects local government transportation revenues. This may be a good thing for local governments seeking to keep their gas-tax money – but a bad thing for transportation agencies (whose boards often consist of local elected officials) trying to use the gas sales/sales tax swap to obtain state transportation funds.

Last spring's swap was a complicated deal that eliminated the state sales tax on gasoline but increased the gas tax and used some of the increased funds to pay off state transportation bonds. Prop. 22 may block part of the swap – and because the deal increased the gas tax (even though it eliminated the sales tax) it may be blocked by Prop. 26. Nobody really knows what the impact will be.

Which is, I suppose, part of the "fun" of governance in California, if you want to call it that. In any given election, nobody quite knows who'll get something on the ballot – or whether voters will approve it – or quite how things will shake out. Proposition 26 is the latest skirmish in a long-running war waged by taxpayer advocates on governments' source of funds. But it's a never-ending war. Every time the taxpayers plug what they see as a leak in the system, the governments figure out how to punch a hole somewhere else. The result is a system that is more and more complicated – and harder to figure out. Good for nexus consultants, maybe not for the rest of us.

--Bill Fulton
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