In a nutshell:
- The Snyder administration’s proposal for raising revenues to address Michigan’s water infrastructure needs would have every customer attached to a public water system contribute annually to a water infrastructure fund.
- The proposal amends an existing law that authorizes a state-assessed user fee to yield the needed funds.
- In light of the 1998 Bolt decision, it appears that the proposal would impose not a fee, but a locally-levied tax. Although the revenues would be deposited into a state fund, the proposal requires local public water systems to charge users for a revenue generating purpose.
Kudos to the Snyder administration for conceiving policy solutions that could improve the state’s deteriorating public water systems. In the wake of the Flint water crisis, the several PFAS contaminations that have popped up this year, and the report of the 21st Century Infrastructure Commission, it is clear that Michigan’s hidden water infrastructure is in need of major reinvestment. However, we think clarity on the details of this proposal is in everyone’s interest.
Part of the proposal to rebuild Michigan’s water infrastructure includes a state-assessed “user fee” on public water supply systems serving more than 1,000 customers. House Bill 5898 would amend the Safe Drinking Water Act, to put flesh on the bones of the plan, first introduced as part of the executive budget.
The bill directs the Water Asset Management Council to devise a new fee structure for the Michigan Department of Environmental Quality to implement. Different fees would be charged to residential and nonresidential accounts with a goal of the new fees, in the aggregate, generating not more than $110 million annually.
The bill suggests the fees can be passed on to customers, and sets limits on how much. It spells out how the revenue generated is to be dispersed, with a requirement that 80 percent of the revenue will be expended in the region in which it was generated.
We think the bill needs more clarity. The legislation would amend existing state-assessed water supply fees to alter the fee structure and use the revenues for broader purposes. But just because the original legislation (PA 399 of 1976) termed the charge a fee does not mean that it meets the modern definition of a fee.
The enactment of PA 399 predates 1978’s Headlee Amendment to the Michigan Constitution. When enacted, the difference between a tax and a fee was subtle and charges were often called fees to avoid the negative connotations of taxes.
The Headlee Amendment, among other intents, created a tax limitation. In doing so, the difference between a tax and a user fee took on much greater significance. Michigan’s courts have made it clear that they must determine the true nature of the issues before them and not be misled by legislative legerdemain.
Because the fee would be assessed on “public” water systems created and administered by local governments, we must assess whether those systems meet the definition of a local government. Also, because customers would be compelled to pay the “fees,” we must assess whether those amounts constitute a tax. It seems to us the proposal asks local governmental entities to impose charges that meet all of the court’s own definition of a tax and none of the court’s definition of a user fee.
A Fee or a Tax?
Provisions in the Michigan Constitution have led the courts to develop standards to differentiate fees from taxes. These are meant to determine when local governments are required to seek voter approval for new taxes, and apply as well to differentiating state fees from taxes.
The Headlee Amendment attempted to limit local tax revenues in two ways. First, it endeavored to control the property tax burden, the primary means of funding local government in Michigan, by limiting net growth in the tax yield on a unit-wide basis. Second, and more significantly for this case, it required voter approval for the levy of new local taxes or increasing the rate of existing local taxes. Section 31 of Article IX provides:
Units of Local Government are hereby prohibited from levying any tax not authorized by law or charter when this section is ratified or from increasing the rate of an existing tax above that rate authorized by law or charter when this section is ratified, without the approval of a majority of the qualified electors of that unit of Local Government voting thereon. . .
Section 31 applies only to the levy of local taxes; state taxes do not require voter approval.
This provision has come under some scrutiny over the question of taxes versus fees. In the 1998 Michigan Supreme Court decision, Bolt v City of Lansing, the court laid out three criteria to distinguish a fee from a tax. The court ruled that the key characteristics of user fees:
- Must serve a regulatory purpose rather than a revenue-raising purpose;
- Must be proportionate to the necessary costs of the service or commodity, and imposed on those benefiting from the right/service/improvement supported by the fee; and
- Are voluntary in nature.
In contrast, and by implication, the main criteria distinguishing a tax:
- Is to be levied to raise revenue for the general operation of government;
- Is to be levied to benefit the general public; and
- Is compulsory in nature.
A fee may be thought of as a charge that permits an individual or other entity access to a government service or to a privilege granted by government, whereas a tax simply underwrites the provision of governmental services available to anyone, whether the tax has been paid or not. For example, a toll on a bridge or highway permits a specific individual access to the bridge or highway and is, therefore, a fee. On the other hand, a gasoline tax, which also pays for bridges and highways, confers no special privilege and is, therefore, a tax.
While the legal definition as it pertains to Michigan government was created because of constitutional provisions that affect local government, those legal definitions apply equally to both state and local governments.
It’s a Tax
How shall we judge the proposed “user fee” on public water supply systems using the parameters laid out by Michigan courts?
The charge does not serve a regulatory purpose. It is, in fact, levied to raise revenue to fund water and sewer infrastructure repair and replacement.
It is in no way proportional to the cost of the water and sewer services. It promises that 80 percent of the revenues will be used to improve water and sewer quality in those places served by public systems. The fact that the other 20 percent could be used elsewhere means that it does not qualify as a fee.
And it would be compulsory in nature. It would be applied to all customers residing in parcels receiving water and sewer services from public systems. The proposal does not allow parcel owners or individuals to opt out of paying the charge.
The suggested user fee would be, in fact, a tax levied only in communities served by public water systems.
Water and Sewer
All of this may seem like hair-splitting to those who must pay. However, the implications of a state-assessed or locally-assessed charge and of a user fee or a tax carry great significance in the constitutional system established by the Headlee Amendment. The state can create charges without seeking voter approval. Local governments must gain their consent to levy new taxes.
Michigan’s public water and sewer systems are in need of improved asset management, infrastructure upgrades and other capital improvements. Clarity and openness about the governor’s proposal to the fund those much-needed improvements is needed. It currently seems that the plan would create a local tax levied only in those places served by public water systems, not a user fee. If the intent is to do something different, the bill should be amended to reflect that intent.