A Tax Is Not a User Fee; L.W. Reed

At all levels of government, a bipartisan effort to impose new or higher taxes and mis label them as seemingly less onerous "user fees" provides another example. Sometimes, a user fee is indeed a user fee. Other times, it's not that at all. Instead, it's a tax hike disguised by a misnomer. When someone chooses to use a govern ment service and pays for it, he's paying a user fee. Furthermore, what he pays should cover the cost of the service he is receiving; if it goes for something he isn't getting or doesn't want, then he's paying a little of both-a user fee plus a tax. Taxes differ from user fees in that paying them isn't a matter of choice and what you pay is not tied directly to what you're using. In principle, true user fees make a lot of sense, especially if you want people to under stand that nothing from government is truly "free." Indeed, the more government finances Lawrence Reed is president of the Mackinac Center for Public Policy (www.mackinac.org), afree market research and educational organization in Midland, Michigan, and chairman ofFEE's Board ofTrustees.

As a member ofthe Headlee Amendment Blue Ribbon Commission, he helped write the portion ofthe com mission's report dealing with the user fee versus tax issue in 1994. 21 itself through user fees instead of taxes, the less it looks like government and the more it gets out of the redistribution business and begins to resemble private firms operating in free markets. Instinctively, most people sense a certain fairness about true user fees. You pay for what you get, and you get what you pay for. Most people understand and support user fees for such things as toll roads, harbors and water ways, and even parks and recreational facili ties. If they understand that private enterprise would probably do a better job with these things, they know that at least a user fee approach for government services gives them an opportunity to make a rational economic choice: buy it if it's worth the price, patronize an alternative, or do without. All this makes for useful background to a victory that advo cates of liberty and sound economics recently won in my state of Michigan.

In 1978, Michigan voters approved the Headlee Amendment to the state constitution. Among other provisions, the amendment requires voter approval before a tax can be imposed or increased. In its 1994 report, the Headlee Amendment Blue Ribbon Commis sion found that a growing number of Michi gan townships, counties, and cities were skirt ing that requirement by mislabeling certain taxes "user fees." The commission recom mended that the legislature clarify the differ ence between a tax and user fee. The Michi gan Supreme Court now has done what the legislature never got around to doing. Here's how the case arose: 22 THE FREEMAN/IDEAS ON LIBERTY. JUNE 1999 In 1995, the city of Lansing adopted Ordi nance 925, known by many as the "rain tax." It provided for the creation of a storm water enterprise fund "to help defray the cost of the administration, operation, maintenance, and construction" of a··new storm water system that would separate sanitary and storm sew ers. Heavy rains had occasionally caused the city's combined sanitary and storm sewer sys tem to overflow, discharging untreated and partially treated sewage into the Grand and Red Cedar rivers. Fifty percent of the 30-year, $176 million cost of the system was to be financed through an annual "storm water ser vice charge" imposed on each parcel of prop erty in the city. The city maintained that the service charge was a user fee and therefore did not have to .. be put before the voters for approval. But Lansing citizen Alexander Bolt had read the constitution and knew a tax when he saw one.

Bolt challenged the Lansing "rain tax," tak ing the case all the way to the Michigan Supreme Court, a majority of which on December 28, 1998, declared, "We hold that the storm water service charge is a tax, for which approval is required by a vote of the people. Because Lansing did not submit Ordi nance 925 to a vote of the people as required by the Headlee Amendment, the storm water service charge is unconstitutional and, there fore, null and void." The decision established an important precedent that puts municipali ties on notice that the voters who approved the amendment intended for it to be enforced, not subverted. The Court's majority opinion refreshingly argues that "a primary rule in interpreting a constitutional provision . . . is the rule of 'common.understanding.'" In other words, in this case the intent of the voters should be of utmost importance, as opposed to some judi cially activist fabrication. The Court affirmed that the voters intended to place limits on taxes and governmental expansion.

Just what exactly distinguishes. a user fee from a tax? The Court advanced three main criteria: (1) a user fee is designed to defray the costs of a regulatory activity (or government service), while a tax is designed to raise gen eral revenue; (2) a true user fee mustbe pro portionate to the necessary costs of the ser vice, whereas a tax may not be; and (3) a user fee is voluntary, whereas a tax is not. The Lansing ordinance failed all three tests of a user fee. The Court determined that it constituted "an investment in infrastructure as opposed to a fee designed simply to defray the costs of a regulatory activity" and agreed with the dissenting opinion in a lower court ruling that the revenue from the charge was "clearly in excess of the direct and indirect costs of actually using the. storm water system." The Lansing rain tax applied "to all property own ers, rather than only to those who actually benefit," contrary to a genuine user fee. More over, the ordinance "failed to distinguish between those responsible for greater and lesser levels of runoff."

Most plainly, the rain tax was utterly invol untary. True user fees are only "compulsory" for those who choose to use a service, but Lansing property owners·in this case had "no choice whether to use the service" and were "unable to control the extent to which the ser vice" was used. The Court's majority concluded by quoting the Headlee commission report, "This is pre cisely the sort of abuse from which the Headlee Amendment was intended to protect taxpayers." Amen! The message is clear to Michigan munici palities: You now have no legitimate excuses for mislabeling taxes as "user fees." Be hon est. If it's a tax, put it before the voters as the Headlee Amendment requires and make your best case. You can't junk the constitu tion just because you want the money. It's a refreshing message that ought to be applied everywhere. [] The Reserve Requirement Debacle of 1935-1938 by Richard H. Timberlake T he principal thrust of Treasury-Federal Reserve monetary policy throughout the 1920s and 1930s was by turns restrictive, con tractionary, and depressive. Even as the econ omy was floundering helplessly in a financial environment of monetary austerity, no one in the Treasury-Fed bureaucracy seemed to understand the ongoing disequilibrium. Most economists and bankers could not grasp it either. Federal Reserve spokesmen claimed that "low" interest rates were a sign of mone tary ease and plenty of credit. Since market interest rates had almost disappeared into the woodwork, "money" was supposedly plenti ful. In fact, the quantity of money-the money the central bank was supposed to pro vide scientifically and opportunely to the economy-was suffocatingly inadequate.!