Minnesota Supreme Court hears arguments in case that could limit use of fees to raise revenue
Last week the Minnesota Supreme Court heard oral arguments in a challenge to St. Paul’s right of way maintenance (ROW) fee. The case presents the Court with an opportunity to define more clearly when a revenue measure is a tax versus a fee.
A clear distinction between a tax and fee is important in order to ensure state and local revenue measures follow constitutional and statutory limitations on taxation. These limitations exist to help guarantee a fair, accountable and transparent tax system to the people of Minnesota. But more and more cities are “diversifying” their revenue streams by imposing fees, using the fee revenue to fund core public services unrelated to the fee, and, thereby, avoiding taxpayer protections provided for in the state’s constitution and statutes.
Case law is limited on this question. Courts rarely hear a challenge to a fee because, even if a fee is improper, it is usually only a small charge and not worth the legal cost and hassle of mounting a challenge.
For instance, as a Minneapolis resident, I pay a questionable 4.5 percent utility franchise fee on my Xcel Energy bill—$2.65 on my last bill—that the city readily admits “help pay for core services” that are unrelated to regulating Xcel. Paying that fee for a decade is still cheaper than paying for just one hour of an attorney’s time to challenge it.
But, in the case before the Court last week, the fee was very large and undeniably unfair. St. Paul charged a $15,706 ROW fee to the First Baptist Church of St. Paul—the oldest church in St. Paul, a church primarily ministering to Burma refugees and, being downtown, a church that provides substantial human services to the homeless. By comparison, the 25-story UBS Plaza was charged $5,458.
The size of the fee and the city’s obstinacy in refusing to negotiate something fairer presented the Court with a unique opportunity to hear a challenge to a fee and bring clarity to the law.
Center of the American Experiment recognized the uniqueness and importance of this case last fall and decided to file an amicus brief to support the churches challenge.
Our brief highlighted the importance of the Court crafting a clear test to establish whether a charge is a tax or a fee. We referenced two cases from the 4th Circuit and the State of Washington that offered such test.
During oral arguments, comments from Justice Dietzen suggests that the Court may indeed be on track to articulate a clearer test. Dietzen cited a Massachusetts case, Emerson College v. Boston, in which Emerson College successfully challenged a city fee for providing fire protection services. In that case, the Massachusetts Court outlined a clear set of “traits that distinguish a tax from a fee.”
The Emerson College case also speaks to a hypothetical that Justice Stras posed to Jack Hoeschler, the attorney who ably represented the churches. St. Paul’s ROW fee applied to the entire city of St. Paul. Stras asked whether a city could charge a fee to properties in a specific neighborhood to pick up litter if it was a particularly dirty neighborhood.
Stras’s question was an important one because it goes to how a city can charge property owners to fund special service districts like the Minneapolis Downtown Improvement District. Setting up a boundary in which a service is provided does not change the character of the service provided. Generally speaking, a charge to fund a special service district should be considered a tax because the services benefit the public in general. Clean and safe city streets are clean and safe to all who walk them.
In Emerson College, the Massachusetts Court was asked to decide whether buildings that require a higher and more costly level of fire protection could be charged more for fire protection through a fee. That court stated that “fees are legitimate to the extent that the services for which they are imposed are sufficiently particularized as to justify distribution of the costs among a limited group (the “users,” or beneficiaries, of the services), rather than the general public.” They then concluded the fire protection fee was not sufficiently particularized because the services protected not only the private property owner paying the fee, but also protected the building occupants and the surrounding property.
It may be possible that a boundary could be established to justify a user fee if the benefits of the services are sufficiently particularized, but it’s hard to think of such an example when the government generally exists to serve public purposes.
Throughout oral arguments, the questions posed to the St. Paul city attorney suggests the Justices are deeply skeptical of the city’s position. Though the churches might win, how they win will determine if the case has a broader impact on how state and local governments raise revenue.