The Redding City Council adopted a budget that included a “payment in lieu of taxes” to be paid by its municipally-owned utility to the city’s general fund. Taxpayers sued the city on the basis that the “payment” was an unconstitutional tax because it paid for general services and was enacted absent the voter approval required by the state’s Proposition 26. An appellate court agreed with the taxpayers that the “payment” was a tax requiring voter approval unless the city proved that the amount collected was necessary to cover the reasonable costs of providing electrical service. The California Supreme Court agreed to review the case and PLF filed an amicus brief supporting the taxpayers.
In 1996, California voters passed Proposition 218 to amend the state constitution to require that new special taxes be approved by two-thirds of the voters subject to the proposed tax, with the exception of fees for gas or electrical service. Local governments responded by relabeling special taxes as fees. So California voters again amended the constitution via Proposition 26, which defined “tax” as “any levy, charge, or exaction of any kind imposed by a local government” and eliminated the gas or electrical service fee exception. The only remaining exception to the requirement for voter approval is a charge imposed for a specific government service or product that does not exceed the reasonable costs to the local government of providing the service or product.
The City of Redding owns a municipal utility to provide electrical service to homes and businesses within the city. The city council approved a rate increase, then, six months later imposed a “payment in lieu of taxes” to “obtain funds” to cover general city budget items. The “payment,” calculated as a flat percentage of the utility’s assets, is equivalent to the amount of an ad valorem tax that would be owed by a privately-owned utility. The utility transfers revenue generated by the “payments” to the city’s general fund to pay for general city operations. Taxpayers sued because these “payments” were really taxes that were never approved by the voters as required by Proposition 26. The case is now pending before the California Supreme Court, where PLF filed an amicus brief explaining the constitutional requirements for voter-approval of exactions and how those requirements promote transparency by eliminating hidden taxes.