December 2, 2008

Florida Rep. Trying to Call Cigarette Tax a "Fee"

by Joseph Henchman

Florida Rep. Jim Waldman (D-Coconut Creek) is seeking to raise the state's cigarette tax by $1 per pack, to $1.339. Tax Foundation Chief Economist Patrick Fleenor explains why such a tax is probably far beyond any externality imposed by cigarette smokers, and is essentially a way to stick a disfavored group with punitive taxes.

What is especially disturbing about Rep. Waldman's proposal is that he is calling it a "user fee." Government-imposed charges on cigarette purchases are taxes, not fees. ATR notes that Gov. Charlie Crist has played the same game. Waldman expresses ambivalence about the tax/fee distinction:

To me, it doesn't really matter. A tax is a tax, a user fee is a tax. It's the same thing. They like to hide behind the semantics. I choose not to. I'm calling it a user fee only because I have spoken to my Republican colleagues who said they would support it if it was called a user fee.

It does matter, in two respects. First, because the American antipathy to taxes is so deeply rooted in our nation's history, lawmakers often seek to raise revenue in ways to avoid the "tax hiker" label even if it requires calling an obvious tax a "fee." That's what's happening here. These shell games undermine transparency by making it harder for citizens to understand the cost of government, and it can encourage them to demand more government services than they are actually willing to pay for. That, over time, can undermine fiscal stability and neutrality.

Second, Florida courts would reject out-of-hand Rep. Waldman's claim that it doesn't matter. Florida's Constitution allows local authorities to impose fees but not taxes, and a series of court decisions have drawn a careful line between the two in order to enforce this provision. See Fla. Const. art. 7, § 1(a) ("All other forms of taxation shall be preempted to the state except as provided by general law."); Alachua County v. State, 737 So.2d 1065, 1067 (Fla. 1999) ("The Florida Constitution preempts to the State all forms of taxation except ad valorem taxes and those authorized by general law."). Florida court rulings have looked at two factors:

• First, one must ask whether the charge is "bargained for [or] unilaterally imposed." Florida Power Corp. v. City of Winter Park, 887 So.2d 1237, 1240 (Fla. 2004).
  • See also Alachua County, 737 So.2d at 1068-69 ("Clearly, Alachua County conferred nothing to the utilities and there was no bargained-for exchange upon which a franchise could be found; rather, Alachua County has attempted to impose a forced charge on the utilities. Thus the trial court properly ruled that the Privilege Fee is not a franchise fee.");
  • Town of Belleair v. Florida Power Corp., 897 So.2d 1261, 1261 (Fla. 2005) ("[C]ontinued imposition of the franchise fee without the support of the underlying agreement constituted an illegal tax....");
  • State ex rel. Gulfstream Park Racing Ass'n v. Florida Racing Comm'n, 70 So.2d 375, 379 (Fla. 1953) ("In common parlance a tax is a forced charge or imposition, it operates whether we like it or not and in no sense depends on the will or contract of the one on whom it is imposed.").
• Second, one must ask what the purpose of the charge is.
  • If the charge is not "reasonably related to the government's cost of regulation or the rental value of the occupied land," Florida Power Corp., 887 So.2d at 1241, it cannot be considered a fee.
  • See also Jacksonville Port Authority v. Alamo Rent-A-Car, Inc., 600 So.2d 1159, 1164 (Fla. App. 1992) (stating that a fee cannot be "a general revenue source for the support of a sovereign government").
• The second point—whether the revenue is used for general spending instead of a narrow group of beneficiaries—is generally considered the essential inquiry by most courts in the United States. Here's a quick list of relevant cases:
  • See, e.g., Safety Net for Abused Persons v. Segura, 692 So.2d 1038, 1041 (La. 1997) ("[A] tax is a charge that is unrelated to or materially exceeds the special benefits conferred upon those assessed.");
  • Chicago and Nw. Transp. Co. v. Webster Co. Bd. of Supervisors, 71 F.3d 265, 267 (8th Cir. 1995) ("[A] government levy is a tax if it raises revenue to spend for the general public welfare.");
  • San Juan Cellular Tel. Co. v. Pub. Serv. Comm'n of Puerto Rico, 967 F.2d 683, 685 (1st Cir. 1992) ("The classic ‘tax' is imposed by a legislature upon many, or all citizens. It raises money, contributed to the general fund, and spent for the benefit of the community.");
  • Brock v. WMATA, 796 F.2d 481, 488 (D.C. Cir. 1986) ("A levy is properly defined as a ‘tax' . . . when its principal purpose is to raise revenues.");
  • Roger D. Colton & Michael F. Sheehan, Raising Local Government Revenue Through Utility Franchise Charges: If the Fee Fits, Foot It, 21 Urb. Law. 55, 63 (1989) ("If the primary intent is to raise revenues, a measure is more likely to be considered a ‘tax.' If the level of the fee is totally divorced from any cost-basis, it is more likely to be deemed a ‘tax.'").

A $1 per pack government charge imposed on cigarette sales is both unilaterally imposed without bargaining and is used for the general fund not for regulatory purposes or to provide a service. Therefore, it's a tax. So, Rep. Waldman, it's more than just semantics. Referring to a government-imposed charge on cigarette sales as a "fee" instead of a "tax" undermines the transparency and long-term stability of Florida's tax system and comes into conflict with Florida case law.