High court looks at fund transfers from fee income

By Chris Bragg

Colorado suffered a massive economic downturn in the years following the 9/11 attacks, resulting in the Legislature’s worst budget shortfall since World War II.

But rather than schedule a citizen vote to raise taxes — or dramatically cut spending — the Legislature attempted a third option.

In a series of eight separate bills passed between July 2002 and June 2004, the Legislature took $442 million out of 31 of the state’s “cash funds” and put it into the state’s starving General Fund.

Was that transfer constitutional? That question came before the Colorado Supreme Court on Wednesday, June 11. If the court finds the Legislature’s action unconstitutional, the Legislature could be forced to pay $442 million in General Fund money back into cash funds.

That, however, seems somewhat unlikely, if statements and questions from the justices on Wednesday are an accurate measure.

The case, Barber v. Ritter, centers on the question of whether the Legislature violated the Taxpayer’s Bill of Rights, a constitutional amendment passed by Colorado voters in 1992 requiring a vote of the state electorate to change tax policy or to create a new tax.

Fees do not require such a vote. Fees, which go into cash funds, by their definition are imposed on only a specific segment of the population, to defray the cost of a specific government service. Taxes, which go into the General Fund, are imposed on the population at-large for general government services.

The major question before the court on Wednesday was whether a fee could be considered a tax retroactively. If a fee is collected as a fee, but the Legislature goes on to spend it as if it were a tax, does it become a tax?

“The court has never defined what a tax is,” said John F. Head, an attorney arguing on behalf of three taxpayers who brought the suit. “And I guess that’s why we’re here today.”

One of Head’s clients, Kerber’s Oil Company, was forced to pay money into a fund for every truckload of fuel it would buy. That fee would then pay for the reclamation of land contaminated by fuel leaks during its transportation.

Head didn’t argue the basic constitutionality of such fees, and acknowledged that the fees and taxes are certainly different in the way they are initially collected. Head argued, however, that if fees meant to pay for a specific government cost are transferred into to the Legislature’s General Fund, that’s a “tax policy change directly causing a net revenue gain.”

Such a transfer, without a vote of the people, is prohibited by the TABOR amendment, Head argued. After all, he argued, General Fund money is typically generated by taxes that are subject to the approval of voters.

Furthermore, Head argued the transfer had the effect of increasing taxes. After the Legislature raided the 31 cash funds, executive agencies had to raise fees to cover the inevitable shortages in those funds, he said.

“When they did that, they put the burden on the agencies to raise fees,” Head said of the Legislature. “There’s no other language for that, other than a net tax increase.”

And that net tax increase, enacted without a vote of the people, also violated TABOR, Head argued.

A number of justices, however, expressed skepticism that there’s any language in TABOR, or in Amendment 1, the legislative amendment that implemented TABOR, backing Head’s argument. And that bodes well for the state’s case.

“The language is not there … It simply is not there,” Justice Gregory J. Hobbs said . “Do we decide if something is a tax only after we see how
it’s spent?”

In response, Head cited the 1989 case of Bloom v. Fort Collins, in which a court found that the Fort Collins City Council could not spend excess transportation money generated from fees for its general operating expenses.

Monica M. Márquez, arguing on behalf of the state, responded that the case at hand was very different from Bloom. In Bloom, she said, the city of Fort Collins was taking money collected by transportation fees and spending it for general purposes on an ongoing basis.

“The critical aspect of that is the open-ended, ongoing nature,” she said.

Meanwhile, the eight pieces of legislation passed by the Legislature from 2002 to 2004 were based on a one-time emergency created by an economic downturn, she said.

“There’s no indication that the General Assembly intends to make a general habit of this outside of those very, very unique circumstances,” Marquez argued. She pointed out that money moved from a cash fund to the General Fund on a one-time basis “does not destroy the purpose or the essential character of the fee.”

However, Justice Allison Eid, one of the court’s more conservative justices, wondered aloud whether, if the court allows the option of transferring money from the cash funds, the Legislature would begin using it on an ongoing basis.

Marquez also argued that the transfers were not a net revenue increase because TABOR puts all revenue, both taxes and fees, in a “single coffer.” To treat the transfer as a revenue increase, she argued, would, in essence, be to “double-count” the cash fund revenue against TABOR limits.

In addition, Marquez also disputed Head’s assertion that there was any causal relationship between the Legislature’s transfer of certain cash funds to the General Fund and increases in certain fees.

A court of appeals previously ruled unanimously in favor of the state, largely based on the points similar to those presented by Marquez on Wednesday. The appeals court also found that Bloom lacked relevance to the Barber case because it was decided before the TABOR amendment was passed. Finally, the court of appeals found that ruling against the state would be harmful because it would hinder the basic function of government operations.

Anti-tax crusaders recently won a big victory in Colorado when Denver District Court Judge Christina Habas ruled a mill levy freeze passed by the Legislature in 2007 unconstitutional, because it violated TABOR by changing tax policy without a vote. That ruling could result in hundreds of millions of fewer General Fund dollars in coming years. That case also is likely to come before the Supreme Court eventually.