Green Fees: the Challenge of Pricing Externalities Under State Law

• Publication year: 2021

97 Nebraska L. Rev. 168. Green Fees: The Challenge of Pricing Externalities Under State Law

Green Fees: The Challenge of Pricing Externalities Under State Law

Erin Adele Scharff(fn*)

ABSTRACT

Policymakers at the state and local level are increasingly interested in using market-based pricing mechanisms as regulatory tools. For example, at the state level, several states have recently considered state-level carbon pricing, while at the local level, municipal governments are increasingly turning to stormwater remediation fees to pay for the treatment of municipal runoff required by the Clean Water Act.

These regulatory programs are inspired by the insight of English economist Arthur Pigou, who suggested governments could price social costs into market transactions by imposing a tax. Such policies, however, are frequently subject to state court litigation challenging them as unlawful taxes. State law restricts both state and local governments' ability to enact taxes, but similar restrictions are often not in place to limit the enactment of regulatory actions or user fees. Unfortunately, state courts have struggled to appropriately classify these fees under existing state law doctrines.

Such legal instability makes state and local governments less likely to adopt such policies, even when there are strong arguments for doing so. This Article takes a critical look at current state law governing the distinction between user fees and taxes. This Article then argues that Pigovian levies do not fit neatly into either legal category under the definitions in place in most states. As a result, this Article proposes reforms to state user fee definitions that would bring needed clarity to user fee doctrine. Specifically, this Article suggests state courts recognize separate categories of user fees. One such category, price-based regulatory tools, would allow governments to impose Pigovian charges as user

1

fees so long as the charge was roughly commensurate with the externality costs or with the governments' expenses in abating the externality.

TABLE OF CONTENTS

I. Introduction .......................................... 169

II. User Fees v. Taxes .................................... 173
A. The Variety of User Fees .......................... 175
B. Legal Differences Between Taxes and User Fees . . . 178
1. Political Process Restrictions ................... 179
2. Restrictions on Local Taxing Authority ......... 180
3. State Law Requirements of Tax Uniformity . . . . 181
4. Tax-Exemptions ............................... 182
5. Federal Law ................................... 182
C. The Doctrine Does Not Readily Distinguish Taxesfrom User Fees .................................... 185
1. Single-Factor Approaches ...................... 186
2. The Multi-Factor Approach .................... 186
3. The California Approach ....................... 190
4. Federal Court Approaches ..................... 194

III. Pigovian Taxes v. Pigovian User Fees ................. 195
A. Emissions Taxes .................................. 197
1. Emissions Taxes in Theory ..................... 197
2. Emissions Taxes in Practice ................... 199
3. Emissions Taxes Under State Law ............. 201
B. Stormwater Remediation Fees ..................... 205
1. Stormwater Remediation Fees in Theory and Practice ....................................... 205
2. Stormwater Remediation Fees Under State Law ........................................... 206

IV. A New Way Forward .................................. 209
A. The Need for Reform .............................. 209
B. The Proposal ...................................... 211
1. Classic User Fees .............................. 213
2. Traditional Regulatory Fees ................... 214
3. Price-Based Regulatory Tools .................. 214
C. Problems with the Proposal ........................ 219
1. Greater Revenue Authority Is Undesirable ..... 219
2. Voter Preferences/Constitutional Interpretation. 221
3. Measuring Externality Costs ................... 222

V. Conclusion ............................................ 223

I. INTRODUCTION

State and local lawmakers are increasingly experimenting with regulations that seek to change behavior through market mecha-

2

nisms.(fn1) In other words, governments are attempting to increase the price for engaging in behaviors that they want to discourage and charge people for the ways their behavior contributes to shared problems. At the same time, governments are also increasingly looking for non-tax revenue.(fn2)

As such policies become more commonplace, state courts increasingly struggle to characterize these policies under existing state law. Stormwater remediation fees, put in place to allow municipal sewage systems to meet Clean Water Act standards, have been repeatedly challenged as illegal taxes.(fn3) In Missouri and Michigan, state courts have struck down such fees, leaving local governments with significant infrastructure costs and limited financing options.(fn4) Ongoing litigation challenges California's carbon auction as an illegal tax under California law.(fn5) Philadelphia's soda tax recently survived a challenge claiming that it conflicted with Pennsylvania's sales tax.(fn6) This legal instability makes state and local governments less likely to adopt such policies, even when there are strong arguments for doing so.

Whether such charges are treated as taxes or user fees depends on state law tests constructed to deal with more traditional types of fees and taxes.(fn7) I will provide more detail on how states define the difference between taxes and user fees later in this Article, but for now, some simple examples will help illustrate these two categories. Property taxes, like income taxes and sales taxes, are treated-unsurprisingly-as taxes. Business or occupation licensing charges measured by gross receipts are also treated like taxes. However, flat business or

3

licensing charges levied to recoup the cost of regulating a specific industry are treated as fees, as are charges a government collects to pay for water usage, trash collection, and other municipally-provided services. Traditionally, user fees are payments for benefits (either goods or services) provided by a government.

Many charges do not fit neatly into either category. For example, a toll is traditionally thought of as a user fee. Paying a toll confers a benefit: the right to use a particular roadway. However, technology increasingly allows for variable pricing in tolls. Variable pricing "charg[es] the customer based on how much he or she values the service, instead of the cost to provide the service."(fn8) Such a pricing model may allow governments to generate revenue for "general transportation needs and a range of other benefits," and if the revenue serves this greater purpose, a toll can be converted to a tax.(fn9)

In many states, stormwater remediation fees are treated as user fees just like any other sewer-related charge; in Missouri and Michigan, such charges are taxes.(fn10) These legal classifications matter for a number of reasons. In many states, there are procedural hurdles for imposing taxes that do not apply to user fees(fn11) and in most states, local governments have less authority to impose taxes than user fees.(fn12)

In many cases, courts will treat regulatory pricing as a tax, not a user fee.(fn13) This is true for several reasons. First, the benefit the payor

4

receives is not a typical user fee benefit. Rather, the benefit conferred could be characterized as the ability to harm a public good. Think about garbage fees: if a garbage fee just reimburses a government for providing trash hauling and disposal, it is clearly a user fee. The government provides a waste management benefit. However, if the government seeks to recover not just the direct costs of garbage disposal but also the indirect costs of trash collection (land contamination or emissions from garbage incineration), these are costs not borne directly by the person who created the trash or the government hauling it away. Rather, society as a whole bears the costs of this kind of garbage-based pollution. If we are to say that the government is charging the user for a benefit, it is for the license to create these problems. Second, the relationship between the size of the benefit to the user and the cost of providing the benefit (or allowing the harmful behavior) is more complicated than that of a typical user fee. In the classic user fee context, the user fee charged reflects dollars that a government spends directly. In the regulatory context, however, the government may not bear the cost of the harm directly. For example, a driver who adds traffic congestion harms other drivers, but the government does not incur any direct additional costs by virtue of that congestion.(fn14) (Of course, there may be indirect costs if congestion leads local residents to advocate additional lanes and other roadway improvements.)

This Article discusses how courts determine-and how courts should determine-whether a charge is a user fee or a tax. I argue, first, that courts should be more precise in recognizing the diversity of government charges encompassed by the user fee doctrine. Second, I argue that state courts, consistent with their interpretive authority, should include in the definition of user fees those charges that are levied to offset the costs expended by a government in combatting an...