When a Tax Increase Isn’t a New Tax

High court rules incidental, minimal tax revenue increase doesn’t violate TABOR

According to the Colorado Supreme Court, legislation that causes an incidental and de minimis increase in tax revenue does not amount to a “new tax” or “tax policy change” under the Taxpayer Bill of Rights, and consequently doesn’t require voter approval.

The decision issued April 23 in TABOR Foundation v. Regional Transportation District settles a 2013 lawsuit against RTD, Scientific and Cultural Facilities District and Colorado Department of Revenue that claimed House Bill 13-1272 violated TABOR because it resulted in a revenue increase without voter consent. The legislature passed the bill to realign sales taxes levied by RTD and SCFD with the state sales tax. Although the districts and state share a taxable base tangible personal property — the taxes levied had diverged over the years due to various differing exemptions.

House Bill 1272 removed exemptions from the districts’ taxes on sales of cigarettes, direct-mail advertising materials, candy, soft drinks, and nonessential food containers. Its passage resulted in a projected tax revenue increase of 0.6 percent for the districts, which amounted to less than 1 percent of SCFD’s budget and one thousandth of RTD’s budget. The TABOR Foundation sued the districts, claiming the removal of exemptions constituted a “new tax” or “tax policy change” because they resulted in the districts taxing things they had not before.

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But the Supreme Court disagreed, and upheld the districts’ analysis of House Bill 1272’s purpose to simplify tax collections and ease administrative confusions associated with the exemption divergences. The court concluded the revenue increase was incidental and de minimis, so it did not violate TABOR.

“The TABOR Foundation disagrees with the state that a tax on something that has not been taxed before is somehow not a new tax,” said Penn Pfiffner, the TABOR Foundation’s chairman, in a news release. “Despite the court’s ruling, we have not changed our minds and are disappointed the court continues to expand loopholes that did not exist in the first place. TABOR does not have a de minimis loophole, but somehow the court found one.” 

William Perry Pendley, president of the Mountain States Legal Foundation representing the TABOR Foundation, confirmed to Law Week the petitioners cannot appeal the decision to the U.S. Supreme Court.

The Colorado Attorney General’s Office, which represented the respondent, did not respond to a request for comment by press time.

In its analysis, the Supreme Court examined the 0.6 percent revenue increase for the districts in the context of their total budgets. According to a contemporary fiscal analysis, the projected increase would equate to an additional $2.7 million for RTD and $250,000 for SCFD. Because the additional revenues constituted such a small portion of each district’s budget, the court deemed them de minimis.

“While the Bill starts taxing some items, it stops taxing others, thus suggesting that increasing revenue is only an incidental effect,” wrote Justice William Hood in the opinion, later adding “although TABOR restrains government, reasonableness tempers TABOR’s grip.”

During oral arguments in November 2017, Steven Lechner of the Mountain States Legal Foundation argued the tax revenue increase was not merely incidental. As evidence, he pointed to the districts’ planning for how to use the additional revenue once the fiscal analysis came out.

To inform its decision, the court looked to precedents in Mesa County Board of Commissioners v. State and Barber v. Ritter. The 2009 Mesa decision found that policy modifications resulting in a de minimis increase in a district’s revenues could not be construed as a “tax policy change.” 

“To apply the limit in such a broad manner would make any legislative action in the revenue arena nearly impossible and cripple the government’s ability to function,” read the opinion.

The 2008 decision in Barber interpreted the difference between a fee and a tax, ruling that if a “primary purpose for the charge is to raise revenues for general governmental spending, then it is a tax.” 

In ruling on TABOR Foundation v. RTD, the court recognized the limited usefulness of the two precedents, because the revenue in question does not raise confusion over whether it is a fee or a tax, and because the Mesa case did not seriously consider whether the tax increase at issue was a tax policy change.

“While not directly on point, Mesa County and Barber weigh against the Foundation’s position that any bill removing a tax exemption and causing an increase in tax revenue — even an incidental and de minimis increase—is a “new tax” or a “tax policy change” requiring voter approval,” Hood wrote.

The TABOR Foundation also asked the Supreme Court to reconsider the established beyond-a-reasonable-doubt standard applied to statutory challenges under TABOR and instead adopt a plain showing standard. But the court did not reach that issue in its decision.

“Because the Bill’s projected revenue increase is incidental and de minimis, the Foundation has not convinced us — either beyond a reasonable doubt or otherwise — that the Bill created a ‘new tax’ or effected a ‘tax policy change,’” Hood wrote. 

— Julia Cardi

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