Though it wasn't likely to make headlines in 2009, San Diego taxpayers won a decisive courtroom victory against an illegal city fee last fall, but City Hall now stands in the way of achieving final justice. Rather than allow back-door tax grabs to linger one more day in our community, the city of San Diego should quickly make proper amends for its illegal practice of "double taxation."
At issue is the $25 processing fee that was imposed by the city of San Diego in 2004, ostensibly to recover the collection costs of the Rental Unit Business Tax (RUBT), which brings in $11 million a year for local coffers. The processing surcharge, which raised approximately $3.5 million a year, was originally part of a proposal by the city manager to offset a $17.3 million state budget cut, leaving many residents to rightfully question its true purpose. Shortly after its implementation, the fee was challenged in court by two landlords in 2006, and has since been found to be violating Proposition 218 and the state Constitution because it was not approved on sound legal footing.
In August 2009, the Fourth District Court of Appeals ruled unanimously that the city of San Diego levied not a processing fee but rather an illegal tax, subject to voter approval. Generally, for a fee to be exempt from being defined as a tax that requires a public vote, fees must "not exceed the reasonable cost of providing the service or regulatory activity for which the fee is charged" and must not be levied for general revenue purposes. The court found that the processing fee was neither a regulatory fee that aims to control behavior (the city did not argue it as such), nor a service fee that confers a special benefit or privilege (the administrative duty of tax collection is not a special benefit). Rather, the court declared the fee to be a "general tax." Prior to the levying of the processing fee, a portion of the business tax proceeds were already being spent on tax collection and program administration, and levying the new fee simply allowed for the city to shift costs and disburse all the tax proceeds for nonrelated services, effectively creating a business tax increase.
San Diego taxpayers should commend the steadfast conviction of Sidney Weisblat and Kenneth Ledgerwood, the landlords who objected to the fee and sued the city of San Diego for a refund in 2006. Though the plaintiffs won their day in court, City Hall has been reluctant to move forward on the matter in an equitable way. The collection of the processing fee has been indefinitely suspended for landlords as well as business owners (whom were also required to pay the fee), however a one-year fee refund was limited by city officials to only be applicable to landlords. Making matters worse, city officials initially suggested that landlords should be required to file a cumbersome "claim" with the city to receive their refund, and the City Council had discussed behind closed doors whether to actually challenge the court decision last September. Taking decisive action on behalf of taxpayers, City Councilmember Carl DeMaio gained council approval to forgo the appeal and the claim policy last fall, opting instead for a fee "refund" for more than 75,000 individuals worth up to $1 million.
There is no valid reason why the city of San Diego, which chose to suspend the processing fee for both landlords and business owners, would now interpret the court's ruling as only being applicable to landlords. Attorney Edward Teyssier, the lawyer who represented Weisblat and Ledgerwood in court, has strong opinions on the matter; he believes that "if the fee is unconstitutional for anyone, it is unconstitutional for everyone." In a recent interview with this author, Teyssier stated that he has since filed a class-action lawsuit on behalf of city business owners who have not received fee refunds, and expects to appear before a judge by this summer. Business owners who are interested in learning more about joining the lawsuit can find more information at stopfee.org.
The processing fee is a prime example of a "collective action problem" confounding taxpayer in countless municipalities -- where there are diffuse costs (small fees and taxes on thousands of people) and concentrated benefits (receipts solely benefitting local government), it is difficult to organize the affected parties and defeat bad policy. The incremental, back-handed approach to raising revenue isn't new, nor is it exclusive to the city of San Diego, but that doesn't mean it should be used. Teyssier characterized the pecuniary pursuit of government as "getting as many feathers as you can from the goose with the minimum amount of squawking." Given the recent tax hikes passed in Sacramento and Capitol Hill, no words seem truer today for San Diego taxpayers.
As I've stated previously in this column, it's never too late to make the right decision, and for the city of San Diego, the writing is on the wall: refund the processing fees for all businesses today. It will save precious public resources from being wasted in the court room, and it would build trust with business owners who have had little relief from our economic turmoil. San Diego taxpayers have proven their mettle, and shown that they will fight to preserve their rights by any means necessary; City Hall should acquiesce and dutifully close the book on this disgraceful saga.
Vasquez is the senior policy analyst at the National University System Institute for Policy Research.