The California initiative process has a knack for creating confusing, vague, and incomplete law. Proposition 26, which passed on November 2nd, with 52.5% of the vote proves this point.  Proposition 26 requires that certain state and local fees now be considered taxes, and be approved by a 2/3 vote. For local governments, this means that new fees or increases to existing fees, which used to require a majority vote of the city or town council, now require a 2/3 vote of registered voters.

So, after passage of Proposition 26, what is a fee and what is a tax? How can a city make sure that it is complying with the new law? Unfortunately, there are no clear-cut answers. However, we can offer our best thinking on this subject.

The fees local governments impose on residents and businesses generally fall into three categories:

Users Fees
.  User fees are simply fees for the cost of a service, like garbage fees.

Regulatory Fees
.  Regulatory fees require businesses or people to pay for programs that achieve particular public goals or help offset the public or environmental impact of certain activities. This category includes, for example, alcohol fees imposed on the sale of alcohol to help pay for nuisances associated with alcohol.

Property Fees
. Property fees are imposed on developers to improve roads and infrastructure in connection with new developments.

Before Proposition 26, the fees above would have all simply been considered “fees” and would be subject to a majority vote.  Now however, some of these would be considered “fees” and some would be considered “taxes.”

If you are trying to sort through what Proposition 26 means for your public agency’s fees, here are some things to consider:

Was your fee passed before November 2nd, 2010?

If yes, then it is likely to be fine – as is.  If however, the fee included a Cost Of Living Adjustment (COLA), it may be considered a tax going forward, and may now be invalid or subject to a 2/3 vote.

If the fee is to pay for a specific service or program, is the fee directly related to the cost of providing that service or program to the specific fee payer?

If yes, then it is likely to be defined as a “fee” and subject to a majority vote of the Governing Board/City Council. However, the public agency may be responsible for proving that the fee is equal to the cost of providing the program or service and not more.

Does the fee help pay for programs or offset damages to residents or society at large?

If so, this is now likely defined as a “tax” and subject to a 2/3 vote of the people.

If the fee is a fee on developers, does the fee benefit the developer directly or does it benefit business in general or the city as a whole?

A fee that benefits a developer directly, like improving roads to new developments, is still considered a “fee”. However, fees that benefit shopping districts, or cities as a whole, like fees that provide public parking, street lighting, or marketing of shopping districts, may now be considered “taxes.”  If so, these would be subject to a 2/3 vote of the people.

The League of California Cities has convened a working group of city attorneys to analyze Proposition 26 and make suggestions.  There will also likely be a number of questions that will be answered in court. Proposition 26 itself may not be clear, but what is clear is that when the dust settles, Proposition 26 will have made it more difficult for cities to raise General Fund money.

TRAMUTOLA creates innovative solutions for the budgetary problems facing cities and other local public agencies.  We will stay on top of Proposition 26 developments and are happy to answer any questions that we can. You can contact us at (510) 658-7003 or at