Utility tax constitutional despite 'taxation without representation' claims

Staff writerOctober 28, 2013 

Boston Tea Party protesters hated taxation without representation.

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“No taxation without representation” has become a battle cry of late by customers of Tacoma Power located outside of the city limits of Tacoma.

At issue is whether it’s legal or fair for Tacoma Power to pass on the cost of the utility earnings tax to all of it’s customers, not just those within the city.

Tacoma Proposition 1, on this year’s ballot, asks Tacoma voters whether to raise the utility earnings tax by 2 percentage points, from a 6 percent to an 8 percent tax. The money would pay for repairs and upgrades to the city’s long-neglected residential roads and includes money for projects to make crosswalks safer near schools.

During public meetings in University Place and in Lakewood, speakers compared the proposed utility earnings tax to “taxation without representation.” Pierce County Council is slated to weigh in Tuesday.

Twenty four years ago, a group of residents served by Vancouver’s water and sewer utility made the same argument to the state Supreme Court -- and lost.

In 1989, the state’s high court ruled that Vancouver could pass on the cost of utility earnings taxes to all of its customers, most of whom were located outside of the city limits.

Much like Tacoma Power, the city of Vancouver’s utility served customers both inside and outside of the city limits. About 46 percent of Tacoma Power’s customers are located outside of the city.

Those outside of Vancouver called it “taxation without representation” because nonresidents could not vote in the city’s municipal elections.

Instead, the court found that rural residents received the benefit of fair utility rates from the city-owned utility:

"The court also found that the rates charged to nonresidents were fair and reasonable and that the Utility would be justified in charging the same rates even if the gross receipts tax had not been factored into the rate structure."

In our example, all Tacoma Power customers pay for the 6 percent utility earnings tax. The amount is embedded in the rates we pay. The money makes up more than one in five dollars the city receives every year to pay for general government expenses, from copy paper to librarian salaries.

Customers of Tacoma Power have the benefit of lower utility rates, about 30 percent cheaper than area competitors, according to the city of Tacoma.

If Tacoma voters pass Proposition 1, electric rates would not increase right away because of the tax. TPU Director Bill Gaines has said the utility won’t seek a rate increase in 2014. But he did say eventually the ratepayers will have to foot the bill.

So far, Tacoma City Council members have said they are not convinced. Private companies can pass along expenses of a utility earnings tax to customers only after approval from the state Utilities and Transportation Commission. If the private utility can convince the UTC that the tax is an expense, the entire cost can be passed through to customers. Not so with Tacoma Power. Rates at the city-owned utility can only be increased with City Council approval.

Even though those outside of Tacoma can’t vote here and have nobody on the City Council who represents them, they can still comment on rates during public meetings.

The state Supreme Court ruled the utility earnings tax constitutional:

The plaintiffs are provided with procedural safeguards, including the right to attend and participate in public hearings, which satisfy constitutional due process requirements. In addition, the courts protect nonresidents from any potentially discriminatory, arbitrary, or unreasonable rates imposed by the Utility. Plaintiffs' inability to vote in Vancouver's municipal elections does not render the tax unconstitutional. Bona fide residential requirements placed on the right to vote do not violate the equal protection clause even where a tax levied on services provided imposes an indirect burden on nonresident customers. We hold that the City of Vancouver's utility tax is constitutional.

Read the full 1984 state Supreme Court ruling here.

Kate Martin: 253-597-8542

kate.martin@thenewstribune.com

@KateReports

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