The Perils of Budget Balancing – or When to Let Sleeping Dogs Lie

Posted on August 2, 2012 by Susan Cooke

On June 14, the Washington Supreme Court heard oral arguments regarding the constitutionality of utilizing the proceeds from a state excise tax on motor vehicle fuel for non-highway related purposes.  The tax in question is the Hazardous Substances Tax which went into effect in its current form in 1989 as part of the Model Toxics Control Act and covers the first in-state possession of petroleum products, pesticides, and a number of chemicals, with “possession” defined as “control of”, and “control” as the power to sell or use, or to authorize sale or use. 

The tax is currently set at 0.7% of the fair market wholesale value of the substance in question, with 47.1% of the proceeds placed in the State Toxics Control Account and the remaining 52.9% in the Local Toxics Control Account.  Those accounts provide funding for contaminated site cleanup and a number of other state and local environmental programs, particularly those relating to waste and toxics controls.  The projected tax revenues for fiscal year 2013 are estimated to be $144 million, with more than 80% of those revenues attributable to payments made by in-state petroleum refineries.

According to the pleadings, the plaintiff Automobile United Trades Organization (“AUTO”) had some concerns about the legality of the Hazardous Substance Tax as adopted in 1989, but did not raise an objection at that time because AUTO also believed it was “good to clean up toxins in the environment”.  As a result, the pleadings reference an “uneasy peace” that continued in effect until the Washington State Legislature diverted $180 million of the 2009 tax proceeds to the state’s general fund to help balance the state budget, and  bills were introduced in both the state house and senate in 2010 to increase the tax rate from 0.7% to 2% and divert very substantial percentages of the additional revenues to the general fund for at least several years thereafter. 

In 2010 the AUTO and Tower Energy Group filed a declaratory judgment action with respect to the constitutionality of the Hazardous Substance Tax as applied to motor vehicle fuel, arguing that any proceeds from taxing motor vehicle fuel must be used for highway purposes under the 18th Amendment of the Washington State Constitution (see Article II, Section 40).  A lower court dismissed this argument, concluding that the Amendment did not require such use.  It also found that the claim was barred by the doctrine of laches.

The 18th Amendment was adopted in 1944 after the state legislature had used gas tax revenues to fund non-highway related projects.  It provides that motor vehicle license fees, as well as all excise taxes collected by the State of Washington on the sale, distribution, or use of motor vehicle fuel and all other state revenue intended to be used for highway purposes, must be placed in a special fund to be used exclusively for highway purposes.   It also includes a proviso that exempts certain taxes then in existence (vehicle operator license fees, excise taxes imposed on motor vehicles or their use in lieu of a property tax on such vehicles, or fees for certificates of motor vehicle ownership) from its purview, and it states that “this section shall not be construed to include revenue from general or special taxes or excises not levied primarily for highway purposes”. 

The Washington State Attorney General argues that the proviso language just quoted limits the scope of the 18th Amendment to the previously noted gas tax and any other motor vehicle fuel excise tax specifically levied for highway purposes.  Thus, the 18th Amendment would not apply to the Hazardous Substance Tax.  The plaintiffs disagree, noting the Amendment’s reference to “all excise taxes”, and that the State Attorney General’s interpretation would dismantle its anti-diversionary policy.  As made clear during oral argument, the plaintiffs interpret the quoted language as a catch-all provision intended to cover any tax levies in existence at the time of the Amendment’s passage that were similar to the two then existing taxes (a motor vehicle excise tax and a business and occupation tax) exempted from its purview. 

Given the questions raised during oral argument, it appears that the Washington Supreme Court’s decision will address the scope of the 18th Amendment and its relationship to the Model Toxics Control Act.  Regardless of the outcome, the sequence of events does bring to mind that old adage about sleeping dogs.



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