CALIFORNIA:

Is it a water-rights fee or a backdoor tax? State's high court will decide

The California Supreme Court is set to hear oral arguments next week on a case that could undermine the state's ability to collect fees for water rights.

The state's highest court has scheduled the hearing for Tuesday, more than three years after briefs were filed in a legal fight that pits the powerful California Farm Bureau Federation against the California State Water Resources Control Board.

The suit, first filed by the farming group in 2003, alleges the board violated the U.S. Constitution and the state-passed Proposition 13 when it implemented a regulatory program that charges water-rights holders annual permit fees.

Attorneys for the farm federation argue the fee is a backdoor tax designed to circumvent Prop 13, which was passed in 1978 and forces the state Legislature to attain a two-thirds vote to enact new taxes. The group also sees a violation of the Constitution's Supremacy Clause because state regulators have collected funds for water permits from both federal and state sources.

An associate counsel for the farm federation, Carl Borden, recently advised members to consider not paying their bills in a document circulated on the group's website that addresses the case in detail. That advice is a departure from the group's recommendations in the past to members that urged them to protest the fees but still pay them, with an eye on a possible rebate if the court finds in their favor.

"A ruling by the state Supreme Court that the so-called fee is unconstitutional should compel the [water board], for the first time, to grant the protests and relieve water rights holders from having to pay," Borden said in the "Ag alert" document.

Borden went on to say that he expects a ruling from the court by year's end, because Chief Justice Ronald George is set to preside over the oral arguments next week before he retires Jan. 2.

But the state, through Attorney General and Gov.-elect Jerry Brown (D), maintains it has an open-and-shut case. Attorneys in the AG's office counter that the fees are a legitimate regulatory charge levied on an industry for benefits received -- namely, free water from the state.

"It was reasonable for the state to decide that the rest of us, meaning the public, shouldn't be paying for this water-rights program," said Molly Mosley, a deputy state attorney general. "It's a necessary evil to have regulation in the world."

Mosley went on to note that of the water board's $400 million annual budget, about $10 million comes from water rights holders. Those holders pay a nominal fee for the permits only to often turn around and sell the water at a higher price.

"We're just passing through the cost of regulating them," Mosley said, explaining that the contractors are considered "legal users" of the water, which makes them subject to a fee -- in the attorney general's view -- that does not fall under the umbrella of Prop 13.

Stage set for other challenges

Regardless of how the court rules, this initial skirmish over taxes and fees is likely to be a prelude to other legal challenges in the months and years ahead. That is because a separate ballot measure -- Proposition 26 -- that was passed by California voters in November specifically requires a two-thirds legislative vote for any new revenue raiser (whether called a fee or tax) whose funds are not used to directly regulate the entity charged.

Many environmental groups fear Prop 26, once it kicks in next year, will be used to attack all manner of environmental fees, including those to be implemented under the state's climate change law (A.B. 32) that limits greenhouse gas emissions starting in 2012.

In the same "Ag alert" document, an attorney who will represent the farm bureau at next week's hearing -- Daniel Kelly of Somach, Simmons & Dunn -- noted that voters recently affirmed their disdain for new taxes when they passed Prop 26, which he says gives credence to his position on water rights.

"With the proliferation of these fees, the California Supreme Court will now revisit the legitimacy of this new source of revenue and determine whether it squares with the voters' intent in passing Proposition 13," Kelly says.

Mosley, for her part, said Prop 26 does not apply to the suit over water rights fees, which was filed well before the statute ever passed. She added that the water-rights fee would face up to a Prop 26 challenge in any event.

"This is a classic regulatory fee," she said.

Click here to read a list of briefs filed in the case California Farm Bureau Federation v. State Water Resources Control Board.

Sullivan reported from San Francisco.

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