The Taxman Cometh--well, sort of.

Hawaii Insurers Council v. Lingle (ICA April 14, 2008)

Vacated in Part by HSC.

Background. The Insurance Regulation Fund (IRF) was established by the legislature, but controlled by the executive branch, to collect monies from Hawai'i insurers in order to support the overhead of the Insurance Commissioner, Dept. of Budget and Finance, the DCCA, and the Insurance Division. Over the years the IRF collected from the insurers and had $2 million in excess. The State therefore prepared to transfer the funds to the General Fund. The Hawaii Insurers Council (HIC) sued the State alleging that the monies collected from the insurers were illegal and unconstitutional taxes. The circuit court enjoined the State from transferring the money.

A Regulatory fee is still an Unconstitutional Tax. The executive branch of government cannot tax. Only the legislature and "political subdivisions" have the constitutional power to tax. Haw. Const. Art. III § 3. The State argued that the charge to insurers is a regulatory fee and does not implicate an illegal tax under San Juan Cellular Tel. Co. v. Public Service Com'n of Puerto Rico, 967 F.2d 683 (1st Cir. 1992). The ICA rejected this argument.

In Hawai'i the question turns not whether this is a regulatory or user fee, but whether a charge from the government is an illegal tax or a mere administrative fee. Whether a charge is a fee or a tax depends on whether the charge (1) applies to a direct beneficiary of a particular service; (2) is allocated directly to defraying costs of providing that service; and (3) is reasonably proportionate to the benefit received. State v. Mederios, 89 Hawai'i 361, 370, 973 P.2d 736, 742 (1999). Here, the regulation of the insurance industry benefits the public-at large, not the persons paying the charges. The insurers are merely incidental beneficiaries, which, for the ICA, is too tenuous a connection for the first prong under Medeiros. The ICA also held that the charge does not meet the other two prongs either. Thus, the charge is an unconstitutional delegation of the State's taxation powers to the executive. The ICA noted that even if the San Juan Cellular test may be a better approach, it is not the law of Hawai'i. The ICA is bound by the holding of the Hawai'i Supreme Court in Medeiros and it will not depart from it.

Joe Feepayer asks: What's in it for me? The ICA has made it clear that if the charge is not coming from the legislature or a "political subdivision" it may arise to an unconstitutional delegation of the taxation power. This is particularly true if it heads toward the General Fund. Whether something is a tax is to be determined by Medeiros. There are countless instances in which the State charges people for things.

Could all of these charges challenged by Medeiros? What about those fees charged to the criminal defendant when he or she is found guilty? Does this mean that criminal defense attorneys should argue that payments to the victim's compensation fund and all the other fees stacked up against a criminal defendant are unconstitutional delegations of the taxation power to the courts? Medeiros, after all, began when the HNL prosecutor and the Dept. of Finance appealed from the circuit court enjoining it from charging convicted defendants for services provided by the City in connection with the arrest, processing, and prosecution. The Hawai'i Supreme Court applied the three-prong test, and found that the charge was, in fact, an unconstitutional tax and upheld the injunction. Id.

Judge Watanabe's Concurrence. Then again, does this mean that the only time an agency can charge a person is when the agency provides some kind of direct service to the payer? Would this strip the government operations to almost nothing? Judge Watanabe was concerned about this and wrote separately. According to a 2001 report from the State Auditor, there were over 200 special and revolving funds that are likely to be compromised as they would fail to be considered "fees" under the Medeiros test. According to Judge Watanabe, the Medeiros test "overlooks" the nature of regulatory fees, which are typically imposed to offset the burdens on the government rather than benefit the "fee-payer." Judge Watanabe believes the Medeiros test should be reexamined to avoid "dire consequences" on the government's ability to maintain its fiscal infrastructure and funding. Note that this is a concurrence. Judge Watanabe recognizes that the law in Hawai'i is based on a tax-fee distinction; even if it might be dismissive over other ways in which the government keeps itself financially afloat.

The Other Issues. The ICA majority briefly reviewed issues pertaining to the separation of powers, equal protection, due process, sovereign immunity, circuit court jurisdiction, and other things. The main question, however, had to do with Medeiros.


LoF said…
I had always said away from this angle when attacking the administration on failure to promulgate administrative rules but this new opinion will help go a long way.

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