Is a water rate increase a tax increase? Michigan appeals judges reject earlier ruling

Lansing – Communities in Michigan can raise water and sewer rates to pay for infrastructure improvements without asking voters for permission in certain circumstances, according to a split ruling from a state appeals court panel.

In a 2-1 opinion, the appeals panel ruled against a Mackinaw City-area tourism agency and hotels that had argued that the Village of Mackinaw City’s decision to raise water and sewer fees constituted a tax increase that should have been passed on to voters are being proposed. The tourist board’s reasoning stemmed from the fact that part of the increase would go to financing the construction of a new water tower.

A lower court agreed with the tourism board that the portion used for water infrastructure should have been submitted to voters as a tax proposal. But the appeals panel disagreed, saying the lawsuit should be resolved in the village’s favor.

“Increasing water and sewer rates to generate revenue to fund necessary capital improvements to the systems serves a regulatory purpose,” said the opinion written by Judge Colleen O’Brien, an appointee of Republican former Gov. Rick Snyder, who the majority had joined. by Judge Michael Kelly.

“There is no bright-line rule that prohibits water rates from being increased to fund ‘new infrastructure’ necessary for the continued safe operation of the water supply system,” O’Brien wrote.

Judge Kirsten Frank Kelly argued in a dissent that the infrastructure investments made by the village did not justify the manner and amount of the increase.

Matthew Vermetten, an attorney for the tourism board and the hotels that filed the suit, said the group is discussing options for the future.

The decision comes as communities across the state are looking for ways to finance aging water and sewer infrastructure. In Mackinaw City, the issue is even more complicated because the village has a population of about 860, but a system is designed to accommodate between 12,000 and 13,000 visitors and the tourism industry.

The Michigan Municipal League filed an amicus brief in support of Mackinaw City’s position after hearing of the village’s defeat in court, said Chris Johnson, general counsel for the league.

A community’s ability to generate revenue for water infrastructure is critical, now more than ever, as the state’s pipelines, water plants and treatment centers show their age, Johnson said.

“All of these things are real basic needs for citizens,” Johnson said.

The dispute in Mackinaw City dates back several years, when the state environmental agency notified the town in 2015 and 2017 that it was violating the law because it did not have enough storage capacity to handle emergencies or even peak flows in the area.

“Part of the village’s responsibility is to ensure a secure financial future for the operation of the water supply,” said the letter from the then-Department of Environmental Quality. “The current rate structure does not allow this.”

In analyzing the village’s water use, the Michigan Rural Water Association found that there were large differences in water use between hotels and traditional water users. The association found that 18% of the village’s customers used 66% of the water and recommended an escalating rate structure with larger water users paying more.

The village council voted in January 2018 to approve a 2% increase and change the rate structure so that customers who used more than 50,000 gallons in a quarter paid a higher rate.

The hotels filed suit soon after, arguing that the rate increase was a “disguised tax” that was disproportionate to the cost of providing services and was actually intended to pay for an infrastructure capital improvement plan.

The village countered that the increase served a regulatory purpose, was voluntary (based on usage), and was proportionate to the cost of the service – meeting a case law test on what qualifies as a rate versus a tax.

The Court of Appeal panel agreed, noting that the water tower was necessary to continue services, that rates were proportionate to costs and that each voluntary user could decide how much water to use.

“All of this together makes it clear that the Village’s higher water and sewer rates constituted a valid user fee, and not a tax,” O’Brien wrote.

Kelly argued in her dissent that the higher rate applied to larger water users was not simply justified by the presence of a new water tower.

“The rates were disproportionate in the sense that there was no justification for why large users had to pay 50% more, and why they had to do so even after the new water tower was built,” wrote Kelly, who was appointed in 1994. to the Wayne County Circuit Court by then-Republican Governor John Engler before being elected to the Court of Appeals in 2000.

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