Legal Corner: New TABOR case threatens short-term rental fees for workforce housing

The rising cost of workforce housing has been especially acute in Colorado's mountain municipalities. Already limited market-rate housing and newly built units have been converted to short-term rental uses that exclude long-term use by the people that need to live near the community they support. The increased presence of short-term visitors compounds the housing problem by increasing the need for workers who cannot find a reasonably close place to live. More workers help to create a positive experience for visitors, creating a benefit for short-term rental owners. 

Colorado's municipalities have stepped up by directly funding workforce housing options, sometimes using fees assessed on short-term rental uses to fill gaps. But the Colorado Supreme Court recently agreed to review a case — Dorotik v. Town of Breckenridge — that challenges those fees as disguised taxes that should be invalidated under the Taxpayer Bill of Rights (TABOR). A negative outcome in the case could negate much of the progress made by municipalities in responding to the housing crisis, dismantle many other state and local programs funded by fees, and lead to crippling budget impacts. 

What's in a fee? 

TABOR requires voter approval of new taxes, but, because TABOR doesn't define what it means by "tax," courts have developed a workable understanding of the limited types of revenue-raising measures that fall under TABOR. Before TABOR, the Colorado Supreme Court distinguished taxes as general revenue raising measures to defray general government expenses while adopting an expansive view of fees as generally connected to a particular service. After TABOR, Colorado courts developed an understanding that fees would not be subject to TABOR's voter approval requirement where the primary purpose of the fee is to offset the direct and indirect costs of a particular service provided to a user that was reasonably likely to benefit from or use a service. 

In 2019, the Colorado Supreme Court approved the City of Aspen's "waste reduction fee" assessed on every paper bag given to a shopper. Colorado Union of Taxpayers Foundation v. City of Aspen, 418 P.3d 506 (2019). The city imposed the fee to mitigate the costs of paper bags on the city's waste stream and natural environment. The Court upheld the charge as part of a comprehensive regulatory regime, imposed through the police power, with a reasonable relationship to the cost of the service or regulatory program.  

Using the same logic justified by the "Aspen bag fee" case, Colorado municipalities have imposed fees on specific activities as part of regulatory programs instead of using general revenues to pay for specific impacts and the costs of regulation. These include several short-term rental fees (as in Breckenridge) and affordable housing linkage fees to fund workforce or low- and moderate-income housing. The state has relied on the decision to implement several fees, like a carry-out bag fee (HB21-1162), retail delivery fees (SB21-260), and oil and gas production fees (SB24-230).  

A novel consideration based on other revenue 

The gist of the Dorotik case is the novel claim that a regulatory fee cannot be imposed on a "revenue positive activity." Under Dorotik's theory, Breckenridge's short-term rentals generate revenue that exceeds any costs of short-term rentals to the town. That revenue is estimated from a variety of sources, including sales and lodging taxes paid by short-term renters for their rental and at local businesses and restaurants. (Never mind that these general revenues are within the authority of the Breckenridge town council to appropriate for a variety of municipal uses.) 

Both the trial court and Colorado Court of Appeals wisely rejected this claim as unfounded under TABOR and the history of cases distinguishing fees from taxes based on the cost of the activity regulated. Recall that whether a fee is permissible depends on the authority to impose the fee and the relationship of the fee to the direct and indirect costs of the activity.  

Dorotik's theory would subvert the traditional test by measuring the validity of the fee in terms of the revenue generated by the activity relative to the cost instead of measuring the validity of fee based on its relationship to the cost. Such concepts are without basis in Colorado caselaw and would extend TABOR to a never-before-seen extent. No Colorado precedent requires a government to assess whether a program is "revenue positive" before offsetting the costs of that program through charges to the persons who benefit from the program. 

Regulatory fees involve policy choices that aren't appropriate for courts 

Dorotik's theory also creates a serious question involving the separation of powers between the judiciary and state and local legislative bodies. Legislatures have significant discretion in implementing regulatory programs through the police power as well as in spending general revenue. The concept promoted in Dorotik would involve the courts in second-guessing the discretionary choices made by governing bodies regarding issues like the scope of activities to be regulated, the use of revenue to address specific issues, and the amount of a fee within reasonable boundaries. Courts would also bog down in determining what revenue is actually attributable to an activity. 

The courts are neither well-suited nor constitutionally authorized to make such decisions about police power regulations or governmental budgets. These choices involve extensive questions about equity and the distribution of government resources and whether those who create or enhance societal problems should be required to fund solutions to those problems. Legislative bodies, not the courts, should answer the policy question of whether a regulated person or entity should be able to demand that the government first fix that problem using its other resources. 

Fees are a creative, direct response to community needs 

Municipalities clearly understand how to determine the scope of regulatory programs and how to ensure that fee revenue is not used as general revenue. The City of Aspen case, decades of other case law describing the boundaries of fees, and other constitutional considerations clearly define the scope and extent of fees. Fees isolate at least some of the cost of the response to an impact on the persons participating in the impact. 

Hopefully, the Dorotik case will result in confirmation of these standards and proof of the authority of municipalities to proactively respond to crises in their communities. Dorotik's argument offers an impossible to administer test that would subvert the policy-making functions of elected local leaders. A "revenue positive" limitation on fees would also endanger general revenue that supports other critical municipal services for the benefit of the public at large. 

Municipalities already face stressed budgets, TABOR's limits on revenue-raising measures, state economic policy that inhibits responsiveness to housing prices, and legislative resistance to creative concepts for generating revenue for housing. Colorado's municipalities don't need any further artificial limits on how they can directly improve housing options for workers and low- and moderate-income families.