Dennehy v. Department of Revenue , 10 Or. Tax 348 ( 1987 )

OPINION ON REHEARING Granting defendant's petition for reconsideration, court modified its language which erroneously implied that taxes levied for urban renewal areas are subject to the restrictions of Article XI, section 11 of the Oregon Constitution. Taxes so levied are akin to "special assessments," not used for general support of government but dedicated to payment of urban renewal expenses, therefore, exempt from the constitutional limitations of Article XI, section 11. Amended decision for defendant rendered February 5, 1987. Defendant petitioned for reconsideration of a portion of the court's opinion issued January 9, 1987. Defendant urges the court to reconsider that portion of its opinion, 10 OTR 348 at 357, which concludes that the state levies the taxes for tax increment financing and the state's tax base sets the limits on urban renewal taxes that may be raised. The court granted defendant's petition and has reconsidered that portion of its opinion in light of the arguments and authorities cited by counsel. Upon reconsideration, the court finds that its language and the questioned conclusions are not correct and the opinion should be modified.

1. The problem is one of accurately characterizing the taxes which result from the statute's directions to the assessor. ORS457.440 directs the assessor to compute a local taxing unit's tax rate based on the frozen (certified) value but to extend that rate against all value within the urban renewal area. If property in the urban renewal area has increased in value over the frozen value, more taxes will be raised than were levied by the local taxing units. Since neither the local taxing units nor the urban renewal agency levied those additional taxes, the court concluded that the taxes are like an income tax and are imposed by the state. The critical question is whether those taxes are subject to the restrictions of Article XI, section 11 of Oregon's Constitution. The language under reconsideration erroneously implies that they are.

In its petition for reconsideration defendant contends that the taxes are not "taxes" within the meaning of Article XI, section 11, and even if they are, they are not subject to that article's restrictions because: (a) they are not "levied" by the state since the state receives no revenue; (b) the funds are constitutionally dedicated to payment of urban renewal expenses; (c) they are in essence a property tax exemption; (d) Article IX, section 1c overrides Article XI, section 11; and (e) the taxes arise from the police power, not the taxing power, of the state and, therefore, are not governed by Article XI, section 11. These many theories reflect the uncertainty associated with attempting to characterize the revenue raised by the operation of ORS 457.440.

While it may seem mere sophistry to say that the taxes in issue are not property taxes, particularly to the property owner who pays them, it is clear that they are not levied in the traditional sense. More significant than the method by which taxes are measured and raised is their purpose. One fundamental distinction to be made in the characterization of taxes are special assessments versus general taxes.

2. "Special assessments are a peculiar species of taxation, standing apart from the general burdens imposed for state and municipal purposes, and governed by principles that do not apply universally. The general levy of taxes is understood to exact contributions in return for the general benefits of government, and it promises nothing to the persons taxed, beyond what may be anticipated from an administration of the laws for individual protection and the general public good. Special assessments, on the other hand, are made upon the assumption that a portion of the community is to be specially and peculiarly benefited, in the enhancement of the value of property peculiarly situated as regards a contemplated expenditure of public funds; and, in addition to the general levy, they demand that special contributions, in consideration of the special benefit, shall be made by the persons receiving it." Cooley on Taxation 1153-1154 (3rd ed 1903).

3. Here the funds in question are not used for the general support of government but are dedicated to the payment of urban renewal expenses. As such, the taxes imposed by ORS 457.440 may be viewed as an assessment for the benefit of a defined area or group of properties. The assessment or levy of these types of impositions have been exempted from the limitations imposed by Article XI, section 11, of the Constitution. As indicated by the court in Northern Pac. Ry.Co. v. J. Day Irr. Dist., 106 Or. 140, 164, 211 P. 781 (1923):

"This constitutional provision has no application to the assessment under consideration. We have already referred to the distinction between general taxes for the support of the government * * * and assessments for the benefit of property."

See also King v. City of Portland, 2 Or. 146 (1865).

The taxes raised by operation of ORS 457.440 would appear to be exempt from the operation of Article XI, section 11 by reason of another characteristic. That is, the amount of the tax to be collected is uncertain until the tax rates for the local taxing units are computed and extended on the roll. Whether an urban renewal agency will receive any funds depends upon whether the local taxing units levy any taxes. InGarbade Boynton v. City of Portland, 188 Or. 158, 214 P.2d 1000 (1950), the court found that Article XI, section 11 of the Constitution applied only to property taxes. One reason that it found that the provision did not apply to income taxes, excise taxes and similar taxes was because the revenue "could not be ascertained until such taxes have been paid or reported, and, until then, there would be no way to determine whether the amount so raised was in violation of the six per cent limitation." The court found that this "demonstrates the utter futility of attempting to apply it [Article XI, section 11] to any other taxes." (188 Or. at 188.)

While there is less uncertainty with regard to taxes raised by ORS 457.440, there is no clear levy which may be determined to be within or without the limitations imposed by Article XI, section 11 of the Constitution.

It is worth noting that the taxes raised by operation of ORS457.440 are limited in use. Subsection (4) of that statute specifies that such funds shall be:

"[P]aid into a special fund of the agency and shall be used to pay the principal and interest on indebtedness incurred by the agency to finance or refinance the carrying out of the urban renewal plan."

4. Subsection (3)(a) of section 11, Article XI, of the Constitution exempts from the limitations of that section taxes which are used to pay "bonded indebtedness or interest thereon." While urban renewal agencies are not limited to the use of bonds as the means of financing their urban renewal plans, the court may take judicial notice of the widespread use of bonded indebtedness for such purposes. Without a traditional form of property tax levy, there is no way to determine which part of the taxes will be used to pay bonded indebtedness and therefore no way to determine whether the limitations imposed by Article XI, section 11, are violated except by an after-tax audit.

In view of the above, the court concludes that urban renewal taxes raised by operation of ORS 457.440 are not subject to the limitations imposed by Article XI, section 11 of the Constitution.

The opinion of the court dated January 9, 1987, is modified accordingly.