Illegal Exaction? AG Opinion and Audit Called for

Please see our correction. In a happy contradiction, the state has said these tax levies both are, and are not, for capital improvements. Whew!

Have the residents of Eureka Springs approved a 1% sales and use tax to pay for General Fund operating expenses as distinct from capital expenses?

The question is an important one because funds for capital cannot be used for general operating. Capital funds go to capital (building) improvements; general operating funds are to keep city operations going. Operating funds go to pay for salaries, for example.

From our research here at ES Folk, it doesn’t look like the city has 1% of tax collections coming in to pay that general operating. That means we have only property taxes, ambulance fees, and various miscellaneous, amounting to a little over $1 million for general operating. That’s not going to cover payroll, let alone anything else. All the rest looks to be dedicated to capital funds.

Let us look first at Ordinance 1386.

Enabling Legislation for 1386 Is for Capital Improvements

It has been argued that Ordinance 1386 provides a one cent tax for general operating expenses. Whether or not there was a vote of the people is not the issue here. There evidently was a referendum as called for in Ordinance 1387, which set up the required special election.

The issue is that Ordinance 1386 was not authorized under legislation that permitted the tax revenues Eureka collects to be used for general operations. Nor was it authorized under any kind of general, non-specific, legislation.

Ordinance 1386 was authorized under capital fund legislation. Nothing more, nothing less.

As stated in the ordinance itself, 1386 is based on “authorizing legislation” from Title 26, Chapter 75, Subchapter 2. It is a subchapter based solely on Capital Improvements.

To be more specific: Subchapter 2, 26-75-203, notes in detail what is covered. Referred to as “capital improvements of a public nature,” the list comprises 35 facilities, including waterways, dams and lakes. Nothing listed comes even remotely close to operating expenses, not even for the facilities noted.

Under its authorizing Subchapter 2 legislation, it is clear that Ordinance 1386 does not provide for any general operating revenues whatsoever. It provides only for capital improvements.

Is There Authorizing Legislation for General Operating Expenses?

Taxing authority for municipalities belongs to the state. Municipalities have no authority to tax unless the state (or the feds) have enacted tax legislation that authorizes it. We do not address federal legislation here.

The State of Arkansas has set up authorizing legislation that allows cities to assess a tiny percentage of the sales and use tax so that small cities like Eureka Springs might be able to cover capital costs. Our search of state statutes suggests that the state allows cities to tax no more than 1%, an indication of how little the state has been willing to allow municipalities to impose their own taxes.

We also believe that the state has not authorized municipalities to impose other, more general, taxes. In our search of state statutes, we have been unable to find any authorizing legislation that would go to general operating expenses– or any kind of general or undesignated purpose for that matter. In that, the state of Arkansas is only following a more general pattern. It is rare for any state to give over very much at all of its taxing authority.

Given this situation, we would ask that the administration provide any authorizing legislation under which Eureka Springs might levy a tax for operating expenses, or for a general, or undesignated, purpose.

The administration should provide it not only to us, but to the Council and the general public.

If there is not such an authorization, the City needs to take immediate action. To continue to use capital funds for general operating expenses would be what is called an illegal exaction– and that is a serious matter.

Illegal Exaction Suits Defined in the AR State Constitution

Under the state constitution, and subsequent rulings by the state Supreme Court, a city can be sued for illegal exaction. Immunity does not obtain, and cities are liable.

Moreover, any one suit is considered a class action suit brought in the name of all affected. That means damages can be awarded to all those who paid taxes illegally exacted.

If Eureka Springs were to have mixed capital and general operating fund tax assessments, it could be liable to a great many people, particularly if it does not take steps to remedy the situation.

Past Errors Are no Excuse for Present Foundering

As a result of past actions taken at least 30 years before this Mayor and this Council were seated, there has been a confusion of laws that need to be straightened out. It was only one small, minor, confusion that led to the administration’s recommendation at the last regular Council meeting, that several ordinances be repealed, back to Ordinance 1120, which was rightfully understood as authorized under capital funds.

It has, however, been erroneously argued that the City can collect a 1% tax for general operating expenses under Ordinance 1386. That would seem to be, for two compelling reasons, wrong.

Moreover, it begins to look like the City cannot enact a 1% tax for general purposes at all.

The upshot is that the administration and the Council must act responsibly and quit foundering in half- researched opinions, and inadequate knowledge.

Action needs to be taken immediately to redress the issues in ways even more serious than those recommended by Chief Municipal League Counsel Mark Hayes.

Without that, we cannot know how to plan on bringing in the revenues the city needs to cover the operating expenses of the departments that have been budgeted for, including payroll.

Give Us an AG Opinion and an Independent Audit

The first essential is that the city seek an Attorney General opinion on the exact nature of the taxing authority we have; and what legal options we have open to remedy the situation. The questions need to be straight- forward and honest, not pussy-footing and protective. The administration and the Council need to say it like it is. Too much is otherwise at risk.

The second thing the administration needs is an audit of what has come and gone under what vote of the people. The auditor needs to double-check with the Department of Revenue, which has a list that does not correspond to the ordinances the Council repealed, and differs in other respects. In short, we need to know what the state is collecting for us, under what authority.

The auditor needs to be a CPA of course. Even more important they need to be entirely independent of the city, its elected officials, or its employees; and they need to have a deep background in municipal law.

Good speed and good luck to us all.