CoA Institute Moves for Summary Judgment in TABOR Case Challenging Hospital Tax

Cause of Action Institute has moved for summary judgment asking the Colorado state district court to rule that, as a matter of law, Colorado violated the Taxpayer’s Bill of Rights (TABOR) and other constitutional provisions when it levied $4.5 billion in hospital taxes without a vote of the people.

TABOR requires that the state legislature obtain Coloradans’ consent before it raises taxes. This constitutional amendment was approved by the voters in 1992 and it continues to be a leading issue in election races statewide.  It was designed not only to restrain the growth of government, but also to give Coloradans a voice when lawmakers attempt to reach into their pockets. Yet since its passage, legislators and governors of both parties have consistently refused to ask voters for more money. Instead, they use convoluted tactics to avoid using the ballot to raise taxes. Some of these tactics include mortgaging state buildings, eliminating tax breaks, and trying to disguise tax increases as fees administered by “enterprises,” state-run entities whose revenues do not count towards TABOR’s revenue cap.

This practice might make it easier for legislators to spend, but it runs contrary to the will of the voters, of whom only 26% disapprove of TABOR. And there is little reason to believe that voters will never approve a tax increase; a ballot measure in 2015 allowing the state to keep $67 million it had over-collected won with wide voter support.

In 2009, as the Affordable Care Act neared passage, the legislature enacted a hospital provider tax, which exploits the federal Medicaid fund-matching scheme to draw down more money to the state. Normally, when a state reimburses a health care provider who gives medical services to a patient who can’t afford healthcare, the federal government matches some percentage of those costs. But with the hospital provider tax in place, the hospital’s costs are artificially increased. When reporting that cost to the federal government, the state then receives matching funds for the inflated price of healthcare, rather than the actual cost to the hospital.

This scheme doesn’t just amount to quasi-money laundering – it also creates perverse incentives for hospitals, who might not choose the most cost-effective care, and legislators, who use Medicaid expansion to fill state coffers.

The scam worked well for the better part of a decade, but in 2016, the state was facing a budget crunch; the newest round of taxes was expected to take Colorado’s revenue collection past the TABOR cap, and it seemed likely that the governor would have to cut funds to higher education or transportation, an essential budget item in a snow-heavy state like Colorado. The governor could have instead cut the fee on the hospitals, but that would have decreased the federal matching funds.

Rather than send a revenue increase to voters for permission, as TABOR requires, the legislature and the governor instead passed SB 17-267, subtitled “Concerning the sustainability of rural Colorado.” The bill, among other things, set up the Colorado Healthcare Affordability and Sustainability Enterprise (CHASE). As with many of Colorado’s enterprises, CHASE was an attempt by the state legislature to avoid its duties under TABOR. To exempt the hospital provider tax from the TABOR revenue cap, the legislature threw an ill-fitting “enterprise” label onto the administration of the tax and the federal matching funds.

In response to this attempt to dodge accountability to the public, the TABOR Foundation, a non-profit educational organization whose mission is to protect TABOR, sued CHASE and the Colorado Department of Health Care Policy and Financing in 2015. According to Penn Pfiffner, President of the TABOR Foundation:

“The Hospital Provider program was built on a lie, then made much worse. The people should get a final vote on tax increases and new government debt, but that was taken from them in a dishonest power grab by elected officials.”

The Foundation argues that the Hospital Provider Charge was a tax that had been levied without the requisite TABOR vote, and that CHASE is an illegal enterprise because its fees are not charged to hospitals based on services provided.

Recently, Cause of Action Institute took on the representation of the TABOR Foundation and the other plaintiffs in the case and will request summary judgment from the Colorado district court. Hopefully, this suit at minimum will indicate to lawmakers that the state might find tax policy to be less onerous (and litigious) if, next time, they simply follow their state constitution and ask voters for permission.

Yesterday’s motion for summary judgment can be viewed here.

Jake Carmin is a law clerk at Cause of Action Institute.

Zen Magnets Wins, but Decision Does Little to Protect Against Regulatory Overreach

Last month, a U.S. District Court tossed a mandatory recall issued by the Consumer Product Safety Commission (CPSC) against Zen Magnets, a company that sells powerful Small Rare Earth Magnets (SREMs) to adults as desk toys or for use in art, jewelry, and physics education. The recall was the latest in a long series of CPSC actions taken against SREM sellers premised on child safety. In a handful of cases, children who swallowed multiple magnets sustained internal harm when the magnets would reconnect in the digestive tract, often despite unmistakable warnings against ingestion or use by children.

The CPSC has been on a relentless crusade to eradicate SREMs from the market using a variety of strategies. One tactic, an attempt to set a regulatory safety standard, was thrown out by the 10th Circuit in part because the Commission ignored the public’s use of SREMs for educational and artistic purposes. Further, the court explained that because the CPSC couldn’t explain why the injury rate from magnets was actually declining, the standard violated the Administrative Procedure Act:

“The Act provides that the Commission cannot promulgate a safety standard unless it concludes “that the rule . . . is reasonably necessary to eliminate or reduce an unreasonable risk of injury. . .” Here, the downward trend in injury rates is obvious, and appears to speak directly to the question of whether the new rule is “reasonably necessary. . . ” While the Commission is certainly free to rely on the emergency room injury report data set, it may not do so in a way that cloaks its findings in ambiguity and imprecision, and consequently hinders judicial review.”

Rather than trying to better back up their data or acknowledging the miniscule risk posed by SREMs, the Commission tried another tactic – continuing to take administrative action against SREM companies who refused to voluntarily recall their products. To companies, a standard would have provided much-needed certainty about which marketing tactics and warnings they could adopt to stay in business and minimize injuries to children. Instead, companies were forced to guess at which fixes would satisfy the CPSC; most were taken to administrative adjudication anyway.

Unlike nearly all similar companies in the market, Zen Magnets’ founder, Shihan Qu, refused to recall his products. But he did add multiple highly visible warnings and primarily marketed the magnets to stores frequented by adults, like marijuana dispensaries. None of these changes placated the CPSC, who at the same time managed to drive every other company selling SREMs out of business.

The CPSC justified their administrative action under the Consumer Products Safety Act, which gives the Commission the ability to make companies recall, replace, or refund products with hazardous defects. But under the agency’s corresponding regulation, before finding a design defect, an agency or court has to weigh the adequacy of warnings, the utility of the product, and the frequency and probability of injury – all of which the 10th Circuit said the agency hadn’t done! Nonetheless, Qu’s magnets were labelled a “design defect” and he was forced to incinerate some $40,000 of his products.

The recent district court ruling invalidated the CPSC’s decision because one of the Commissioners had made public statements (see the video here at 22:14) indicating that he was incapable of judging the case fairly and on its facts. The ruling, though a win for Qu and Zen Magnets, affirms the CPSC’s authority to order mandatory recalls. Unfortunately, nothing in this decision prevents the CPSC from abusing this power in the future, so long as its commissioners keep their internal thoughts out of the public record.

In 2014, Cause of Action Institute investigated a similar case brought by the CPSC against Craig Zucker, founder of the magnet company Buckyballs. One of Zen’s biggest competitors, Zucker settled with the CPSC, but for less than one percent of the Commission’s estimated cost of recall. This disparity, combined with concerns that the CPSC had initiated the action in retaliation for Zucker’s popular anti-CPSC internet campaign, prompted us to submit FOIA requests and demand investigations to determine why the Commission had pursued the case so fervently, yet only as far as driving Zucker out of business. The CPSC not only bankrupted Zucker’s business but also attempted to go after him in his personal capacity to pay for a mandatory recall.

Shihan Qu fought for over six years in numerous courts before this recent victory, which likely won’t restrain the CPSC’s ability to go after other entrepreneurs in the future. For Qu, the ruling marked the end of a costly, drawn-out tangle with the administrative state:

Along the way we eulogized burnt magnets, uncovered CPSC injury data dishonesty, spent two dozen days in court over four years, all while a blizzard of legal motions flew around us.
The nationwide magnet ban meant we were without income for most of 2015. After downsizing from 12 employees in a big warehouse to one loyal part time in a spare bedroom, 2016 was when we had our first significant victories.

The experience of entrepreneurs like Zucker and Qu serve as a stark reminder of the cost of fighting the federal government.  But it is thanks to people like Qu, who are willing to push back against agencies that are abusing their power, that we are able to hold our government accountable.

Jake Carmin is a Law Clerk at Cause of Action Institute.