Legislation limiting the power of towns to tax is drawing opposition from towns in the Cape Region and across the state.
Dewey Beach Mayor Diane Hanson said she was shocked by legislation introduced by Speaker of the House Rep. Pete Schwartzkopf.
Schwartzkopf, D-Rehoboth, is the primary sponsor of House Bill 333, introduced May 8. Hanson said the bill eliminates the all-powers clause written into town charters up and down the state. The ability to tax is among many powers the clause gives to municipalities, she said during a May 10 commissioners meeting.
There are 31 municipalities in Delaware, including Dewey Beach, with this clause, Hanson said. She said Schwartzkopf introduced the bill after a December 2013 Chancery Court ruling in favor of the town that found the clause gave the town the power to collect an annual business license fee.
Hanson said if Schwartzkopf's bill were to pass, Dewey Beach could lose $250,000 in revenue each year in business and rental licenses, a loss that would inhibit the town's ability to protect residents and visitors during the busy summer months.
Before the court ruling, Hanson said, Schwartzkopf said to a room full of people that if the ruling favored the town, he wouldn't do anything because he doesn't get involved in town politics.
But that's exactly what he's doing, she said.
Schwartzkopf confirmed the Chancery Court decision spurred the bill, which he says clarifies state law already in place, does not target Dewey Beach, and isn't taking anything from the town.
Schwartzkopf said for any town to create any tax, it must get approval from the General Assembly – a three-fifths vote in the Senate and the House – and then be approved by the governor.
Hanson said the Chancery Court ruling allows towns to tax anything, but Schwartzkopf said they can't. He said the state's founders believed in taxing to provide necessary services, but they also wanted to make it hard to create new taxes, he said.
Schwartzkopf said his bill has three parts. The first says a town has the ability to tax or collect fees that are specifically addressed in their charters; the second section says an all-powers provision in a town's charter does not supersede the first subsection.
It's the third part of the bill that especially draws the attention of Dewey Beach officials. This section says that a town can collect a fee or tax, as long as it is reasonably related to the cost of administering the program.
Marc Appelbaum, Dewey Beach town manager, said the first two sections of the bill are bad enough, but the third section is an egregious overreach.
Appelbaum said the third section of the bill will have unintended consequences – such as lawsuits being filed against towns across the state by businesses who think they're paying too much in taxes. Using Dewey as an example, he said, if it costs $35,000 a year to pay someone to administer the business licenses, and all that can be collected is $35,000, then how would the town pay for the services needed to support people coming to town and using those businesses?
Schwartzkopf said a House attorney had added the last section based on current case law, and it could be removed. However, he said, if a business wanted to challenge a town's tax it could, because the language proposed in the bill is already in the code.
The speaker said he's crafted an amendment that grandfathers any tax or fee instituted before Jan. 1, 2014, passed without going through the General Assembly.
Sen. Ernie Lopez, R-Lewes, a cosponsor of the bill, said he supports both of Schwartzkopf's recommendations. He said other towns are concerned they could face lawsuits over taxes that had not been approved by the General Assembly before being enacted.
This bill clarifies what's already in place, Lopez said. Placing an undue burden on any town is not the goal, he said, and the proposed changes should relieve the majority of concerns that were causing any heartburn.
Appelbaum said grandfathering existing measures might be a step in the right direction, but he didn't see the need to push the legislation through at a breakneck speed. Appelbaum called for delaying the bill for six months.
After its introduction, the bill was assigned to the House Administration Committee and six days later, on May 14, it passed through the committee, provided discussions are had and amendments are added that address the concerns of municipalities.
Schwartzkopf said he had no intention of placing the bill on the House agenda before Memorial Day. “This is not being rushed. It's part of the normal process,” he said.
It's not just Dewey officials who say the bill has not been properly vetted. Hanson said the League of Local Governments is adamantly against the bill.
“It just causes a mess. Everybody has a horse in this race,” she said.
Rehoboth Mayor and Delaware League of Local Governments Vice President Sam Cooper said he would rather see the people who sponsored the bill reach out rather than take a sledgehammer approach.
“As I understand it, there are a lot of upset towns,” Cooper said.
Pires, Dewey have feud history
This bill is the latest twist in the lawsuit saga that has Dewey Beach pitted against business owner Alex Pires.
The town was in Chancery Court defending a suit brought by Dewey-based Highway One, owned by Pires, whose businesses include the Rusty Rudder, Bottle and Cork and Northbeach, among others.
Pires filed a suit in February 2013 against the town's business license fee, claiming the town has no authority to collect the fee, which he said was a tax. The lawsuit was dismissed after the ruling, but Highway One appealed. The case is now moving through Delaware Supreme Court.
The suit has halted discussions between Dewey Beach council members and Dewey businesses, some owned by Pires, centered around the businesses paying more to offset costs such as expanded police services. Talks began after the town proposed a gross receipts tax in November 2012; eight months later, in July 2013, town officials voted 3-2 against putting the tax to referendum.
Instead of further discussion of a gross receipts tax, council gave the business community six months to come up with an alternative solution for revenue. In February, 12 businesses presented a proposal to pay the town $250,000 over the next five years. In March, council agreed to delay action on the proposal in light of the ongoing Highway One suit.
Hanson said Schwartzkopf has introduced the bill because he and Pires are friends, and he wants to help out a wealthy businessman. She said the town plans an all-out attack on the legislation. During an emergency meeting of town council May 12, a unanimous vote was taken to spend up to $50,000 on a lobbyist or legal advice to defeat the bill.
Schwartzkopf flat-out denies the accusation that he's presenting the bill as a favor to Pires.
“That's ridiculous,” he said.
Schwartzkopf said he delayed introducing the legislation to avoid influencing the court process. He said a Delaware Supreme Court ruling regarding the town and Pires isn't expected before September, which is too late for the General Assembly to react. This law would kick in if the court rules in favor of Dewey, said Schwartzkopf, adding that the bill has bipartisan legislative support and the support of Gov. Jack Markell.
Appelbaum said HB 333's wording directly refutes Dewey's charter regarding a business license and what it's allowed to be used for. The first section of Chapter 117 in town code deals specifically with the purpose of a business license, reading, “In order to protect and preserve the safety, health, peace, cleanliness, good order and welfare of the Town of Dewey Beach and its citizens, all activities as stated herein shall be required to obtain a business license and pay a license fee related to the investigation, regulation and enforcement of said license activities.”
“It's hard to construe it as any way other than as a direct favor,” said Appelbaum.
Cooper said that's a fair characterization. “But for their issues with Highway One, this would not be an issue,” he said.
Without commenting on that issue, Lopez said he and Schwartzkopf were responding to consituents. “I like to think we're being responsive. I'm siding with the written law, using an evenhanded, reasonable approach,” he said.
Schwartzkopf said that Pires has told him that if the bill becomes law, he will drop the lawsuit against the town, and that Appelbaum has been told this.
Appelbaum said, “Of course he will.” If the bill passes unchanged from how it's currently written then it's an absolute win for Pires, Appelbaum said.
When reached for comment, Pires said he didn't have one because he didn't know enough about the issue.