Illinois Court Calls Business Fee Hike Unconstitutional

Published January 1, 2005

A Cook County, Illinois judge has struck down a state surcharge on workers’ compensation insurance premiums, putting into question the legality of scores of other recently enacted business fees in the state.

In a ruling issued November 29, Judge Patrick McGann declared the state’s Industrial Commission Operation Fund Surcharge to be unconstitutional. The surcharge was one of more than 300 fee increases on businesses enacted by the state since 1993.

The increases sparked an outcry from numerous business groups. The workers’ compensation surcharge was passed in 2003 as part of the 2004 budget act. In Spring 2004 the Illinois Chamber of Commerce did more than cry out; it filed a lawsuit over the surcharge. As an employer, the Chamber was required to buy workers’ compensation insurance for its employees and pay the surcharge, giving the Chamber legal standing to challenge the law.

Other Fights Expected

McGann’s ruling means the Chamber has won round one of the legal fight. Becky Carroll, a spokesperson for the state’s budget office, promised a round two, saying the state plans to appeal.

Other fights are expected. The ruling opens the door to challenges of many other fees, according to Chamber officials. State budget officials say the fee hikes have brought in nearly $340 million.

“The court’s decision sends a clear message to our state lawmakers that it is unreasonable–and unconstitutional–to discriminate among fee payers and specifically burden one group, in this case businesses and employers, with providing funds for general purposes,” said Douglas L. Whitley, president and CEO of the Illinois Chamber.

McGann ruled the surcharge created an arbitrary class of taxpayer and violated a provision of the state constitution that requires all new fees to operate like existing fees, which raise only enough money to cover specific activities. In the case of the workers’ compensation insurance surcharge, the fee ostensibly was to pay the cost of operating the Illinois Industrial Commission, which adjudicates workers’ comp claims.

McGann agreed with the Chamber that the surcharge had no “reasonable relation” to the cost. He noted in his ruling that the workers’ compensation surcharge had brought in $31 million and that $22 million had gone to the state’s general fund.

“The surplus resulting from this fee increase was clearly anticipated,” McGann wrote. He added, “This is clearly beyond the role of fees in the financing of governmental operations.”

Business Group Lauds Decision

Whitley said he hopes other businesses and business organizations will follow the Chamber’s lead and challenge excessive fees that directly affect them.

“The court’s decision addresses the fundamental distinction between fees and taxes,” Whitley said. “If the General Assembly decides it needs additional funds for general purposes, it should be up front about it and enact a tax increase.”

Carroll told the Chicago Tribune the state was justified in hiking fees because many of them had gone unchanged for years. This forced the state to use general fund revenues to cover costs that should have been borne by business, she said.

“The burden fell on taxpayers and we felt that it was time the fees were increased to adjust to everyday levels,” Carroll told the Tribune.

But Whitley argues that in many instances, the state has overreached in its fee hikes.

“Our hope is that this well-reasoned decision will prevent lawmakers in Illinois and across the nation from abusing their power by using excessive fee increases to supplement general revenue funds, which should be generated by taxes paid by all taxpayers,” he said. “By drawing this distinction, the court is saying that state government does not have unlimited power to impose fees.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.