Water rate increase not a tax hike, court rules

The Michigan Court of Appeals ruled 2-1 that an increase in water and sewer rates is not a tax increase, even if comes without voter approval. The ruling comes in a case arising out of Mackinaw City.

Mackinaw City, which is officially a village, increased its sewer rates in January 2018 after the Michigan Department of Environmental Quality said it violated the Michigan Safe Water Drinking Act. State officials said the village didn’t have enough water storage capacity, and its rates were not high enough to pay for necessary changes.

The Mackinaw Area Tourist Bureau sued the village over the rate increase, claiming it levied a tax increase without voter approval, violating the Headlee Amendment.

Although the village has a population of 860, the water system serves up to 13,000 people during the summer tourist season, when water parks and hotels use large amounts of water.

A lower court had previously ruled in favor of the tourism bureau, but the Court of Appeals sided with the village.

“Increasing water and sewer rates to generate revenue to fund necessary capital improvements to the systems serves a regulatory purpose,” Judge Colleen O’Brien wrote in the 20-page May 23 ruling. “There is no bright-line rule prohibiting water rates from being increased to fund ‘new infrastructure’ necessary for the water-supply system’s continued safe operation.”

Judge Michael Kelly joined O’Brien in the majority while Judge Kirsten Frank Kelly dissented.

The tourism group is made up of hotels, motels, bars and other businesses that benefit from tourism.

The trial court had sided with the tourism bureau, which said the rate increase was a tax because some of it funded a new water tower.

The higher court applied the three-factor test from the case Bolt v. City of Lansing. It found the disputed rates “did not constitute a tax.”

“The court believed that ‘new infrastructure’ could never be funded through a user fee, so the water-rate increase must be a tax,” the May ruling reads. The high court considered this to be in error.

Pat Rivera, superintendent of utilities for Mackinaw City, told CapCon “We’re glad it’s over.”

“There are a lot of infrastructure improvements that have been put on the back burner waiting for a result of this case,” Rivera said in a phone interview. “Now, we want to move forward with these water and wastewater improvements and just put this behind us.”

The attorneys representing the tourism businesses haven’t yet responded to a request for comment. Neither have attorneys for Mackinaw City.

The order reverses the trial court’s order granting the plaintiff’s motion for summary disposition. It remands the trial court to grant summary disposition in favor of Mackinaw City.

A 2017 analysis from the engineering firm C2AE found that a few customers used large amounts of water.

“This means that 18% of your customers use 66% of your water,” the lawsuit says, quoting the analysis.

In 2023, The American Society of Civil Engineers gave Michigan’s stormwater infrastructure system a ‘D’ grade and wastewater a ‘C’ grade.