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Argument preview: Tax forgiveness and equality

At 10 a.m. Wednesday, the Supreme Court will hear one hour of oral argument on Armour, et al., v. Indianapolis, et al. (11-161), testing whether some taxpayers may be given a break on their tax obligations, when that is denied to others.  Arguing for the challenging taxpayers will be Mark T. Stancil of the Washington office of Robbins, Russell, Englert, Orseck, Untereiner & Sauber.  Arguing for the city of Indianapolis, local officials, and agencies will be Paul D. Clement of the Washington law firm of Bancroft PLLC.   This is the only case being argued Wednesday.



Few issues surrounding the financing of government programs can rouse as much resentment among citizens who pay their taxes as the sense that they are paying more than their fair share.   Tax equality, in fact, is highly important in government revenue systems that rely heavily upon taxpayers’ voluntary willingness to pay up, without having to be hounded through costly enforcement efforts.   But how far through the tax collection system is equality constitutionally required?  The Supreme Court now faces that question anew, to determine if — and when — tax forgiveness can be done for some, but not all.

That issue can arise, as it does in the new case of Armour, et al., v. Indianapolis, et al. (11-161), when a government changes its tax policy, at a time when some have already paid up while others still face obligations under the old policy.   The protesting taxpayers in this case want the Court to rule that, if those who still owe can get their remaining obligations cancelled, equivalent refunds should have to be paid to those who had already satisfied their obligations.  The rates were the same, so the obligations should be, the taxpayers contend.  The city, on the other hand, wants the Court to rule that, if the city wants to waive a tax duty for citizens who have lower incomes, it can have such a Robin Hood preference, and need not return money to those who had enough to pay up front.   Taxpayers, according to the city, are not fungible, even if the rates they were charged were the same.

An Indiana mid-level appeals court sided with the taxpayers, but the state Supreme Court sided with the city.   The Indiana high court’s ruling conflicts with decisions by a federal judge in Indiana as well as those of four other states’ supreme courts, and raises basic issues about which of two prior Supreme Court precedents should decide the question.

In the 1989 decision in Allegheny Pittsburgh Coal Co. v. County Commission, a West Virginia case, the Supreme Court ruled that it violates the Constitution’s equal protection guarantee if a county government adopts an assessment policy that treats comparable property in grossly disparate ways, resulting in sharply different tax bills.   The Court did say, though, that government may divide different kinds of property into different tax categories, if doing so was reasonable.

In a 1992 decision, in a California case, Nordlinger v. Hahn, the Court ruled that it did not violate equal protection guarantees when a state constitutional amendment assessed real property at values related to the property value at the time it was bought by the taxpayers rather than to the value it would have in the current real estate market.   Longer-term property owners paid lower taxes based on historic property values, compared to more recent purchasers.  That difference, the Court said, was reasonable, since the longer-term owners had relied for a longer term on their acquisition price.

The Indianapolis case involves the owners of 31 residential real estate parcels in the Northern Estates subdivision of the city.   In April 2001. the city told property owners in that subdivision that they would be assessed a tax to help pay for a new sanitary sewer project, the Brisbane/Manning Barrett Law Project.  The project was designed to connect to the municipal sewer system the properties that were then using individual septic systems.

For each of about 180 parcels, city officials set a tax assessment of $9,278.   The property owners were given the option of paying their assessments in full, or paying in monthly installments over 10, 20 or 30 years, if they also paid an added interest cost of 3.5 percent.  Most of the owners in the Northern Estates development opted to stretch out their payments, but the owners of 31 of the plots opted to pay up front and in full.

In October 2005, the city-county council adopted a new plan to pay for the project, abandoning the existing payment plan, and imposing a $2,500 fee for every dwelling connected to the sanitary sewer system.   In December of that year, the local Board of Public Works forgave all assessment amounts that remained due, eliminating outstanding balances for some 142 owners.   That meant, depending upon the number of years they had chosen for their payment period, that those property owners wound up paying as little as $309.27 of the $9,278 original assessment.

The 31 owners who had paid in full asked for a refund, equal to what was being forgiven for the installment-plan payers.  That ultimately was figured to be a total refund obligation for the city of $273,391.63.   When the city refused to pay any refunds, the property owners sued, and won a refund order of that amount, plus $105,153 in attorneys’ fees and $2,369.53 in expenses.

In ultimately overturning that victory, the Indiana Supreme Court ruled that the city did not have to pay any refunds to the 31 property owners.  It concluded that the city had a legitimate reason in seeking to simplify the way it collected money for sewer improvements by drawing a clear line at which it cut off future obligations, and had a further valid reason in helping middle- and lower-income taxpayers, who, it figured, were less able than the pay-in-full owners to come up with their tax obligations.    It ruled that it was not bound by the Supreme Court’s 1989 ruling in the Allegheny Pittsburgh case, concluding that that ruling was limited to its quite rare facts.

Petition for Certiorari

The 31 Northern Estates property owners took the case on to the Supreme Court in August of last year, raising a single issue: whether the city had a constitutional duty to make refunds when it opted to forgive the tax obligations “of identically situated taxpayers,” when the only difference was the payment schedules the two groups had selected.   The state Supreme Court ruling, the petition argued, allowed the city to retain from each of the 31 taxpayers 30 times as much in taxes as some in the same subdivision had paid on the installment plan.

Contending that the different treatment of taxpayers was “the epitome of arbitrariness,” the 31 homeowners contended that the city had no more reason for its choice than that it was “simply easier and cheaper” to keep the money rather than to return it to those who had paid up front.  “Even under rational-basis review,” the petition asserted, “that is no answer to an equal protection challenge.”

In calling for resolution by the Court of the conflicting lower court decisions, the taxpayers contended that four other state supreme courts “have held that the Equal Protection Clause prohibits tax-forgiveness measures that differentiate between taxpayers who promptly paid their tax assessments in full and those who delayed full payment.”

Moreover, the petition said that there was a direct conflict between the Indiana high court ruling and one by a federal District Court judge in Indiana, holding that the same differing treatment among Indianapolis property owners was a constitutional violation.   The state Supreme Court simply disagreed with that result, the petition said.

Initially, the city and its officials opted not to respond to the taxpayers’ challenge before the Justices.  The Court then asked for a response.  In opposing Supreme Court review, the city’s lawyers argued that city officials were justified in adopting a forward-looking system of paying for future sewer projects, made necessary to accommodate “economically-depressed neighborhoods served by septic systems.”

Among the reasons the city officials cited for their switch in funding was to make a clear break between old and new financing methods, to avoid the costs of collecting tax payments over as long as 30 years, to spare homeowners unable to pay the remaining tax debt from foreclosure, and to accept that those who were inclined to stretch out payments had done so because they had less ability to pay.

This switch, the city contended, was a one-time effort the city had made to extricate itself from a financing system that simply was not working, either for the city or for taxpayers.

The homeowners’ petition was supported by the National Taxpayers Union and by the Tax Foundation.

On November 14, the Court granted review.

Briefs on the Merits

The 31 homeowners’ brief on the merits offered the Court a simple proposition: if a state once makes a clear decision to treat taxpayers whose situations are comparable in the same way, neither the state nor local governments can change their minds and adopt a system of “grossly unequal treatment, even if there might have been some basis for differentiating from each other in the first instance.”  In other words, once there was a commitment to tax equality, it had to be maintained.   That, the brief argued, was a clear standard against which to measure what was done in Indianapolis.

In Indiana, the brief noted, there is a state tax code provision promising explicitly that assessments of property for tax purposes are to be apportioned equally among all “abutting lands or lots.”   Defying that promise, the taxpayers contended, Indianapolis wound up collecting 80 percent of the funds for the sewer project from 31 of the 180 parcel owners.  “This is the same kind and level of gross inequality struck down in Allegheny Pittsburgh, in a state that (like West Virginia in Allegheny Pittsburgh) promised equality.  It should meet the same fate here.”   The brief mounted a vigorous defense of that 1989 precedent, arguing that it was not an isolated precedent, as the state Supreme Court contended.

The taxpayers’ brief also sought to separate itself from any conflict with the city’s desire to help out lower-income property owners.  The taxpayers’ lawsuit, they argued, does not challenge that desire, does not contest the city’s authority to go to a new financing system, does not object to a specifically defined cut-off date, and does not seek to impose added burdens on city administrators.  All of those, it argued, have nothing to do with the core issue: what was the city’s rationale for refusing to pay refunds to the paid-up taxpayers?   The only justification for that, the brief, was to save money for the city, and “saving money is not a rational basis for such extreme disparities.”

Any government that wanted to save money, the brief argued, could always resort to discriminatory taxation, but the Supreme Court has never allowed that argument to save such biased treatment from challenge under equal protection principles.

As for the city’s claim that it was motivated mainly by concern for low-income taxpayers, the homeowners’ brief said the city could have given them a benefit by spelling out more precisely how it would treat individual taxpayers’ financial circumstances.  “If timing of payment were an adequate proxy for wealth,” the property owners asserted, “any number of bizarre distinctions — e.g,, whether taxpayers paid by check or credit card — would pass constitutional muster.”

Indianapolis officials, who had relied on their own city attorneys to defend the case before the Supreme Court had granted review, moved to escalate the strength of their case by hiring former U.S. Solicitor General Paul D. Clement, now a Washington attorney, to file their merits brief and to argue the case.

Relying heavily upon the constitutionally tolerant standard of rational-basis review, the city’s brief suggested that Indianapolis adopted “an eminently rational approach” in order to switch away “from an unpopular program.”   Once that switch in policy was adopted, the filing said, the city turned to the issue of how to shut down the prior financing mechanism.   It was “perfectly rational,” the brief said, for the city to choose “a middle course” between collecting what taxpayers still owed for another three decades, or making refunds “at enormous cost and administrative difficulty.”

The “middle course” was to forgive outstanding balances, shut down the old program for future projects, and refuse “to reopen closed transactions or refund past payments.”  That choice, according to the brief, was simply one of the choices that every branch of government often makes, between “prospective action and retroactively revisiting past transactions.”   Giving up on an unpopular program and moving on, the city asserted, is more than sufficient justification under a rational standard of constitutional review.

Repeating the use of the word “rationally” as it ran through each of the city’s rationales, the brief wound up arguing that what this city did “is no different from countless government programs that announce forgiveness or amnesty for those who owe some obligation to the government.”  It is not common, in such situations, to pay back those who had paid in full.  Citing the example of a person who pays a parking ticket in full, but does so late, under an amnesty program, that person should have no claim if someone else is even tardier and pays later.  In such differing treatment, Indianapolis argued, “there is no inequality of constitutional dimension.   The impulse that produces tax forgiveness and parking ticket amnesty is to be encouraged, not rendered unconstitutional if unaccompanied by refunds.”

To the argument that Indiana’s tax code guarantees equal tax assessments on like property, the city’s brief argued that this applies only to the assessments at the outset, and there was no violation of that equality principle in the sewer financing policy switch.  It “mixes apples and oranges,” the brief went on, to treat initial equality the same as forgiveness equality when a financing program is to be abandoned.

The city also argues that the Supreme Court precedent in Allegheny Pittsburgh was “severely circumscribed” only three years later, and the state court rulings cited by the taxpayers are “inapposite.”   The Court’s 1992 decision in the Nordlinger case, the city asserted, confirmed that the West Virginia decision “was a narrow, factbound decision, not a revolution in Equal Protection jurisprudence.”   The Allegheny Pittsburgh ruling was so weak, the city suggested, that the Indianapolis taxpayers did not even rely upon it in the lower courts.   Moreover, the city said, Allegheny Pittsburgh dealt with assessments, not tax forgiveness.

The taxpayers’ case drew the amici support of the same two tax policy groups that favored review, along with the free-market advocacy group, the Institute for Justice, along with the National Associaton of Home Builders.  Indianapolis attracted the supported of a collection of municipal government associations and their lawyers.


Sometimes, simplicity is a better strategy for winning a Supreme Court case, if it is argued well and makes the Justices suspicious of the nuance, qualification, and rationalization that the other side has offered.   The 31 Indianapolis homeowners may have done both: it is no exaggeration that they simply paid much more than the installment plan taxpayers did — 80 percent of the sewer tax collections — and it is plain that the city’s several justifications for the forgiveness do not do as much work as they need to do to explain away the refusal to provide refunds.

The class-based difference in treatment may well be the city’s weakest argument, since there is no evidence that the city did any actual calculations about who could afford to pay up front and who needed to stretch out payments.  From all that appears, that was mere supposition, and yet it is that argument that should have provided the most sympathy for treating homeowners in the same subdivision differently.  Instead of calculating ability to pay, the city pigeon-holed household income within the unexplained individual choice of pay schedule.  Such choices might well have been made at random, rather than as calculations of how much cushion there was in a given family’s budget.

There is nothing about this case that would prevent a city from shifting its tax policy or revising its plans for financing civic improvements.  No one is claiming that Indianapolis was stuck with one way to pay for hooking up homes with city sewers, and no one is arguing that a city cannot create legitimate classifications between taxpayers who are convincingly placed in different circumstances.   The homeowners’ lawyers have made those points clearly.

There is a good deal of energy spent in this case over how important the Court’s prior precedents are to the outcome here — that is, whether Allegheny Pittsburgh is still good law, or whether Nordlinger speaks more directly to tax classifications.  This dispute in Indianapolis has quite a different focus: the Court may well have to start fresh to analyze whether tax forgiveness, or any other form of “amnesty,” to use Indianapolis’s provocative analogy, is something that has to satisfy equal protection principles.



Recommended Citation: Lyle Denniston, Argument preview: Tax forgiveness and equality, SCOTUSblog (Feb. 28, 2012, 12:04 AM),