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Opinion recap: Not so equal tax equality


A switch in a local government’s tax policy that leaves some taxpayers worse off than others need not be remedied if that would be too much of a bureaucratic burden, even if state law promises that taxpayers will be treated equally, a divided Supreme Court ruled on Monday.  Unless the state’s promise of equality actually also embraced a refund for those worse off, the differing outcomes for the taxpayers are not unconstitutional, the Court declared by a 6-3 vote in Armour, et al., v. Indianapolis (11-161).

The Armour case had been watched closely to see if the Court would give new life to a 1989 decision that struck down a local government’s tax policy that resulted in sharply higher tax bills for some property owners than others, despite the similarity of their properties.   But the Court majority did not do that; instead, it treated that prior ruling (Allegheny Pittsburgh Coal v. Webster County Commission) as “the rare case” where a state’s guarantee of tax equality is so “clear and dramatic” that there is no rational way to explain it away.

In the Armour case, the state law assured equality in setting initial assessments, but did not promise a refund if a switch introduced inequality at the other end, the Court said.  It would have been too costly and too much of a bureaucratic hassle, the majority concluded, for city officials to try to figure out how to assure equality after the switch in tax policy — that is, how to work out a system to give “forgiveness” to taxpayers who had paid their full share of sewer taxes to match the “forgiveness” given to those who had not paid their full share so that they did not have to cover the rest, Justice Stephen G. Breyer wrote for the majority.

Administrative cost is enough of a “rational” explanation to justify the difference, the opinion said.  To give the taxpayers who paid up-front a guarantee of a refund, Breyer wrote, “would risk transforming ordinary violations of ordinary state tax law into violations of the Federal Constitution.”

In dollar terms, Chief Justice John G. Roberts, Jr., wrote for the dissenters, the taxpayers who had paid their sewer hook-up assessments in full at the beginning paid the full $9,278 for the connection, while those whose due balances were waived off by the change in policy wound up paying as little as $309.27.   That meant that those who had opted to pay up-front “paid between 10 and 30 times as much for their sewer hook-ups as their neighbors,” according to the dissent.  Roberts was joined in dissent by Justices Samuel A. Alito, Jr., and Antonin Scalia.

The case went back to 2001, when the city of Indianapolis told property owners in a subdivision that they would be assessed $9,278 as their share of the cost of a new sanitary sewer project.  Each of the 180 parcels in the subdivision would pay that amount, as a cost of their individual hook-up to the sewer, the city said.  These properties up to then had been using septic systems; the new sewers would be more efficient and more environmentally friendly.

Property owners were given an option: pay in full or pay in monthly installments that could stretch out over 10, 20 or 30 years, with 3.5 percent annual interest tacked on.  Most of the owners chose to stretch out their payments.  The owners of 31 of the parcels, however, chose to pay the full amount at the outset.

Four years later, the city council adopted a new plan to pay for such public works projects.  It abandoned the existing plan for financing sewer improvements, and replaced it with a flat $2,500 fee to connect to sewer pipes.  The local Board of Public Works chose to forgive all assessments still outstanding.  The 31 lot owners who had paid in full in the beginning asked for a refund, equal to what they would have been forgiven had they been paying on the installment plan.l  The city refused the request, and the 31 owners sued.

A local trial court agreed with those taxpayers, ordering the city to pay a total of $273,392 in refunds, plus more than $100,000 in attorneys’ fees and expenses of $2,370.  A state appeals court ruled that those taxpayers should win, but ordered the trial court to figure out how to put them on an equal footing.  The Indiana Supreme Court ruled for the city, however, concluding that the city had valid reasons for abandoning the old sewer financing system and going to a new method.

The switch in policy, the state’s highest court said, was justified by reducing administrative costs, sparing some homeowners from financial hardship, making a clear break with the old financing system, and  saving budget funds for the city.   That court dismissed the Supreme Court’s Allegheny Pittsburgh Coal precedent as limited to its own facts.

The Supreme Court majority agreed with the state’s highest court, in an opinion that was full of admonitions against courts’ second-guessing of state and local tax policy, stressing that “legislatures have especially broad latitude in creating classifications and distinctions in tax statutes.”   All that Indianapolis city officials needed to show, the Breyer opinion said, was that “there is a plausible policy reason” for the differing treatment that resulted from the switch in sewer project financing.

The main reason the majority found to justify the outcome of the switch was the administrative burden it said would result if city officials had to maintain the old accounts under the abandoned financing system, tracking down defaulters, spending big sums on computers to track the debts, and devising a workable method for calculating refunds.  It was not simply a matter of issuing checks to those taxpayers who had paid in full, the opinion insisted.

On the differing treatment itself, the majority said, Indianapolis was justified in drawing a distinction between past payments and future obligations.  That, it said, was “a line well known to the law,” similar to an “amnesty program” such as cities sometimes use to forgive outstanding parking tickets or other obligations.   Such a line, the Court added, does not have to be a perfect one, or one that is necessarily preferable to another line that might be drawn.  The Constitution “requires only that the line actually drawn be a rational line…We believe that the line the city drew here is rational,” the opinion concluded.

The Breyer opinion was supported by Justices Ruth Bader Ginsburg, Elena Kagan, Anthony M. Kennedy, Sonia Sotomayor, and Clarence Thomas.

The Chief Justice, in dissent, relied heavily on the Court’s prior opinion in Allegheny Pittsburgh Coal, and argued that the “gross disparity” found in that case was comparable in dollar terms to those in the Indianapolis sewer assessments case.  That precedent, Roberts wrote, stands for “the common-sense proposition that the Equal Protection Clause is violated  by state action that deprives a citizen of even ‘rough equality in tax treatment,’ when state law itself specifically provides that all the affected taxpayers are in the same category for tax purposes.”

Dismissing the city’s complaint of a heavy administrative burden if it had to provide refunds, the dissenters said that “what the city employees would need to do…is cut the checks and mail them out.”

Plain English summary:

Governments pay for civic projects, like new sewers, by requiring property owners to pay their fair share.   In Indiana, state law assures that such shares would be equal for homeowners as they connected to the city sewer system.  But Indianapolis decided to let taxpayers either pay for their connection one month at a time, or all at once, in the beginning.  Later, it switched its payment system, and forgave any amounts still owed by those paying on the installment plan.  Those who had paid in full thought that was unfair, because they had paid everything they owed, while their neighbors had not.  They asked for refunds to make them equal, as state law required.  The Court ruled that, as long as the initial obligations to pay were the same, the city need not pay refunds to those who had paid in full because that would be a bureaucratic hassle, and state law did not guarantee refunds, anyway.




Recommended Citation: Lyle Denniston, Opinion recap: Not so equal tax equality, SCOTUSblog (Jun. 4, 2012, 2:47 PM),