The Washington Post reports that federal-state plans for a high-speed train connecting San Francisco with Los Angles and points in-between may never come off the ground. In the face of public resistance, the state may have to decline some $3.5 billion in federal “stimulus” funds dedicated to an initial segment of the line, connecting the thriving metropolises of Bakersfield and Merced. We may be witnessing an outbreak of fiscal and institutional sanity. Keep reading to learn more.
Last week, the shorthanded Supreme Court bounced back into action with orders on the pending clutter of cases. Among a slew of cert denials, some grants in mostly tedious cases, a handful of CVSG’s (Call for the views of the Solicitor General), and a gaggle of housekeeping orders, there was a relist in The Gillette Company v. California Franchise Tax Board. The humble Question Presented is whether the Multistate Tax Compact has the status of a contract that binds its signatory States. Gillette and a bunch of other companies say “yes.” California says the Compact was just a good-natured joke, and the California Supreme Court agreed.
Yawn. However, after blogging on fun stuff like higher-ed drinking games and impeachments, I feel entitled to return to my true passion: state taxation. Out of the sheer goodness of my heart I’ll skip the FedCourts-ish questions in Gillette (e.g.,why is there a federal common law of contracts?) and instead endeavor to reward patient readers with a modest institutional and political economy point, or two.
Just how and where does one tax the income of business firms that operate in many and often all states? The Supreme Court used to have constitutionally grounded non-discrimination rules for that coordination and allocation problem, but it effectively ditched those rules in a 1959 decision. In response Congress contemplated a federal, preemptive statute to govern the allocation of state taxes. To forestall that legislation, states created the Multistate Tax Compact. The MTC has four stated goals: equitable apportionment of taxes across and among states; uniformity; taxpayer convenience; and the avoidance of duplicative taxation. To those ostensible ends the Compact ordains that member-states must offer taxpayers the option of using the tax apportionment formula that gives equal weight to the (corporate) taxpayer’s sales, employment, and property within the state. (The so-called UDITPA formula is slightly more complicated but you really don’t want to know.) The Compact allows states to craft alternative apportionment formulas, which taxpayers may but need not use.
In real life the Compact has never achieved any of its commendable goals. And in truth, it was never meant to. As I’ve explained at excruciating length, it’s a tax cartel, intended to suppress tax competition among states and to fully tax corporate income, wherever earned. Now, every cartel needs a leader to enforce discipline. OPEC has Saudi Arabia. The EU has Germany. The MTC has California, which became a full member of the Compact in 1972 by enacting the Compact’s terms into domestic law. How did that work for them?
Not so well. Back then, California was a producer state with lots of factories with lots of real estate and employees, so UDITPA worked to its advantage. Soon enough, though, the Golden State decided to de-industrialize and to render itself safe for folks who mostly consume (such as public sector unions, trial lawyers, and delta smelts). The UDITPA formula isn’t kind to consumer states; and so in 1993, California amended its tax code to provide that notwithstanding the provisions of the Compact, all business income would be apportioned to the state by using a double-weighted sales factor. This change substantially increased the tax liability of business taxpayers with a high volume of sales but little or no presence and employment in California.
Gillette et al. paid the taxes and then sued in state court for a refund. Their basic argument is that California was bound by the terms of the Compact and could yank the UDITPA formula only by leaving the Compact entirely, in accordance with its explicit terms (which California eventually did). The companies won in an appellate court. The California Supreme Court reversed, holding that the Compact was not a binding contract but rather a mere “model law” suggestion. Message to Gillette and its razor girls: go pound sand.
That’s sure good news to Gov. Jerry “Bullet Train” Brown and his bandits. California simply doesn’t have the $750 million to pay the estimated tax refund. It needs all its revenue, as well as a ton of other people’s money, to complete a high-speed train that would connect Fresno (motto: “Detroit Without the Charm”) with an almond orchard, and I’m not making this up. (The linked story also reports that with an additional $2.9 billion in federal funding the train might go all the way to Bakersfield and if you don’t find that funny, you’ve never been to Bakersfield.) To keep the dough in-house, though, the California Supremes had to re-write the Compact and contort a half-dozen Supreme Court opinions. The decision screams reversal. The cert decision is the merits decision.
The trick is to actually get the case granted. There’s no lower court split. The case comes from a state court, and cert grants to those courts have well-nigh disappeared from the Court’s docket. (The Justices seem content to let the fifty states hand-carve their very own U.S. Constitution.) And it’s only about money and so who cares.
The petitioners are well aware of the difficulty. To overcome it, they have obtained impressive amicus support from trade associations, experts who actually helped create the MTC and know what it means, and even a state (Ohio). They note that eight other states have pulled California’s stunt, so there’s quite a bit of money at stake (an estimated $3 billion in refunds). They note that some 46 binding, regulatory state compacts are structured like the MTC; if the California Supreme Court’s theory, permitting unilateral modification, were to stick, all those compacts would turn from legal instruments to nifty ideas. And they observe that
[t]his Court repeatedly has recognized its special role in policing the actions of States and state courts that favor local interests, while disadvantaging the residents of other States. In light of this important principle, the Court has acknowledged that a State “cannot be its own ultimate judge” in such a controversy; resolving such a dispute “is the function and duty of the Supreme Court of the Nation.”
The petitioners have to say something like this, because that’s what’s at stake here: the California Supremes’ decision effectively transforms the MTC from a largely ineffectual coordinating device into a mutual aggression pact under which state tax commissioners and legislatures coordinate efforts to overtax each others’ businesses. Still: ouch.
The fact of the matter, which you can’t put in a brief but can divulge on a blog, is that the modern Court has been utterly derelict in performing its “duty and function” to police states’ discriminatory conduct. (The quotes in the just-quoted passage come from long-ago cases I wouldn’t want to rely on.) E.g., try to get cert in a dormant Commerce Clause case, especially a tax case that comes up through state courts: best of luck to you. Ain’t going to happen unless perhaps you are a state that managed to lose in its own courts. So the actual argument has to be that it’s past time for the Court to resume that function and duty; and that this case is a splendid place to start.
The relist means that at least some Justices may want to take a look at this. It takes three authentic votes plus one courtesy vote to grant. Let’s hope those votes can be found.