Taxes and Equal Protection

     The buzz today is about the Supreme Court's grant of certiorari in the Health Care cases, and that certainly merits comment, but the Court also granted cert in Armour v. Indianapolis, a case coming from the Indiana Supreme Court.  In short, Indiana law permits cities to finance certain new infrastructure inprovements by leving assessments on benefitted property owners, and giving those property owners the choice of paying the assessment in full at the time of the levy, or amortizing the assessment over 10, 20, or 30 years, with an interest rate of 3.5% on the unpaid balance.  Indianapolis assessed some 180 residential owners about $9,000 apiece to bring in sewer to replace their septic systems.  Thirty one owners paid in full; the remainder took one of the amortization options.  Then, a few years later the city decided that it would finance new sewer projects by municipal bonds instead.  The reason for the change was to lessen the financial burden on low and mid-income taxpayers and to hasten the replacement of septic systems with sewers.  In doing so, the city forgave the outstanding assessments of those owners who had opted for borrowing from the city, and refused to refund any portion of the fully-paid assessment made by the 31 owners who had paid up front. 

     The Indiana Supreme Court concluded that the federal equal protection guarantee was not offended by this treatment of the 31 owners.  The applicable standard is minimal scrutiny, and Indianapolis had a legitimate government interest to which the refusal was rationally related.  What was that interest?  To preserve scarce municipal financial resources. 

     There is no doubt that differential taxation may be valid when supported by rational reasons to accomplish a legitimate end.  Although some, such as Richard Epstein, have challenged the legitimacy of the progressively graduated income tax, one need not take on that burden to express some doubts about Indy's scheme.  The preservation of scarce financial resources is a handy justification for almost any refusal by government to treat identically situated taxpayers unequally.  Were Indy to declare that the local property tax will be replaced by an income tax and that it would refund the current year's taxes already paid by owners, but only to owners whose birthdate is on an odd-numbered day, this would surely preserve scarce municipal financial resources.  But it would be spectacularly arbitrary.  So, too, if the city announced that, as part of the transition to the new income tax-but-no-property tax regime, it would forego collection of unpaid property taxes for the current year but would not refund any portion of the current year property taxes to those owners who had already paid their property taxes in full.  But that is this case.  If this isn't arbitrary, the term has been stripped of all meaning. 

Comments

[James Grimmelmann]

All?

[Joe]

This is really interesting. My first thought was to look at the Indiana Supreme Court opinion to see how it resolved the state constitutional uniform taxation claim -- only to see that it didn't. Which then led me to the Indiana state constitution to see why not. Turns out Indiana doesn't have the typical "taxes must be uniform and/or reasonable" provision that most or at least many states due.

See, for example, Indiana's neighbor to the west: Illinois property taxes assessed directly by the state must be uniform (Article IX, section 4(a)), and property taxes assessed at the county level (which can occur when the counties exceed 200,000 people) must be uniform within the class and reasonable (Id. at 4(b)).