1. Whether New York State can lawfully rescind a tax on workers who commute to New York City without seeking a home rule message from the City.

2. Whether a tax on workers who commute to New York City from only outside New York State violates the United States Constitution.

1. Yes. A home rule message is not required since the changing of the tax law deals with a substantial state interest and bears a reasonable relation to that concern.

2. Yes. The tax law violates the Privileges and Immunities Clause and the Commerce Clause of the United States Constitution.

In 1966, the state legislature authorized the New York City government to collect a "commuter tax" from any nonresident of the city that worked, but did not live, within the city. That same year, the city imposed the tax on non-residents working in the City. In 1999, the legislature amended the law so that the commuter tax only applied to out-of-state residents, and not to New York State residents residing in counties outside the City. This amendment, called "Chapter 5 of the Laws of 1999", also declared that should this change be held unconstitutional or invalid, then the entire tax authorization would be repealed retroactively and in its entirety.

Five separate lawsuits were consolidated into the instant appeal. In the first, the City of New York challenged the constitutionality of the amended law since it was passed without a home rule message from the City. The other four actions were brought by residents of New Jersey and Connecticut, and by the State of Connecticut. These plaintiffs argued that Chapter 5 violated the federal Constitution and sought injunctive relief against further collection of the tax. Plaintiffs in Wolf also sought attorney fees.

The supreme court declared the taxation of non-resident commuters unconstitutional, but declined to enjoin collection of the tax, and denied the Wolf plaintiffs attorney fees. The Appellate Division unanimously affirmed. The Court of Appeals affirmed both lower courts.

The Court held that no home rule message was necessary for the state to change the law.

The Court determined the issue based upon an application of the Adler test, which balances State and local interests in determining home rule questions. Adler v. Deegan, 251 N.Y. 467. The Adler test holds that if the issue is substantially a matter of State concern in degree, depth or extent, then the Legislature may act without home approval, while considering the concerns of the local government. Wambat Realty Corp. v. State of New York, 41 NY2d 490, 494. The law must also bear a reasonable relationship to the legitimate State interest. New York City v. Patrolmen's AssÁn, 89 NY2d 380, 391. In applying the test, the Court reasoned that the state has a substantial interest in easing the burden of the tax on in-state commuters. This tax relief, as well an encouragement in growth of the city created by this tax break, constitutes a substantial state concern. The Court rejected the City's contention that political motivations negated the actual and substantial state interest in the tax law. Instead, the Court reaffirmed its reliance on the stated purpose and legislative history of the law in question to determine the substantial state concern. Finally, the mere fact that the state previously asked the City for a home rule message when enacting the policy in 1966 does not require the state to ask again, as the state had not surrendered its taxation power.

The Court also held that the selective taxation of only non-state resident commuters violates the federal constitution under both the Privileges and Immunities Clause and the Commerce Clause. The standard of the Privileges and Immunities Clause requires that citizens of the taxing state be treated substantially equally to non-citizen taxpayers. Austin v. New Hampshire, 420 U.S. 656, 665. If they are not treated equally, then the taxing state must show both that there is a substantial reason for the difference in treatment and that the discrimination practiced against nonresidents bears a substantial relationship to the taxing State's objective. Supreme Court of New Hampshire v. Piper, 470 US 274, 284. In the instant case, the Court found that the tax plan denied non-residents the Privileges and Immunities of New York residents. The Court rejected the argument that the commuter tax be considered an offset to an aggregation of general tax revenues. The "substantial equality" of a tax is measured by assessing the impact of the tax at issue on nonresidents and residents, and not by measuring each group's relative tax burdens. The Court declared that the State failed the substantiality test, finding that the legislative history and intent did not include an equalization between residents and non-residents. Further, the Court found that since non-residents do not constitute the "particular evil" at which Chapter 5 is aimed, no reasonable relationship exists between a disparate tax burden between New York City residents and non-resident commuters to justify the discriminatory taxation.

The Court found that the tax also violated the Commerce Clause of the federal Constitution. The purpose of the Dormant Commerce Clause is to prohibit economic protectionism burdening out-of-state competitors to benefit in-state economic interests. Dormant Commerce Clause analysis requires a two-step inquiry. The first question is whether the statute at issue regulates evenly, with only incidental effects on interstate commerce, or whether it discriminates against interstate commerce. State laws that discriminate against interstate commerce are per se invalid. The Court found that since Chapter 5 promoted economic protectionism by benefiting New York State residents, and burdening out-of-state commuters, it was facially invalid. Despite Chapter 5's facial invalidity, however, it would survive scrutiny if the State could show that the tax advanced a local purpose not adequately served by reasonable, non-discriminatory alternatives. The Court found that tax relief for residents does not justify a discriminatory tax on non-resident workers. The tax was not justifiable as necessary to a local purpose because there existed alternative ways to relieve the alleged burden on in state commuters without discriminating.

The Court rejected the State's argument that the Commerce Clause was not implicated because the Plaintiffs failed to show that Chapter 5 had a demonstrable effect on an identifiable interstate market. The Court noted that the movement of persons across State lines had long been considered a form of commerce, and that thousands of daily commuters working in New York City clearly had an impact on interstate commerce. Additionally, the Court rejected the State's argument that Tamagni v. Tax Appeals Tribunal of the State of New York, 91 N.Y. 2d 530 stands for the proposition that the Commerce Clause does not protect commuters. In the instant case, the Court found that the tax was clearly assessed against the interstate labor market, and favored intrastate, rather than interstate, economic activity by taxing only out-of-state residents.

Finally, the Court held that awarding attorney fees in this case was inappropriate since the state had an obligation to defend its laws.