Oral argument: Feb. 29, 2012
Appealed from: Indiana Supreme Court (May 10, 2011)
EQUAL PROTECTION, RATIONAL BASIS, SPECIAL ASSESSMENT, TAXPAYER, BARRETT LAW
The Supreme Court will resolve whether a local taxing authority violated the Equal Protection Clause when it forgave the outstanding debt of taxpayers who elected to pay a special assessment over the course of several years while refusing to refund similarly situated taxpayers who paid in full. The Indiana Supreme Court determined that Indianapolis did not violate the Equal Protection Clause despite the large disparity in tax obligations of identically situated taxpayers. Petitioners Christine Armour and other taxpayers argue that where a state has made a determination to treat a group of properties as the same class, it must treat the taxpayers of those properties with rough equality. They assert that forgiving the outstanding debt of some taxpayers without issuing refunds to those who made a single full payment violates the Equal Protection Clause. Respondent City of Indianapolis maintains that the differing treatment is based on legitimate governmental interests and is constitutionally valid.
Whether the Equal Protection Clause precludes a local taxing authority from refusing to refund payments made by those who have paid their assessments in full, while forgiving the obligations of identically situated taxpayers who chose to pay over a multi-year installment plan.
Does a city violate the Equal Protection Clause when it forgives the outstanding debt of taxpayers who elected to pay an assessment over the course of several years but refuses to refund similarly situated taxpayers who paid the tax in full?
Indiana’s Barrett Law allows municipalities to fund public improvements through special assessments levied against and apportioned equally among benefited properties. See City of Indianapolis v. Armour, 946 N.E.2d 553, 556–57 (Ind. 2011). Using the Barrett Law, the City of Indianapolis (“City”) funded numerous sewer projects, including connecting 180 properties in the Northern Estates neighborhood to the Indianapolis sewer system. See id. at 557. The City levied a $9,278 special assessment that could either be paid up front or in monthly installments over the course of 10, 20, or 30 years. See id. 142 of the 180 property owners elected to use the installment method; the others made a single payment in full. See id. The City charged an annual interest rate of 3.5% to owners who chose the installment method and placed a statutory lien on their homes. See id. One year after levying the special assessment, the City created the Septic Tank Elimination Program in response to public health concerns from outmoded septic systems and concerns over the burden imposed on low- to middle-income property owners by the Barrett Law financing method. See id.
The City eliminated the debts owed by the 142 property owners who elected to pay the special assessment in installments. See id. at 558. The City also forgave taxpayers’ debts from more than 40 other sewer projects that were being funded using the Barrett Law at the time. See id. at 557–58. However, the City did not refund any portion of amounts already paid. See id. at 558. Some property owners in the Northern Estates neighborhood who had fully paid the special assessment petitioned the Indiana Board of Public Works for a refund, but the Board denied the petitions on the grounds that it would be unfair to owners who had paid assessments for other Barrett Law projects. See id. The owners filed a complaint against the City for violating due process and equal protection, but they abandoned their due process argument after the trial court granted their motion for summary judgment. See id.
The Indiana Court of Appeals determined that the City lacked a rational basis for eliminating the debt of installment taxpayers while denying any relief to owners who paid the assessment up front. See id. at 559. The Indiana Supreme Court vacated that judgment and found that the ordinance was rationally related to legitimate governmental interests—namely, reducing administrative costs, providing financial relief to property owners, preserving resources, and making a smooth transition between financing methods. See id. at 559, 564. The Supreme Court granted certiorari on November 14, 2011.
According to the City of Indianapolis (“City”), the decision to eliminate the outstanding debt of some taxpayers had a rational basis and therefore did not violate the Equal Protection Clause. See Brief for Respondent, City of Indianapolis at 21–22. Christine Armour and other taxpayers maintain that the City did not have a rational basis for treating taxpayers who paid the assessment in full differently from taxpayers who paid in installments. See Brief for Petitioners, Christine Armour, et al. at 22, 36–37.
Impact on Taxpayers
The City argues that it decided to eliminate outstanding debts owed by the taxpayers who elected to pay the assessment in installments for the legitimate purpose of providing financial relief to low-income taxpayers. See Brief for Respondent at 57. The City explains that installment-method taxpayers would face a considerably greater financial burden than taxpayers who paid in full because they would be required to pay new fees under the Septic Tank Elimination Program while also paying installments under the Barrett Law regime. See id.
Armour responds that refunding the early taxpayers would not diminish the financial relief provided to installment-method taxpayers. See Brief for Petitioners at 52. According to Armour, nothing in the record supports a correlation between wealth and the taxpayer’s chosen method of payment. See id. at 53. Furthermore, Armour argues that the City refused to provide refunds to middle- to lower-income taxpayers who paid their assessments in full, even though it provided prospective relief to some wealthier taxpayers. See id. at 53–54.
The Tax Foundation adds that the Indiana Supreme Court’s decision will undermine business certainty and respect for the law. See Brief of Amicus Curiae Tax Foundation in Support of Petitioners at 7. According to the Tax Foundation, businesses face greater difficulty making reasonable predictions about the future tax climate when a city acts arbitrarily, as Indianapolis did here. See id. The Tax Foundation maintains that the City’s conduct will cause taxpayers to view tax policies as unfair, creating tension between citizens and government. See id. at 9.
Impact on Government
The National Taxpayers Union argues that allowing the City to eliminate outstanding balances will not only cause unfair harm to some taxpayers, but it will ultimately limit the flexibility of taxing authorities. See Brief of Amicus Curiae National Taxpayers Union in Support of Petitioners at 18. The National Taxpayers Union contends that by providing a choice between methods of payment, the government can raise some funds quickly without forcing all taxpayers to make a single, large expenditure. See id. at 19. The National Taxpayers Union claims that if the City’s conduct is upheld, it will discourage taxpayers from paying assessments up front because the government could decide to favor taxpayers who paid in installments. See id. Consequently, the National Taxpayers Union adds, this could cause the government make the politically impractical decision to require all taxpayers to pay the amount in full. See id. at 19.
Armour adds that the City would face minimal administrative costs if the taxpayers who paid in full were paid a refund in the amount of the difference between the amount they paid and the refund given to taxpayers who paid in installments. See Brief of Petitioners at 44. According to Armour, the City’s only burden would be to issue checks since the proper refund amount can be easily determined. See id.
The International City/County Management Association and other organizations respond that a decision in favor of the taxpayers could deter state and local government from making necessary alterations to financing plans for public works projects. See Brief of Amici Curiae International City/County Management Association, et al. in Support of Respondent at 14–16. According to those organizations, when determining how to finance infrastructural projects, taxing authorities confront conflicting policy and pragmatic interests that often require reevaluation in light of changing circumstances, public feedback, and technological advancement. See id. at 15. The organizations maintain that a decision in favor of the taxpayers would discourage state and local governments from changing infrastructure financing in the way that best serves the public interest. See id. at 15–16.
According to the International Municipal Lawyers Association, the City of Indianapolis had valid financial reasons to provide prospective relief while denying refunds. See Brief of Amicus Curiae International Municipal Lawyers Association in Support of Respondent at 8. The Lawyers Association claims that tax refunds impose greater financial and administrative burdens than forgiveness of debt. See id. at 9, 12. The City confirms that it would face a considerable administrative burden if required to provide refunds, especially because the City would be required to refund payments to similarly situated property owners from other projects. See Brief for Respondent at 56.
In this case, the Supreme Court will determine whether the City of Indianapolis (“City”) violated the Equal Protection Clause when it eliminated the debts of taxpayers who elected to pay a special assessment in installments but refused to refund taxpayers who paid the full amount in a single payment. Respondent, the City, argues that its decision to eliminate future payment obligations of taxpayers without refunding past payments has a rational basis and therefore does not violate the Equal Protection Clause. See Brief for Respondent, City of Indianapolis at 22. Petitioner Christine Armour and other taxpayers assert that where the state has made a decision to treat a class of property equally, it must also treat the owners of all property that fit within that class roughly equally for tax purposes. See Brief for Petitioners, Christine Armour, et al. at 23. They reject the idea that the City’s decision to forgive the debts of only the taxpayers who paid in installments does not have a rational basis, and contend that the City’s financial interests, which they see as the true basis for the City’s decision, cannot justify the distinction it drew between taxpayers. See id. at 37.
Rational Basis Argument
The City notes that rational basis review determines whether a government’s actions were in violation of the Equal Protection Clause. See Brief for Respondent at 22. It further states that rational basis only requires that the challenged classification promote a legitimate state interest to be constitutional, and that the burden is up to the party challenging the legislation to overcome a strong presumption that the classification is valid. See id. at 23–24. According to the City, this type of review is particularly deferential when the government action at issue relates to taxation. See id. at 26.
In reviewing the circumstances of the classification in this case, the City contends that it was reasonable for the City to eliminate any outstanding debt from the unpopular Barrett Law financing method. See id. at 26–27. It argues that doing so allows a clean break from the previously used method and avoids confusion regarding whether a transition from one financing regime to another has taken place. See id. at 27. This way, the City asserts, the transition has a lesser financial impact on lower- and middle-income residents, for they would not be subjected to any double payments arising out of the old and new financing methods. See id. at 29. Moreover, it states that the elimination of prospective payment obligations makes administrative sense, for the City would otherwise be collecting Barrett payments for up to thirty years. See id. at 28. In the City’s view, simplifying the transition process serves an important purpose of ensuring a smooth regulatory transition. See id.
While the City asserts that its decision is valid under rational review, Armour argues that there is not a sufficient link between the differential treatment and rational goals. See Brief for Petitioner at 36. She contends that where a state has placed a group of property in the same class, its varying treatment of property owners that fall within that class violates the Equal Protection Clause. See id. at 24–25. Armour observes that the City assessed an equal share of the project’s cost onto its taxpayers and the taxpayers chose whether to pay that cost in a one-time or multiple payments. See id. at 31. Due to the City’s forgiveness of outstanding debt, Armour contends that those who made the single full payment were taxed up to 30 times as much as others who were similarly situated to them. See id. at 32. According to Armour, this grossly compromised the taxpayers’ reasonable expectations and put citizens who have already paid the full amount at a significant financial disadvantage. See id. at 32, 37.
She rejects the City’s assertion that its decision to refund only taxpayers who chose to pay the assessment in installments eased the financial burden on lower- and middle-income citizens, stating that this only supports the abandonment of the Barnett financing method and does not explain the City’s decision to treat similarly situated taxpayers differently. See id. at 37–38. Armour adds that if the City wanted to ease the burden on lower- and middle-income taxpayers, it could have given refunds to or forgiven the debts of homeowners who had actually had lower incomes, instead of discriminating based on method of payment. See id. at 52.
She argues that the City’s administrative convenience argument also fails because it only explains why the City forgave outstanding debt, not why it withheld the same relief to taxpayers who already paid the full amount. See id. at 39–40. The administrative burden, according to Armour, is not nearly great enough to justify the immense disparity in treatment. See id. at 45. Armour contends that it is common sense that it is more costly to pay refunds than to deny them. See id. Armour adds that allowing administrative convenience to justify disparate treatment in taxation would allow governments to freely implement arbitrary tax programs. See id. at 45.
Burden of Providing Refunds
The City argues that the taxpayers who have already paid the payment in full are not similarly situated to those who have opted to pay in installments because they do not have outstanding balances. See Brief for Respondent at 30. The key difference, it contends, is timing. See id. at 32. The City notes that if it is required to provide refunds to these taxpayers, it essentially means that to make decisions affecting prospective obligations, the government needs to make retroactive changes as well. See id. at 30. The City argues that there is a clear line between prospective and retroactive changes and that there is a legitimate interest in not revisiting past transactions. See id. at 30–31. The City also notes that deciding how far back the government should go in time when issuing a refund would be even more arbitrary of a determination than deciding not to give out any refunds. See id. The City adds that it is rational to draw a distinction between taxpayers who owe money and those who paid in full, analogizing that litigants can benefit from new constitutional rules when their cases are pending, but not once there is a final judgment. See id. at 32. Furthermore, the City emphasizes that it would be extremely costly and difficult for the City to issue refunds. See id. at 36.
Noting that the issue in this case centers on the City’s providing financial relief to some taxpayers but not others, Armour asserts that the only legitimate reason that the City has put forward is preserving its own financial resources. See id. at 37. She argues that the Supreme Court has previously held that a goal of saving resources alone cannot justify differing treatment towards similarly situated citizens if the classification is not rationally related to other legitimate purposes. See id. at 41, 43. Armour states that if conserving or raising financial resources could function as justifications for discriminatory tax programs, it would allow any and all arbitrary taxes to be constitutionally valid. See id. at 43.
The Court’s Decision in Allegheny Pittsburgh Coal Co. v. County Commission
Armour points out that in Allegheny Pittsburgh Coal Co. v. County Commission of Webster County, the Supreme Court held that a state cannot deny “rough equality” in taxation to property owners in a class once the state determines that all property within that class should be given equal tax treatment. See Brief for Petitioner at 22. Armour argues that the Allegheny Pittsburgh decision controls in this case because Indiana law provides that all property within a class should be taxed equally. See id. at 31–32. Armour contends that the City demonstrated its commitment to equality through the Barrett Law that required the costs for sewage projects be allocated equally, and through the Septic Tank Elimination Program that required all homeowners using the sewer system to pay the same flat fee. See id. at 31–32. Armour asserts that like in Allegheny Pittsburgh, taxpayers here who paid the full amount of the assessment are forced to pay substantially more than other owners of property in the same class. See id. at 32.
The City maintains that Allegheny Pittsburgh is distinguishable from this case. See Brief for Respondent at 45. The City contends that unlike Allegheny Pittsburgh, where the petitioners were challenging the property assessments themselves, here, Armour is only challenging the City’s decision not to refund payments to a group of taxpayers. See id. at 46. Armour contends that although Allegheny Pittsburgh held that assessments must be imposed equally, neither the United States Constitution nor state law requires the City to provide refunds for prior tax payments. See id. at 47. Further, Armour argues that the decision in Allegheny Pittsburgh was limited to the facts of that case. See id. at 48.
In this case, the Supreme Court will determine whether a city violated the Equal Protection Clause by forgiving outstanding debt payments of taxpayers who opted to pay their assessment fees in multiple installments while withholding refunds from taxpayers who have made the full payment. Respondent City of Indianapolis states that such differential treatment is rationally related to legitimate interests, such as assuring a smooth transition from one financing program to another, and is therefore constitutionally valid. Petitioner Christine Armour and other taxpayers argue that a state must provide roughly equal treatment to similarly situated taxpayers and that preserving financial resources, which it views as the City’s main reason for refusing to issue refunds, cannot solely justify discriminatory taxation programs. A decision in favor of the City may result in the inability of businesses to make accurate predictions about the future tax climate and increase discontent among citizens towards taxing authorities, or it could also allow the City to make regulatory transitions without facing great financial and administrative burden.
Edited by: Natanya DeWeese
Tax Policy Blog, Joseph Henchman: Supreme Court to Hear Challenges to Indianapolis Tax Refund Policy & Health Care Reform Law (Nov. 14, 2011)
Thomson Reuters News & Insight, Rebecca Hamilton: U.S. Supreme Court to hear Indianapolis tax case (Nov. 14, 2011)
Heartlander, Doug Kellogg: Indianapolis Cuts Taxes for Some, Not Others; Supreme Court to Hear Case (Dec. 20, 2011)