On February 9, 2017, we filed a brief with the U.S. Supreme Court asking them to review a challenge to a retroactive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. enacted by Michigan, in Skadden, Arps, Slate, Meagher & Flom LLP v. Michigan Department of Treasury, No. 16-688. We at the Tax Foundation want the Supreme Court to set some rules for when retroactivity violates due process.
In 2014, Michigan decided that a tax compact they had signed in 1967 was no longer advantageous and repealed it, retroactively to 2008. This harmed a number of business taxpayers who had been counting on tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. s, and they’ve sued.
The deeper issue is about the extent of protection from legislative overreach provided by the Due Process Clause of the Fourteenth Amendment. The seminal case regarding the Due Process limitations on retroactive tax law is United States v. Carlton which provides that a retroactive tax statute must have a “legitimate legislative purpose” and a “modest” period of retroactivity. Unfortunately, courts are misapplying Carlton and upholding retroactive tax laws of increasingly long periods, to the point where states can essentially do whatever they please, unsettling expectations and saddling taxpayers with years of unanticipated tax obligations. In many instances, the purpose of the retroactive tax law was merely to raise revenue.
Our brief further noted:
- States are interpreting Carlton to mean that simply preventing revenue loss or raising funds automatically constitutes a legitimate legislative purpose, despite the fact that the Court in Carlton gave significant weight to other factors, including the “unanticipated” nature of the revenue loss. This sets the bar very low when it comes to justifying retroactive tax laws.
- Retroactive tax laws in response to an unfavorable court decision are enacted for an illegitimate or arbitrary purpose and disrupt the separation of powers. States should not get a free pass to change settled outcomes retroactively decades later just because they left something ambiguous, unaddressed, or deliberately open to multiple interpretations or agency regulation.
- States have reached inconsistent results regarding what constitutes a “modest” period of retroactivity. While some states have a limited scope of tax retroactivity and adhere to the temporal standard suggested in Carlton, most have upheld quite long periods of retroactivity, sometimes stretching a decade. Such an expansion is dangerous, depriving taxpayers of reliance on the laws as they exist now.
The lack of clear rules on the constitutional limits of retroactive state tax laws has led to courts pushing the boundaries of Due Process further and further. Without a clear standard, this problem will only continue to proliferate. The U.S. Supreme Court should step in and provide guidance on the Due Process limitations of retroactive tax laws.Share