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U.S. Supreme Court Sides with Tax Foundation Brief, Reaffirming that Tax Exemptions Can Be Discriminatory

2 min readBy: Joseph Bishop-Henchman

In the 1970s, Congress passed a law seeking to prevent states from imposing discriminatory 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. burdens on interstate railroads. The law specifies that railroad property taxes must be similar to those of comparable industries, and generally prohibits “another tax” that discriminates against railroads.

What is “another tax”? Alabama, like 44 states, has a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , and exempts purchases of fuel from the tax unless you’re a railroad. Alabama argued that the federal law doesn’t prohibit this, because (1) “another tax” only means another kind of property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. , or (2) discriminatory tax exemptions aren’t prohibited because they aren’t taxes. CSX, a railroad, filed a lawsuit against the tax, and the Tax Foundation filed a brief with the U.S. Supreme Court supporting their position:

Granting a tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. , or a zero percent rate, to one company, can produce identical outcomes as a heavier tax on its competitors…. No economic distinction can be made between the burdens imposed by a higher rate on one party relative to his competitors, and the burdens imposed by a rate of zero on competitors while the party pays the tax.

Today, the U.S. Supreme Court ruled for CSX (PDF), holding that “another tax” in the federal law encompasses sales taxes, and encompasses sales tax exemptions. (The specific question of whether this tax exemption violates the federal law goes back to the lower court for consideration.) Justice Elena Kagan, writing for the 7-justice majority, echoes our brief in explaining the economics of discriminatory tax exemptions:

To charge one group of taxpayers a 2% rate and another group a 4% rate, if the groups are the same in all relevant respects, is to discriminate against the latter. That discrimination continues (indeed, it increases) if the State takes the favored group’s rate down to 0%. And that is all an exemption is.

Justices Clarence Thomas and Ruth Bader Ginsburg have a joint dissent, urging the Court to go even further and hold that any tax exemption that “target[s] or single[s] out railroads by comparison to general commercial and industrial taxpayers” violates the federal law.

The case is CSX Transportation, Inc. v. Alabama Dept. of Revenue, No. 09-520.