Tax Foundation Urges Supreme Court to Protect Taxpayers From Discriminatory Taxation

November 2, 2007

On Monday, the U.S. Supreme Court will hear oral arguments in two discriminatory taxation cases, and among the arguments considered will be those included in two friend-of-the-court briefs filed by the Tax Foundation.

In CSX Transportation, Inc. v. Ga. Bd. of Equalization (No. 06-1287), the Tax Foundation’s brief supports a taxpayer railroad’s effort to reverse a lower court ruling that barred taxpayers from challenging the methods by which property values are assessed for taxation.

The ability of taxpayers to challenge flawed property tax assessment methods is important for ensuring transparency and stability in the tax system. Our brief cited past cases and other historical evidence in arguing that the Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”) specifically allows railroads to challenge a state’s tax assessment method as discriminatory.

“Discriminatory assessment methods cannot be shielded from legal challenge because Congress has exercised its power to limit states’ ability to use any conceivable method of assessing and taxing railroad transportation property,” said senior tax counsel Chris Atkins, a co-author of the brief. “Ensuring a transparent process is the best way to protect interstate commerce and individual rights, and uphold the text, purpose, and meaning of the 4-R Act.”

The brief also noted that railroads are not alone in being subjected to appraisal and assessment disparities that result in discriminatory taxation. For example, a lawsuit was recently filed in Florida challenging that state’s practice of imposing higher taxes on property owned by out-of-state “snowbirds” than on in-state residents.

The full CSX Transportation v. Ga. Bd. of Equalization brief is available online at

In Kentucky Dep’t of Revenue v. Davis (No. 06-666), the Tax Foundation’s brief supports a Kentucky couple’s suit to invalidate Kentucky’s practice of taxing interest on non-Kentucky bonds, but not Kentucky bonds, as a way to punish out-of-state investment. The brief argues that the Kentucky scheme violates the Commerce Clause of the U.S. Constitution, which bans burdens on interstate commerce.

“The Davis case is the perfect opportunity for the Supreme Court to affirm that the Constitution defends competitive neutrality,” said Chris Atkins, senior tax counsel for the Tax Foundation and co-author of the brief. “States can encourage investment through low tax systems, but cannot discourage out-of-state activity with discriminatory taxes.”

The brief also highlighted Tax Foundation research that federal and state municipal bond exclusions help high-tax states avoid tax competition. “The greater a state’s income tax rate, the greater the benefit from the exclusion,” said Tax Foundation chief economist Patrick Fleenor. “States with the highest individual income tax rates have a stronger interest in preserving the municipal bond tax exclusion, because it enables them to protect those higher rates from interstate competitive pressures.”

The brief also noted that striking down Kentucky’s law would not harm state financing, that courts should scrutinize discriminatory subsidies as well as taxes, and that Kentucky’s law may also violate the Import-Export and Privileges or Immunities Clauses of the Constitution.

“We agree that states can constitutionally lay out ‘welcome mats’ by designing tax systems that create incentives to invest within the state,” said Atkins. “But Kentucky’s law is not a welcome mat; it’s an exit toll. By taxing out-of-state activity while exempting identical in-state activity, Kentucky seeks to shield its economic policies from interstate competition.”

The Tax Foundation’s brief joins one other brief submitted in support of Mr. and Mrs. Davis, compared to nine filed by agencies and organizations with vested interests in the tax exclusion.

The full Kentucky v. Davis brief is available online at

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