On Friday, the Wisconsin Supreme Court ruled that Wisconsin’s ad valorem 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. for airlines that have hubs in Wisconsin (i.e. Midwest Express and Air Wisconsin) is not in violation of federal law. Northwest Airlines, which is subject to the ad valorem 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. and a competitor of Midwest and Air Wisconsin, sued the state alleging that the hub exemption discriminated against interstate commerce since it effectively exempted only in-state airlines from ad valorem taxation.
The lower court ruled in favor of Northwest Airlines, but the Wisconsin Supreme Court reversed without reaching the merits of the Commerce Clause claim. Instead, the Court ruled that the claim was precluded by federal law governing the regulation of airlines:
“Because § 40116(e) authorizes the states to collect property taxes from air carriers, and because the hub exemption does not fall within any of the assessment or collection practices prohibited by the statute, we conclude the hub exemption is not subject to dormant Commerce Clause review.”
If the majority had reached the merits of the claim, they would have been hard-pressed to uphold the hub exemption. While the Supreme Court’s Commerce Clause jurisprudence has been, in the words of the Supreme Court itself, a “quagmire” (see Quill, 504 U.S. 298, 315), certain general principles have stood the test of time. One of these is the principle that a state cannot enact a generally applicable tax and then increase that tax as you increase other activities out of state. This is classic economic protectionism, and it is foreclosed by the Commerce Clause itself.
This principle is most easily seen in the Boston Stock Exchange case, where New York enacted a tax on the sale of all stocks on New York stock exchanges, but then offered a tax exemption if the transaction was conducted using a New York-based broker. The Wisconsin tax exemption is similar to the discriminatory scheme in Boston Stock Exchange. As the dissent notes in the Northwest Airlines case:
“In invalidating the tax, the Supreme Court considered the history of the New York tax statute and determined that the statute was enacted for economic
protection, that is, to help the New York Stock Exchange and encourage it to remain in New York. The Supreme Court observed that the tax was invalid because the state was using its taxing power as a means of forcing more business into the state.”
The dissent gets it right. The Commerce Clause allows states to use their tax system to compete for business, but not by burdening out-of-state businesses more heavily than in-state businesses. Therefore, while the Wisconsin hub exemption would be properly struck down under such a rule (since its impact is to effectively impose the ad valorem tax only on airlines based out of state) the credit at issue in Cuno would not, since it is available to anyone who invests in Ohio, not just those who invest in Ohio plus those who engage in further activities. The Ohio credit did not impose a higher tax on a business if it chose to invest out of state; the Wisconsin ad valorem exemption does.
Thus, the Commerce Clause would not have precluded Wisconsin from offering a general 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. exemption to any airline that places new property in Wisconsin (thus becoming subject to the ad valorem tax), but it does preclude Wisconsin from crafting an exemption that effectively punishes out of state activity by applying the tax only to those who do not have a hub in the state.
There is no word yet on whether Northwest Airlines will appeal the case. It should be interesting to see whether the U.S. Supreme Court agrees to hear the case if it is appealed.
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