As the Supreme Court’s October 2003 Term wrapped up last month, the press – in its zeal to cover holdings on matters such as national security, the evisceration of the federal Sentencing Guidelines, and the extraterritorial reach of U.S. antitrust laws– overlooked the single biggest story of the Term. In Hibbs. v. Winn, No. 02-1809; 2004 U.S. LEXIS 4175, the Court affirmed (albeit by a slim 5-4 margin) an opinion authored by oft-maligned Judge Stephen "Writ of" Reinhardt! The lesson? Hostage-taking works!
When we last left our heroes, the situation was this: The State of Arizona awards tax credits for contributions to "school tuition organizations" or "STOs." STOs are permitted to distribute grants to students who attend sectarian schools. Some Arizona taxpayers filed suit in federal court to challenge the tax credit as violating the First Amendment’s Establishment Clause because STOs may distribute grants to students attending sectarian schools. Arizona moved to dismiss for lack of federal jurisdiction pursuant to the Tax Injunction Act ("TIA"), which provides: "The district courts shall not enjoin, suspend, or restrain the assessment, levy or collection of any tax under state law where a plain, speedy and efficient remedy may be had in the courts of such State."
Arizona did not argue that the tax-credit scheme involved the "collection" or "levy" of a tax, and the Ninth Circuit, per Judge Reinhardt, held that the credit was not an "assessment" because: (1) the STO credit was applied to the calculation of taxes after the taxpayer’s gross income had already been determined; and (2) the tax-credit program involved the grant of a benefit in the form of an excuse from paying a portion of taxes already assessed. In a fiendishly clever attempt to insulate himself from reversal, Judge Reinhardt cleverly embraced a Seventh Circuit opinion written by Judge Frank Easterbrook reaching the same result on similar facts, thereby signaling the Court that, this time, he wasn’t going down alone. It worked.
A five-Justice majority held that the Tax Injunction Act is no jurisdictional bar to challenges to tax credits authorized by state law. In fact, according to Justice Ginsburg, who authored the majority opinion and is never shy about making hyperbolic points, those who argue to the contrary are nothing more than modern-day segregationists bent on rolling back civil-rights advances. Huh?, you might say. Me, too. But on page two of the opinion, Justice Ginsburg asserts that Brown v. Board of Education — yes, that Brown v. Board of Education — would have been decided differently if the TIA barred federal-court challenges to tax credits. Who knew that George Wallace was really shouting "Tax Injunction Act here; Tax Injunction Act now; Tax Injunction Act forever!" If I might digress for a moment (and don’t I always?) I note that, in medical circles, "TIA" has another meaning — "transient ischemic attack," otherwise known as a small stroke. Frankly, Justice Ginsburg’s surreal civil-rights diatribe in a TAX CASE leaves me wondering exactly which sort of TIA was at issue here, the legal kind or the medical kind.
Anyway, with the histrionics aside, the opinion moves on to pretty well track the Ninth Circuit’s analysis, specifically focusing on whether a tax credit is a tax "assessment" under the TIA. It is not, according to the Court, because in "tax law generally, an assessment is closely tied to the collection of a tax, i.e., the assessment is the official recording of liability that triggers levy and collection efforts." Arizona’s argument that "assessment" has a much broader meaning, encompassing "the entire plan or scheme fixed upon for charging or taxing," is not consistent with its usual meaning in tax contexts and would render other language in the TIA superfluous. Moreover, the Court held, the TIA is designed to prevent federal suits designed to stop tax collection by state authorities, not interference with all aspects of state tax administration. Federal challenges to a tax-credit scheme do not interfere with state tax collection, and therefore do not threaten state revenues.
In reaching its conclusions, Justice Ginsburg’s majority opinion specifically approves Judge Easterbrooks’ "trenchant" analysis of the matter. Brilliantly played, Judge Reinhardt!
The question on the table is the scope of the Hibbs decision. Certainly, it means that prospective challenges to state tax-credit schemes face no TIA barrier. Does it go further to suggest that any prospective challenge to a state taxation scheme on federal constitutional grounds is likewise immune from TIA dismissal (as the dissent at least suggested)? Almost certainly not. One could point to Justice Ginsburg’s civil-rights exegesis and argue that the need to vindicate federal constitutional rights in federal court overcomes TIA barriers. But, on its face, the decision turned on the specific language in the TIA and its express policy to avoid interference with state-tax collection. A different rule would eviscerate the TIA, as most would-be federalcourt challenges to state-tax schemes are rooted in one federal constitutional principle or another.
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