Tax cut legal challenges could be game-changers

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by June 30th, 2014 Posted in ,
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Jerry Fent. Photo courtesy of David Glover.

Over the years, Oklahoma City attorney Jerry Fent has proven a big thorn in the side of Oklahoma policymakers, filing and winning a string of constitutional challenges to legislation. Several of his lawsuits have led the Supreme Court to strike down down bills as violations of the state’s single-subject rule, including last year’s ruling overturning a measure that combined funding for repairs to the State Capitol and an income tax cut. Others have overturned various bond issues and budget provisions.

This year, Fent is back with new lawsuits challenging SB 1246,the bill that would reduce Oklahoma’s top income tax rate subject to certain revenue triggers, and HB 2562, the bill that changes taxation of oil and gas production. If successful, these challenges would represent a seismic shift in Oklahoma’s budget and tax landscape.

This post will focus on SB 1246, which has now been argued in front of an Oklahoma Supreme Court referee.  The lawsuit (Fent v. Fallin) contends that SB 1246 is unconstitutional because it violates Article  5, Section 33 of the Oklahoma Constitution, which pertains to revenue bills.  The original constitutional language, which dates to statehood, states:

A. All bills for raising revenue shall originate in the House of Representatives. The Senate may propose amendments to revenue bills.

B. No revenue bill shall be passed during the five last days of the session.

In 1992, Oklahoma voters passed SQ 640, which added two new subsections to Article 5, Section 33 requiring that “any revenue bill originating in the House of Representatives” must either receive 3/4 approval of both Chambers or be approved by a vote of the people.

SB 1246 was not a House bill and did not receive 3/4 support from either legislative chamber. That much is clear and beyond dispute. The question for the Court to decide is whether SB 1246, a bill that will lower the top income tax rate, is a revenue bill and thus subject to the constitutional requirements of Article 5, Section 33.

The lawsuit will hinge on how the Court interprets the terms “revenue bill” and “bills to raise revenue.” In a nutshell, the question is whether “a bill for raising revenue” is only one that increases taxes? Or does the term “revenue bill” encompass all bills that are primarily related to levying taxes, whether they would increase or decrease taxes.

In his plaintiff’s brief, Fent contends that the legal definition of “raising revenue” is “to assemble or collect, as money”, akin to the expression “to raise an army.” He writes:

The word “raising revenue” is the “act of raising” not increasing revenue at a higher rate! Raising is not increasing a higher rate but merely collecting revenue! Raising is collecting!

In an amicus brief filed in support of the lawsuit, Steven Dow, Director of the Community Action Project of Tulsa, fills in some of the legal justification for the plaintiff’s case.* He writes that, “The definition of ‘revenue bills’ and ‘bills raising revenue’ is settled law of more than 100 years and includes bills which decrease taxes.” Dow focuses on an Oklahoma Supreme Court decision from 1908, Anderson v. Ritterbusch, in which the Court concurred with an Alabama Supreme Court decision that held that legislation which “lowers the rate of taxation of the state” was a bill for raising revenue.  Although the Oklahoma courts have not subsequently ruled directly on whether an act that reduces tax rates is a revenue bill, the brief reviews how that broader understanding of revenue bills has been upheld in other states and by the federal courts (e.g. “‘Bills for raising revenue’ does not refer only to laws increasing taxes, but instead refers in general to all laws relating to taxes,” Armstrong v. United States, 1985). Limiting the application of Article 5, Section 33 only to bills which increase tax rates or revenues, Dow writes, “is contrary to settled law and will create unnecessary confusion and disputes.”

In their respondents’ brief, the Oklahoma Attorney General’s office offers two primary rebuttals. The first is that the “prevailing understanding” of the original language of Article 5, Section 23 “was, and is, that it only applied to bills whose primary purposes was to increase tax revenue.” They cite a long list of cases, but most of these pivoted on whether or not a bill had the levying of taxes as its primary purpose, not whether the bill increased or decreased revenue. Their second argument is that in passing SQ 640, Oklahoma voters clearly intended to limit the Legislature’s ability to increase taxes and not its ability to lower taxes, which remains the pervasive understanding to this day. The brief cites Court language regarding SQ 640 which specifies that the measure affected the legislature’s ability to “raise new revenue” and “to raise new taxes” as evidence that the Court saw the amendment applying only to tax increases. Yet if the original Constitutional language did in fact apply to all bills primarily related to the levying of taxes, then it may turn out that supporters of SQ 640 simply failed to draft language that accomplished their apparent purpose.

Should the Supreme Court side with Fent in this case and overturn SB 1246,the challenge to HB 2562, which raises fundamentally similar claims about revenue bills, is likely to succeed as well. (HB 2562 may be vulnerable even if SB 1246 is upheld because it arguably raises the rate on some production).  Such decisions would usher in a very different day in Oklahoma, one where lawmakers and voters would have another opportunity to consider whether a system that imposes procedural hurdles and super-majority requirements on tax increases but not tax cuts is really in the state’s best interests.

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