U.S. Supreme Court Decides Dormant Commerce Clause Case

May 29, 2008 | Roger McEowen

The U.S. Supreme Court has issued an important opinion involving the “dormant Commerce Clause.”  The opinion goes to the heart of what states can do to regulate out-of-state businesses that conduct transactions within the state in a manner that is different from the way in which similar in-state business is regulated.   That’s been an important issue in agriculture in recent years, particularly as applied to state attempts to restrict corporate involvement in agriculture.  

The current case may indeed shape the future of the “dormant Commerce Clause.”  At oral argument, the   Court was offered two clear-cut theories on how to treat tax favoritism that a state provides for itself - (1) the Constitution does not bar a state from making a tax bargain with its own citizens that benefits both the state and its citizens by financing essential public services; or (2) the Constitution prevents a state, when it enters into a national investment market, from using taxes to put up artificial barriers to that market’s functioning.

The issue turned on a system — begun in New York in 1919 and now utilized practically everywhere — of taxing state residents on the interest they get when they buy “municipal” bonds issued in other states, but exempting the interest earned on bonds issued by the taxing state or its subdivisions.  The legal question was whether that scheme violated the so-called dormant Commerce Clause and its concern over states engaging in economic protectionism – regulatory efforts that benefit in-state economic interests by burdening out-of-state competitors.  But, as the Court decided last term, otherwise discriminatory state laws will be upheld if the law addresses a traditionally government function.  That case involved a state law requiring trash haulers to deliver solid waste to a public authority’s processing plant, and the Court said the case provided a firm basis for the disparate tax treatment involved in this case.  Here, the Court noted, debt securities are used to pay for public projects – a governmental function – and bond proceeds are a way to shoulder civic responsibilities.  In addition, the Court noted that no State that engaged in the disparate tax treatment of municipal bond interest perceived that it was gaining any local advantage or disadvantage from engaging in the practice.  In addition, the Court noted that many single-state funds would likely disappear if the current differential tax treatment was dissolved, and that it was highly unlikely that interstate markets would welcome the weaker municipal issues that would lose their local market homes if the disparate tax treatment were struck down.  

So, what’s the implication, if any for agriculture?  Clearly, if a State can articulate a rational and legitimate state purpose for treating in-state businesses differently than out-of-state businesses (i.e., the protection of health, welfare, environmental impacts, or traditional agricultural practices), the particular treatment will be upheld.  Also, if both in-state and out-of state businesses are treated similarly, and it’s just more difficult for the out-of-state business to operate in the state because of the out-of-state location, that’s not a constitutional violation either.  That casts recent dormant Commerce Clause opinions involving agriculture (particularly from the U.S. Court of Appeals for the Eighth Circuit) in a new light.  Kentucky Department of Revenue, et al. v. Davis, et ux., No. 06-666 (U.S. Sup. Ct. May 19, 2008).