June 17, 2005

Pushing an Unconstitutional Payroll Tax

Today's print edition of the Nashville Business Journal has a good editorial in response to a June 12 Tennessean editorial calling for Nashville to enact a 1 percent payroll tax to balance its budget on the backs of non-residents from the suburbs who work within the city limits. The NBJ piece won't be online until Monday. Meanwhile, I'd like to point out something that the NBJ editorial writer didn't mention: a payroll tax would violate the state constitution.

Here's why: A payroll tax is an income tax - which The Tennessean editorial tacitly admits when it says "A 1% payroll tax would produce about $235 million, with as much as a third of it coming from people who work here but live elsewhere."

And the state constitution specifically prohibits city and county governments in Tennessee from having an income tax.

The Tennessean editorial tries to skate by that little problem.

One of the emerging political currents is resentment by many of the taxpayers that they are subsidizing a million area residents who play in, work in and enjoy Nashville but retreat to lower-cost bedroom communities at night.

It was barely a blip on the radar last fall, but the Tennessee Supreme Court allowed Memphis to conduct a referendum on a city payroll tax last November. The question was badly written, open-ended and poorly promoted. It got beat about 3-1.

The court did not rule on the constitutionality of a city payroll tax, which has not been authorized by the legislature. But it did leave the door open.

In various incarnations over three decades, Metro Council has repeatedly petitioned the legislature, sometimes unanimously, to permit a payroll tax. There is going to be a referendum later this year on the sales tax and probably several charter amendments. Why not a payroll tax as an alternative?

Even the most ardent anti-income tax opponents shouldn't object to a referendum; one of their mantras during the bitter legislative debate was that the voters should have a say.

That issue would have been litigated later - if the voters had approved a city income payroll tax, it could have and no doubt would have been challenged in court as an unconstitutional tax.

The court didn't need to rule on the unconstitutionality of the proposed Memphis income payroll tax because one had not been implemented - and because the state constitution is very clear that such a tax is not permitted.

The Tennessean notes, correctly, that a city income payroll tax "has not been authorized by the legislature," but it doesn't tell you why.

So I will: The Legislature is forbidden to do so by the state constitution.

While some argue that an income tax is permitted because Article II, Sections 28-29, which list the things the legislature may tax, does not specifically forbid the income tax, there is a second passage of the constitution which makes that a losing argument.

Article 11, Section 9 of the state constitution says this:

The General Assembly shall not authorize any municipality to tax incomes, estates, or inheritances, or to impose any other tax not authorized by Sections 28 or 29 of Article 2 of this constitution.

A payroll tax is an income tax. The legislature is forbidden to tax incomes, and specifically forbidden by Article 11, Section 9 to authorize the government of the city of Nashville to tax incomes.

The Tennessean editorial's assertion that the Supreme Court "did leave the door open" to the payroll tax being constitutional appears to be a bit of very creative spin as the court was not asked to address the question of the proposed Memphis payroll tax's constitutionality, only the question of whether the Shelby County Election Commission exceeded its authority by refusing to place the referendum on the ballot based upon the State Election Coordinator’s opinion that the ordinance itself was unconstitutional.

A lower court judge, Chancellor Arnold Goldin, had ruled that Shelby County Election Commission and the State Election Coordinator had the authority to refuse to place the Ordinance on the ballot. Goldin also ruled that the proposed payroll tax ordinance itself would be unconstitutional because it would unlawfully increase the taxing power of the City in violation of Article XI, section 9 of the Tennessee Constitution, which states that "the power of taxation of such municipality shall not be enlarged or increased except by general act of the General Assembly."

The state Supreme Court ruled only on the separation-of-powers issue, not on the constitutionality of the proposed city payroll tax ordinance itself.

In fact, in the Supreme Court opinion written by Chief Justice Frank F. Drowota III, the court actively and very forcefully declined to even consider the constitutionality issue:

A challenge to the substantive constitutional validity of the Ordinance is not ripe for judicial determination. The City’s voters may or may not approve the Ordinance. If the Ordinance is approved, the City may or may not adopt a privilege tax to which the Ordinance speaks. The City may or may not seek approval by the General Assembly for such a tax, and the General Assembly may or may not approve any such request. In short, we decline to pass upon the constitutionality of a measure that is not now the law and may never become the law. For us to do so at this premature stage would violate the established rule that appellate courts will not render advisory opinions, and will not decide theoretical issues based on contingencies that may or may not arise.

Deciding the constitutional challenge in this case would require not only review of the City’s existing charter to determine how broad the City’s taxing powers are at present, but also review of the Ordinance to determine whether it would, upon adoption, actually enlarge or increase the City’s taxing powers in violation of Article XI, section 9. In short, the challenge in this case strikes at the substantive constitutional validity of the Ordinance. Thus, as previously stated, this pre-election challenge simply is not ripe for judicial determination.