Source: https://supreme.justia.com/cases/federal/us/451/648/
Timestamp: 2019-04-22 04:21:43+00:00

Document:
If Congress has specifically authorized states to regulate in a certain area, a law that discriminates and retaliates against out-of-state commercial actors in that area is not unconstitutional.
Western & Southern Life Insurance Co. was an Ohio insurer doing business in California. It was subject to a retaliatory tax that California levied on all out-of-state insurers that were incorporated in states that imposed higher taxes on California insurers doing business in them than California would have imposed on that state's insurers that were doing business in California. Western sought refunds through the administrative claims process for the amounts that it paid in retaliatory taxes. When it failed, it argued in California state court that the tax was invalid under the Commerce Clause.
Although Congress has plenary power over interstate commerce, part of this power includes the authority to allow states to regulate interstate commerce. Any action taken by a state within the scope of the authority granted by Congress is per se valid under the Commerce Clause. In this instance, the federal McCarran-Ferguson Act explicitly allowed the states to regulate and tax the insurance business, notwithstanding the authority of Congress under the Commerce Clause.
This law normally would be struck down under the dormant Commerce Clause, but it arose from a specific exception to this doctrine. States do have the authority to regulate, including enacting discriminatory taxes, when Congress has expressly authorized them to do so, as was the situation here.
California, in addition to imposing a premiums tax on both foreign and domestic insurance companies doing business in the State, imposes a "retaliatory" tax on such a foreign insurer when the insurer's State of incorporation imposes higher taxes on California insurers doing business in that State than California would otherwise impose on that State's insurers doing business in California. Appellant, an Ohio insurer doing business in California, after unsuccessfully filing administrative refund claims for California retaliatory taxes paid, brought a refund suit in California Superior Court, alleging that the retaliatory tax violates the Commerce Clause and the Equal Protection Clause of the Fourteenth Amendment. The Superior Court ruled the tax unconstitutional, but the California Court of Appeal reversed.
1. The retaliatory tax does not violate the Commerce Clause. The McCarran-Ferguson Act, which leaves the regulation and taxation of insurance companies to the States, removes entirely any Commerce Clause restriction upon California's power to tax the insurance business. Neither the language nor the history of that Act suggests that it does not permit, as appellant argues, "anticompetitive state taxation that discriminates against out-of-state insurers." Pp. 451 U. S. 652-655.
2. Nor does the retaliatory tax violate the Equal Protection Clause. Pp. 451 U. S. 655-674.
(a) Whatever the extent of a State's authority to exclude foreign corporations from doing business within the State, that authority does not justify imposition of more onerous taxes or other burdens on foreign corporations than those imposed on domestic corporations, unless the discrimination between foreign and domestic corporations bears a rational relation to a legitimate state purpose. Pp. 451 U. S. 655-668.
believed that the retaliatory tax would promote that purpose, it being immaterial whether, in fact, the tax will accomplish its objectives. Assuming that the lawmakers of each State are motivated in part by a desire to promote the interests of their domestic insurance industry, it is reasonable to suppose that California's retaliatory tax will induce other States to lower the burdens on California insurers in order to spare their domestic insurers the cost of the retaliatory tax in California. Pp. 451 U. S. 668-674.
99 Cal.App.3d 410, 159 Cal.Rptr. 539, affirmed.
BRENNAN, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, WHITE, MARSHALL, POWELL, and REHNQUIST, JJ., joined. STEVENS, J., filed a dissenting opinion, in which BLACKMUN, J., joined, post, p. 451 U. S. 674.
in the State, is imposed on both foreign and domestic insurance companies, and a "retaliatory" tax, set in response to the insurance tax laws of the insurer's home State, is imposed on some foreign insurance companies. This case presents the question of the constitutionality of retaliatory taxes assessed by the State of California against appellant Western & Southern Life Insurance Co., an Ohio corporation, and paid under protest for the years 1965 through 1971.
tax owed by a given out-of-state insurer, California subtracts the California taxes otherwise due from the total taxes that would be imposed on a hypothetical similar California company doing business in the out-of-state insurer's State of incorporation. If the other State's taxes on the hypothetical California insurer would be greater than California's taxes on the other State's insurer, a retaliatory tax in the amount of the difference is imposed. If the other State's taxes on the hypothetical California insurer would be less than or equal to California's taxes, however, California exacts no retaliatory tax from the other State's insurer.
The Superior Court tried the case on stipulated facts without a jury, and ruled that the retaliatory tax is unconstitutional. It ordered a full refund of retaliatory taxes paid, plus interest and costs. App. 78-79. The California Court of Appeal reversed, upholding the retaliatory tax. 99 Cal.App.3d 410, 159 Cal.Rptr. 539. The California Supreme Court denied Western & Southern's petition for hearing. App. 89. Western & Southern filed a notice of appeal in this Court, and we noted probable jurisdiction. 449 U.S. 817 (1980). We affirm.
The Commerce Clause provides that "The Congress shall have Power . . . To regulate Commerce . . . among the several States." U.S.Const, Art. I, § 8, cl. 3. In terms, the Clause is a grant of authority to Congress, not an explicit limitation on the power of the States. In a long line of cases stretching back to the early days of the Republic, however, this Court has recognized that the Commerce Clause contains an implied limitation on the power of the States to interfere with or impose burdens on interstate commerce. [Footnote 3] Even in the absence of congressional action, the courts may decide whether state regulations challenged under the Commerce Clause impermissibly burden interstate commerce. See, e.g., Minnesota v. Clover Leaf Creamery Co., 449 U. S. 456 (1981); Philadelphia v. New Jersey, 437 U. S. 617 (1978).
may freely regulate an aspect of interstate commerce, any action taken by a State within the scope of the congressional authorization is rendered invulnerable to Commerce Clause challenge.
Congress removed all Commerce Clause limitations on the authority of the States to regulate and tax the business of insurance when it passed the McCarran-Ferguson Act, 59 Stat. 33, 15 U.S.C. § 1011 et seq., as this Court acknowledged in State Board of Insurance v. Todd Shipyards Corp., 370 U. S. 451, 370 U. S. 452 (1962). See also Group Life & Health Ins. Co. v. Royal Drug Co., 440 U. S. 205, 440 U. S. 219, n. 18 (1979); Wilburn Boat Co. v. Firemen's Fund Ins. Co., 348 U. S. 310, 348 U. S. 319 (1955). Nevertheless, Western & Southern, joined by the Solicitor General as amicus curiae, argues that the McCarran-Ferguson Act does not permit "anticompetitive state taxation that discriminates against out-of-state insurers." Brief for Appellant 28; Brief for United States as Amicus Curiae 16. We find no such limitation in the language or history of the Act.
"Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States."
Section 2(a), 59 Stat. 33, 15 U.S.C. § 1012(a), declares: "The business of insurance . . . shall be subject to the laws of the several States which relate to the regulation or taxation of such business." The unequivocal language of the Act suggests no exceptions.
"put the full weight of [Congress'] power behind existing and future state legislation to sustain it from any attack under the commerce clause to whatever extent this may be done with the force of that power behind it, subject only to the exceptions expressly provided for."
We must therefore reject Western & Southern's Commerce Clause challenge to the California retaliatory tax: the McCarran-Ferguson Act removes entirely any Commerce Clause restriction upon California's power to tax the insurance business.
of the laws," but does not prevent the States from making reasonable classifications among such persons. See Lehnhausen v. Lake Shore Auto Parts Co., 410 U. S. 356, 410 U. S. 359-360 (1973); Allied Stores of Ohio v. Bowers, 358 U. S. 522, 358 U. S. 526-527 (1959). Thus, California's retaliatory insurance tax should be sustained if we find that its classification is rationally related to achievement of a legitimate state purpose.
But as appellee points out, state tax provisions directed against out-of-state parties have not always been subjected to such scrutiny. Rather, a line of Supreme Court cases most recently exemplified by Lincoln National Life Ins. Co. v. Read, 325 U. S. 673 (1945), holds that a State may impose a tax on out-of-state corporations for the "privilege" of doing business in the State, without any requirement of a rational basis. Since the California courts have defined the retaliatory tax as a "privilege" tax, Western & Southern Life Ins. Co. v. State Board of Equalization, 4 Cal.App.3d 21, 35, 84 Cal.Rptr. 88, 97-98 (1970), application of the reasoning of these cases would require us to sustain the tax without further inquiry into its rational basis. We must therefore decide first whether California's retaliatory tax is subject to such further inquiry.
Some past decisions of this Court have held that a State may exclude a foreign corporation from doing business or acquiring or holding property within its borders. E.g., Asbury Hospital v. Cass County, 326 U. S. 207, 326 U. S. 211 (1945); Bank of Augusta v. Earle, 13 Pet. 519, 38 U. S. 588-589, 38 U. S. 592 (1839). From this principle has arisen the theory that a State may attach such conditions as it chooses upon the grant of the privilege to do business within the State. Paul v. Virginia, 8 Wall. at 75 U. S. 181. While this theory would suggest that a State may exact any condition, no matter how onerous or otherwise unconstitutional, from a foreign corporation desiring to do business within it, this Court has also held that a State may not impose unconstitutional conditions on the grant of a privilege.
E.g., Sherbert v. Verner, 374 U. S. 398, 374 U. S. 404 (1963); Wieman v. Updegraff, 344 U. S. 183, 344 U. S. 192 (1952); Frost & Frost Trucking Co. v. Railroad Comm'n, 271 U. S. 583, 271 U. S. 592-593 (1926).
These two principles are in obvious tension. If a State cannot impose unconstitutional conditions on the grant of a privilege, then its right to withhold the privilege is less than absolute. But if the State's right to withhold the privilege is absolute, then no one has the right to challenge the terms under which the State chooses to exercise that right. In view of this tension, it is not surprising that the Court's attempt to accommodate both principles has produced results that seem inconsistent or illogical. Compare Dole v. Continental Ins. Co., 94 U. S. 535 (1877), with 87 U. S. v. Morse, 20 Wall. 445 (1874); and compare Lincoln National Life Ins. Co. v. Read, supra, with Hanover Fire Ins. Co. v. Harding, 272 U. S. 494 (1926).
This Court sustained the Virginia statute. Viewing corporations as recipients of "special privileges," 8 Wall. at 75 U. S. 181, and believing that "it might be of the highest public interest that the number of corporations in the Sate should be limited," id. at 75 U. S. 182, the Court held that a State's assent to the creation of a domestic corporation or the entry of a foreign corporation "may be granted upon such terms and conditions as those States may think proper to impose." Id. at 75 U. S. 181. [Footnote 10] Under this view, there was no need for the Court to consider whether the statute was arbitrary, irrational, or discriminatory.
"[The States] may exclude the foreign corporation entirely; they may restrict its business to particular localities, or they may exact such security for the performance of its contracts with their citizens as in their judgment will best promote the public interest. The whole matter rests in their discretion."
Henderson 68. [Footnote 11] Second, the Fourteenth Amendment, ratified in 1868, introduced the constitutional requirement of equal protection, prohibiting the States from acting arbitrarily or treating similarly situated persons differently, even with respect to privileges formerly dispensed at the State's discretion. The combination of general incorporation laws and equal protection necessarily undermined the doctrine of Paul v. Virginia. If the right to incorporate or to do business within a State ceases to be a privilege to be dispensed by the State as it sees fit, and becomes a right generally available to all on equal terms, then the argument for special exactions as "privilege taxes" is destroyed.
the power to change the conditions of admission at any time, for the future, and to impose as a condition the payment of a new tax, or a further tax, as a license fee. If it imposes such license fee as a prerequisite for the future, the foreign corporation, until it pays such license fee, is not admitted willing the State or within its jurisdiction. It is outside, at the threshold, seeking admission, with consent not yet given. . . . By going into the State of New York in 1872, [the Philadelphia Fire Association] assented to such prerequisite as a condition of its admission within the jurisdiction of New York."
Id. at 119 U. S. 119-120.
"that it is the settled doctrine of this court that the terms and conditions so prescribed must not be repugnant to the Constitution of the United States or inconsistent with any right granted or secured by that instrument."
"that a corporation is estopped to claim the benefit of the constitutional provision securing to it the equal protection of the laws simply because it voluntarily entered and remained in a State which has enacted a statute denying such protection to it and to like corporations from the same State?"
Id. at 119 U. S. 127.
"that the imposition of special taxes upon foreign corporations for the privilege of doing business within the State is sufficient to justify such different taxation."
"[i]t would be a fanciful distinction to say that there is any real difference in the burden imposed because the one is taxed for the privilege of a foreign corporation to do business in the State and [the] other for the right to be a corporation."
"to tax the foreign corporation for carrying on business under the circumstances shown, by a different and much more onerous rule than is used in taxing domestic corporations for the same privilege, is a denial of the equal protection of the laws."
thus he manipulated out of existence."
Frost & Frost Trucking Co. v. Railroad Comm'n, 271 U.S. at 271 U. S. 593-594. See also Power Manufacturing Co. v. Saunders, 274 U. S. 490, 274 U. S. 497 (1927).
"that a State may discriminate against foreign corporations by admitting them under more onerous conditions than it exacts from domestic companies. . . ."
"then the long-established rule that a State may discriminate against foreign corporations by admitting them under more onerous conditions than it exacts from domestic companies would go into the discard."
Ibid. [Footnote 19] So long as a tax is "levied upon the privilege of entering the State and engaging in business there," it may not be challenged under the Equal Protection Clause, even though it may impose a burden greater and more discriminatory than was imposed at the date of the corporation's entry into the State. Id. at 325 U. S. 678.
in at least three subsequent cases. In Wheeling Steel Corp. v. Glander, 337 U. S. 562 (1949), the Court struck down a provision of Ohio's ad valorem tax law that subjected certain intangible property of non-Ohio corporations to a tax not applied to identical property of Ohio corporations. The Court concluded that the provision violated the Equal Protection Clause on the ground that the inequality of treatment was "not because of the slightest difference in Ohio's relation to the decisive transaction, but solely because of the different residence of the owner." Id. at 336 U. S. 572. [Footnote 20] The decision in Wheeling Steel was not directly in conflict with that in Lincoln National, because the Ohio courts had held the tax in Wheeling Steel an "ad valorem property tax, . . . and in no sense a franchise, privilege, occupation, or income tax." 337 U.S. at 337 U. S. 572. However, the Wheeling Steel decision rejected the principle of Lincoln National: the opinion declared that a State's power to exclude out-of-state corporations is limited by the Constitution; the State may not "exac[t] surrender of rights derived from the Constitution of the United States." 337 U.S. at 337 U. S. 571 (citing Hanover Fire Ins. Co. v. Harding, supra, at 272 U. S. 507).
"This Court has consistently held that, while a State may impose conditions on the entry of foreign corporations to do business in the State, once it has permitted them to enter,"
"the adopted corporations are entitled to equal protection with the state's own corporate progeny, at least to the extent that their property is entitled to an equally favorable ad valorem tax basis."
"Wheeling Steel Corp. v. Glander, 337 U. S. 562, 337 U. S. 571-572. See Reserve Life Ins. Co. v. Bowers, 380 U. S. 258; Hanover Fire Ins. Co. v. Harding, 272 U. S. 494; Southern R. Co. v. Greene, 216 U. S. 400."
393 U.S. at 393 U. S. 119-120.
"No doubt there are . . . subjects as to which foreign corporations may be classified separately from both individuals and domestic corporations and dealt with differently. But there are other subjects as to which such a course is not admissible, the distinguishing principle being that classification must rest on differences pertinent to the subject in respect of which the classification is made."
In determining whether a challenged classification is rationally related to achievement of a legitimate state purpose, we must answer two questions: (1) does the challenged legislation have a legitimate purpose? and (2) was it reasonable for the lawmakers to believe that use of the challenged classification would promote that purpose? See Minnesota v. Clover Leaf Creamery Co., 449 U.S. at 449 U. S. 461-463; Vance v. Bradley, 440 U. S. 93, 440 U. S. 97-98 (1979).
state doing business therein burdens heavier than those imposed upon corporations of such foreign state doing business in the enacting state, but to induce such foreign state to show the same consideration to corporations of the enacting state doing business therein as is shown to corporations of such foreign state doing business in the enacting state."
"The actual rationale for the provision is that the application of the retaliatory laws acts as a deterrent to state taxation on the insurance industry."
"is to put pressure on the several states to impose the same tax burden on all insurance companies, foreign or domestic, and thereby encourage the doing of interstate business."
99 Cal.App.3d at 413, 159 Cal.Rptr. at 541. Accord, Western & Southern life Ins. Co. v. State Board of Equalization, 4 Cal.App.3d at 34, 84 Cal.Rptr. at 96; Atlantic Ins. Co. v. State Board of Equalization, 255 Cal.App.2d 1, 4, 62 Cal.Rptr. 784, 786 (1967), cert. denied and appeal dism'd, 390 U. S. 529 (1968).
Many may doubt the wisdom of California's retaliatory tax; indeed, the retaliatory tax has often been criticized as a distortion of the tax system and an impediment to the raising of revenue from the taxation of insurance. See, e.g., Council of State Governments, State Retaliatory Taxation of the Insurance Industry 12-13 (1977); Task Force Report, Statement of Policy on Insurance Premium Taxation, 1 Proc.Nat.Assn. of Ins.Comm'rs 71 (1971); Report of New Jersey Tax Policy Comm., Pt. V, pp. 47-48 (1972); Strickler, The Mess in State Premium Taxation of Insurance Companies, 69 Best's Rev. 34, 38 (1969). But the courts are not empowered to second-guess the wisdom of state policies. Ferguson v. Skrupa, 372 U. S. 726, 372 U. S. 729 (1963). Our review is confined to the legitimacy of the purpose.
There can be no doubt that promotion of domestic industry by deterring barriers to interstate business is a legitimate state purpose. This Court has recognized the legitimacy of state efforts to maintain the profit level of a domestic industry, Parker v. Brown, 317 U. S. 341, 317 U. S. 363-367 (1943), and of efforts to "protect and enhance the reputation" of a domestic industry so that it might compete more effectively in the interstate market, Pike v. Bruce Church, Inc., 397 U. S. 137, 397 U. S. 143 (1970). California's effort on behalf of its domestic insurance industry is no less legitimate.
"Any time a State adopts a fiscal or administrative policy that affects the programs of a sister State, pressure to modify those programs may result. Unless that pressure transgresses the bounds of the Commerce Clause or the Privileges and Immunities Clause of Art. IV, § 2, see, e.g., Austin v. New Hampshire, 420 U. S. 656 (1975), it is not clear how our federal structure is implicated."
in fact, the provision will accomplish its objectives is not the question: the Equal Protection Clause is satisfied if we conclude that the California Legislature rationally could have believed that the retaliatory tax would promote its objective. Minnesota v. Clover Leaf Creamery Co., 449 U.S. at 449 U. S. 466; Vance v. Bradley, 440 U.S. at 440 U. S. 111; United States v. Carolene Products Co., 304 U. S. 144, 304 U. S. 154 (1938).
"It is true that insurers are disadvantaged by retaliatory taxation provisions in the short run, for they usually result in some insurers' paying more in taxes in retaliating states. But, in the long run, insurers as a group pay less in taxes because of these provisions, since legislators, when considering measures affecting insurers, do consider retaliatory effects in instance after instance."
Insurance Tax, at 66. The study concluded that retaliatory taxes "have kept premiums lower and insurers' profits higher than would otherwise have been the case." Id. at 67. It therefore recommended passage of the proposed constitutional amendment. See ibid.
We cannot say that the California Legislature's conclusions were irrational, or even unreasonable. Assuming that the lawmakers of each State are motivated in part by a desire to promote the interests of their domestic insurance industry, it is reasonable to suppose that California's retaliatory tax will induce other States to lower the burdens on California insurers in order to spare their domestic insurers the cost of the retaliatory tax in California.
"Whether the insurance companies have sponsored this legislation or not, in their resistance to tax change, they have benefitted by it. The home-owned companies in all but a half dozen states are able to say, 'Don't raise our taxes. If you do, we will have to pay more in other states.' The effectiveness of this barrier is demonstrated by the fact that, of the 48 states, only 9 increased their insurance tax rates in the last twelve years. . . . None of these is an outstanding insurance state."
"The common purpose of [retaliatory tax] legislation in the several states has been to discourage any state from imposing discriminatory taxes or other burdens upon out-of-state companies. The effort seems to have been very largely successful; in any event, taxes on insurance premiums have stayed close to 2 percent in most states, for both domestic and out-of-state insurers."
Atlantic Ins. Co. v. State Board of Equalization, 255 Cal.App.2d at 4, 62 Cal.Rptr. at 786.
against foreign insurance companies has declined over the period. Bodily, 44 J. of Risk & Ins. at 27-32. These results are precisely those that advocates of the retaliatory tax would predict, and thus provide some support for that theory. Statistical analysis of the available data, however, failed to verify this conclusion: the correlation between retaliatory tax laws and the observed results was not found to be statistically significant. Id. at 30-31. The author therefore concluded that retaliatory taxes have been "of questionable value." Id. at 34. Cf. Pelletier, 39 Notre Dame Law. at 267-269; Felton, Retaliatory Insurance Company Taxation: An Evaluation, 28 J. of Ins. 71, 77-78 (1961).
"it is evident from all the considerations presented to [the legislature], and those of which we may take judicial notice, that the question is at least debatable."
United States v. Carolene Products Co., supra, at 304 U. S. 154. On this standard, we cannot but conclude that the California retaliatory insurance tax withstands the strictures of the Fourteenth Amendment.
"When by or pursuant to the laws of any other state or foreign country any taxes, licenses and other fees, in the aggregate, and any fines, penalties, deposit requirements or other material obligations, prohibitions or restrictions are or would be imposed upon California insurers, or upon the agents or representatives of such insurers, which are in excess of such taxes, licenses and other fees, in the aggregate, or which are in excess of the fines, penalties, deposit requirements or other obligations, prohibitions, or restrictions directly imposed upon similar insurers, or upon the agents or representatives of such insurers, of such other state or country under the statutes of this State, so long as such laws of such other state or country continue in force or are so applied, the same taxes, licenses and other fees, in the aggregate, or fines, penalties or deposit requirements or other material obligations, prohibitions, or restrictions, of whatever kind shall be imposed upon the insurers, or upon the agents or representatives of such insurers, of such other state or country doing business or seeking to do business in California. Any tax, license or other fee or other obligation imposed by any city, county, or other political subdivision or agency of such other state or country on California insurers or their agents or representatives shall be deemed to be imposed by such state or country within the meaning of this article."
Cal.Ins.Code Ann. § 685 (West 1972).
This provision was enacted in present form in 1959, pursuant to the California Constitution, Art. XIII, § 14-4/5(f)(3). At that time, the California Constitution permitted imposition of the retaliatory tax only when the other State taxed California insurers at a higher rate than it taxed its own insurers. See Cal.Const., Art. . XIII, § 14-4/5(f)(3) (West Supp. 1964). In 1964, however, the California Constitution was amended to permit the imposition of the retaliatory tax whenever the other State's taxes on California insurers are higher than California taxes on similar insurers. Cal.Const., Art. XIII, § 14-4/5(f)(3) (West. Supp. 1966). See Franklin Life In. Co. v. State Board of Equalization, 63 Cal.2d 222, 225-227, 404 P.2d 477, 480-481 (1965).
Western & Southern also challenges a provision of California's property tax law, since repealed, which permitted certain domestic insurance companies to credit a greater portion of property tax paid on their principal offices against their premiums tax liability than foreign insurers could credit. Cal.Rev.Tax. Code Ann. §§ 12241(a) and (b) (West 1970). We need not consider this challenge, because any increase in the property tax deduction would merely trigger an offsetting increase in the retaliatory tax. See App. 86-87.
See Cooley v. Board of Wardens, 12 How. 299 (1852); Gibbons v. Ogden, 9 Wheat. 1, 22 U. S. 209 (1824).
The California courts have described the Kansas retaliatory insurance tax as "substantially identical" to § 685. Atlantic Ins. Co. v. State Board of Equalization, 255 Cal.App.2d 1, 10, 62 Cal.Rptr. 784, 790 (1967), cert. denied and appeal dism'd, 390 U. S. 529 (1968).
"We are unable to find in the record evidence to support the view that the tax in question upon foreign insurance companies is greater than that levied on the home insurance companies."
160 Kan. at 311, 161 P.2d at 734. But the principle of Benjamin, applied in Hobbs, was that it was unnecessary for the Court to decide whether the challenged tax was discriminatory, since the McCarran-Ferguson Act simply made the Commerce Clause inapplicable. Thus, Western & Southern's reliance on this purported distinction carries no weight.
"It is not the intention of Congress in the enactment of this legislation to clothe the States with any power to regulate or tax the business of insurance beyond that which they had been held to possess prior to the decision of the United States Supreme Court in the Southeastern Underwriters Association case. Briefly, your committee is of the opinion that we should provide for the continued regulation and taxation of insurance by the States, subject always, however, to the limitations set out in the controlling decisions of the United States Supreme Court. . . ."
H.R.Rep. No. 143, 79th Cong., 1st Sess., 3 (1945).
"Congress, of course, does not have the final say as to what constitutes due process under the Fourteenth Amendment. And while Congress has authority by § 5 of that Amendment to enforce its provisions [citing cases], the McCarran-Ferguson Act does not purport to do so."
Id. at 370 U. S. 457.
Although Western & Southern raises a due process claim in its statement of questions presented, it does not separately address that claim in its brief. We therefore assume that any due process argument is subsumed in the equal protection issue. See Minnesota v. Clover Leaf Creamery Co., 449 U. S. 456, 449 U. S. 470, n. 12 (1981).
"No conceivable violation of the commerce clause, in letter or spirit, is presented. Nor is contravention of any other limitation."
Id. at 328 U. S. 436. The appellant in that case, however, challenged the South Carolina tax under the Commerce Clause, id. at 328 U. S. 411, and nothing in the opinion of the Court suggests that the Court considered or decided any equal protection issue.
The Court disposed of plaintiff in error's Commerce Clause argument on the ground that the business of insurance is not commerce. 8 Wall. at 75 U. S. 183. See supra at 451 U. S. 653-654.
"at first, the corporate privilege was granted sparingly, and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unavailable."
Louis K. Liggett Co. v. Lee, 288 U. S. 517, 288 U. S. 549 (1933) (dissenting opinion). See also 1 W. Fletcher, Cyclopedia of the Law of Private Corporations 5-6 (1974); G. Henderson, The Position of Foreign Corporations in American Constitutional Law 64-68 (1918) (hereafter Henderson).
In 1869, the year Paul v. Virginia was decided, the Commonwealth of Virginia did not permit general incorporation of insurance companies. Va.Code of 1860, ch. 65, § 4. Thus, the Court's conception of the corporate franchise in that case as a "grant of special privileges to the corporators," Paul v. Virginia, 8 Wall. at 75 U. S. 181, was an accurate portrayal of the corporation as it existed at that time. This was not to last for long. See Act of Mar. 30, 1871, 1870 Va. Acts, ch. 277 (general incorporation law made applicable to insurance companies).
As appellee concedes, the theory espoused in Philadelphia Fire Assn., that a foreign corporation is not "a person within [the State's] jurisdiction" within the meaning of the Equal Protection Clause unless it is in compliance with all conditions imposed on its entry is now discarded. See Kentucky Finance Corp. v. Paramount Auto Exchange Corp., 262 U. S. 544, 262 U. S. 549-551 (1923) (holding that a foreign corporation is "within" the State if it files a lawsuit therein); Bethlehem Motors Corp. v. Flynt, 256 U. S. 421, 256 U. S. 424 (1921) (holding that "corporations doing business in a State and having an agent there are within the jurisdiction of the State").
Southern R. Co. v. Greene, 216 U. S. 400 (1910); Ludwig v. Western Union Telegraph Co., 216 U. S. 146 (1910); Pullman Co. v. Kansas, 216 U. S. 56 (1910); Western Union Telegraph Co. v. Kansas, 216 U. S. 1 (1910) (Western Union I).
Southern R. Co. relied on two Commerce Clause cases decided earlier in the same Term, in both of which Justice Harlan wrote the plurality opinion. Western Union I, supra, and Pullman Co. v. Kansas, supra, struck down Kansas taxes imposed on the total authorized capital of out-of-state corporations, representing the corporations' property both within and without Kansas. The State defended the taxes on the strength of Paul v. Virginia and like cases, as conditions imposed on the privilege of doing business within the State. The plurality held that a State may not impose unconstitutional conditions on the privilege of doing business within the State. See 216 U.S. at 216 U. S. 33-38, 216 U. S. 46-48; Pullman Co. v. Kansas, supra, at 216 U. S. 62-63. Accord, Ludwig v. Western Union Telegraph Co., supra. Since a tax imposed on the out-of-state operations of an interstate company violates the Commerce Clause, see 216 U.S. at 216 U. S. 38-45, such a tax may not be imposed as a prerequisite to doing business in the State. The plurality opinion distinguished Paul v. Virginia as involving the business of insurance, which was not considered interstate commerce. 216 U.S. at 216 U. S. 33-34. Although modified in detail, the principle established in these cases still governs Commerce Clause challenges to state privilege taxes. See Complete Auto Transit, Inc. v. Brady, 430 U. S. 274 (1977).
Justice Holmes, in dissent in both cases, pointed out that, if a State has an "absolute arbitrary power" to exclude foreign corporations, then no conditions imposed on corporations in the exercise of that power could be unconstitutional. 216 U.S. at 216 U. S. 54.
Southern R. Co. did not, however, overrule Philadelphia Fire Assn. v. New York and like cases. Although acknowledging the difference in principle between its decision and that in Philadelphia Fire Assn., 216 U.S. at 216 U. S. 416, Southern R. Co. distinguished the earlier case on the ground that the Philadelphia Fire Association, unlike the Southern Railway, held only a one-year license renewable at the State's discretion.
This effectively overruled those portions of Baltic Mining Co. v. Massachusetts, 231 U. S. 68, 231 U. S. 88 (1913), overruled on other grounds, Alpha Portland Cement Co. v. Massachusetts, 268 U. S. 203, 268 U. S. 218 (1925), and Cheney Bros. Co. v. Massachusetts, 246 U. S. 147, 246 U. S. 156-158 (1918), that appeared to limit Southern R. Co. to cases in which the foreign corporation held substantial permanent property within the State.
"the measure of the burden is in the discretion of the State, and any inequality as between the foreign corporation and the domestic corporation in that regard does not come within the inhibition of the Fourteenth Amendment."
272 U.S. at 272 U. S. 511. The opinion makes clear, however, that a tax on the business of the corporation after its admission may not be imposed in the guise of an admission fee. Ibid.
The Court in Lincoln National Life Ins. Co. v. Read erroneously distinguished Hanover Fire Ins. Co. as involving an out-of-state insurance company holding an "unequivocal" license, rather than an annual license, renewable only upon satisfaction of the condition precedent of paying the discriminatory tax. 325 U.S. at 325 U. S. 676. In fact, the Hanover Fire Insurance Co. held only an annual license. 272 U.S. at 272 U. S. 509. The Court in Hanover Fire Ins. Co. explicitly stated that the "principle is the same" no matter whether the license is annual or indefinite. Ibid.
The reasoning in Lincoln National Life was virtually identical to that offered by Justice Holmes in his Western Union dissent. See n 14, supra.
"[i]t is hard to see that this offer of reciprocity restores to appellants any of the equality which the application of the Ohio tax, considered alone, so obviously denies."
337 U.S. at 337 U. S. 573.
"the power constitutionally to discriminate in favor of its own residents against the residents of other state members of our federation."
Id. at 358 U. S. 533. Our position has not been adopted by the Court, which has subsequently required no more than a rational basis for discrimination by States against out-of-state interests in the context of equal protection litigation. E.g., Baldwin v. Montana Fish and Game Comm'n, 436 U. S. 371, 436 U. S. 388-391 (1978); Hughes v. Alexandria Scrap Corp., 426 U. S. 794, 426 U. S. 810-814 (1976).
Although the retaliatory tax is an imposition on interstate insurance companies, it is supported by the industry as a means of fostering uniform and moderate levels of taxation nationwide. See Brief for the American Insurance Association et al. as Amici Curiae; Council of State Governments, State Retaliatory Taxation of the Insurance Industry 12 (1977).
The nature of the classification supports this conclusion as well. The retaliatory tax is not imposed on foreign corporations qua foreign corporations, as would be expected were the purpose of the tax to raise revenue from noncitizens; rather, it is imposed only on corporations whose home States impose more onerous burdens on California insurers than California otherwise would impose on those corporations.
A large part of this decline may be accounted for by the general decline in the States' reliance on business taxes. From 1957 to 1972, the proportion of total state tax revenues attributable to general business taxes fell by 17.7%, while the proportion attributable to life insurance premiums taxes fell by 20.0%. Bodily, The Effects of Retaliation on the State Taxation of Life Insurers, 44 J. of Risk & Ins. 21, 31-32 (1977). But see State Department of Finance, Budget Div., Highlights of Proposal for Quarterly Insurance Tax Payments 3-4 (1963) (showing that, since 1950, the proportion of California tax revenues attributable to insurance taxes has decreased substantially relative to that attributable to bank and corporate taxes).
against Ohio citizens within its jurisdiction is specifically intended to coerce the Ohio Legislature into enacting legislation favored by California. Today the Court holds that this state purpose is legitimate. In my opinion, that coercive motivation is not an acceptable justification for California's discriminatory treatment of nonresidents.
The discrimination disclosed by this record is much more irregular than a simple preference for domestic corporations over foreign corporations. Some foreign insurance companies pay the same tax that domestic companies pay. Those that pay higher taxes than California companies do not all pay the same tax. Thus, for example, California taxes insurance companies incorporated in Ohio at a 2.5% rate, Montana companies at a 2.75% rate, and West Virginia and Idaho companies at a 3% rate. [Footnote 2/1] The prevailing tax rate in California for domestic companies and most foreign companies is 2.3%. [Footnote 2/2] Thus, the insurance companies competing in the California market are subjected to flagrant discrimination.
In my opinion, the federal interest in the impartial administration of the laws of the several States is unquestionably paramount to any one State's parochial interest in applying pressure to its neighbors by use of "retaliatory" legislation. This discriminatory legislation is not justified by a legitimate purpose, and therefore violates the Equal Protection Clause.
See Cal.Ins.Code Ann. § 685 (West 1972); Idaho Code § 41-402 (1977); Ohio Rev.Code Ann. § 5729.03 (1973); Mont.Code Ann. § 33-2705 (1979); W.Va.Code §§ 33-3-14 and 33-3-14a (Supp. 1980). As the Court's opinion indicates, ante at 451 U. S. 651, the amount of retaliatory taxes reflected by these small percentage differences is significant.
Cal.Rev. & Tax. Code Ann. §§ 12201, 12202 (West 1970).
"The several states have different resources, populations, social and economic conditions, levels of public service, fiscal structures, methods and sources of raising revenue, and tax burdens, both in gross and per capita. With respect to other states, where no discriminatory or hostile action is involved, the states are largely autonomous in these matters. And even if another state has engaged in discriminatory action, the Constitution, as this Court has pointed out, does not contemplate the economic warfare of reprisal and retaliation. A&P Tea Co. v. Cottrell, 424 U. S. 366 (1976)."
Brief for United States as Amicus Curiae 10.
"We consider it now established that, whatever the extent of a State's authority to exclude foreign corporations from doing business within its boundaries, that authority does not justify imposition of more onerous taxes or other burdens on foreign corporations than those imposed on domestic corporations, unless the discrimination between foreign and domestic corporations bears a rational relation to a legitimate state purpose."
"It seems obvious that appellants are not accorded equal treatment, and the inequality is not because of the slightest difference in Ohio's relation to the decisive transaction, but solely because of the different residence of the owner."
"[I]t is clear that the purpose is not to generate revenue at the expense of out-of-state insurers, but to apply pressure on other States to maintain low taxes on California insurers."
See ante at 451 U. S. 669-670.
California's objective is to confer a limited benefit on a limited group of companies that are incorporated under its laws. This case involves the special interest of insurance companies in paying taxes at a rate no higher than the rate California requires for its budgetary purposes. The next case may involve a different industry with a different special interest. Thus, for example, the trucking industry or the motorcoach industry might favor high speed limits, loose safety inspection laws, and lax emission standards. If their lobbyists could persuade the legislature of a powerful State to adopt rules favorable to their interests, then, under today's holding, they may also seek retaliatory programs that would apply pressure to neighboring States to adopt similar rules. Although such a statute might violate other constitutional provisions, such as the Commerce Clause, under today's holding, the Equal Protection Clause would present no impediment.
In holding that California's purpose in enacting the discriminatory tax is legitimate, the Court compares this case to state attempts to maintain the profit level of a domestic industry, Parker v. Brown, 317 U. S. 341, 317 U. S. 363-367, and efforts to "protect and enhance the reputation" of a domestic industry, enabling it to compete more effectively in the interstate market. Pike v. Bruce Church, Inc., 397 U. S. 137, 397 U. S. 143. The enactment of a statute designed to confer a direct benefit or to provide protection for domestic corporations is surely not comparable to California's imposition of a burden on foreign corporations designed to coerce foreign States to enact legislation which will benefit California corporations at the expense of the interest which motivated the foreign State's original tax rate.
State Bd. of Equalization of Cal.

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