Opinion ID: 1395261
Heading Depth: 2
Heading Rank: 3

Heading: The Tax Exemption System under the Alaska Equal Protection Clause.

Text: Under Erickson, the beginning of our analysis is an examination of the legitimacy of the purposes of the enactment. The statute does not contain a statement of purposes, but in its brief the state has summarized what it believes to be the purpose of a selective, rather than a total, repeal of the income tax law. We have rearranged and reworded the statement of purposes slightly from the text of the state's brief: (1) the plan should keep the state's income tax audit and collection staff intact; (2) the plan should not saddle individuals with an empty and burdensome annual filing requirement; (3) the revenue collection bureaucracy should be in proportion in size and cost to the amount of revenue collected; (4) the plan should not redistribute the income tax burden so that it falls only on the very highest income earners, but it should retain the existing progressive structure; (5) the plan should not result in a windfall to persons who receive the protections, services and benefits provided by the state that are closely related to the earning of income, but who have never before contributed to the costs of providing those programs; (6) the plan should not entirely relieve individuals of their obligation to help defray the costs of government. The first three purposes relate to the administrative convenience of the Department of Revenue. The essence of the state's position seems to be that, by requiring only one particular class of people in the state to pay income taxes, it is possible to reduce the workload and size of the bureaucracy needed to process tax returns. We have recognized the validity of administrative convenience as a legislative purpose, Commercial Fisheries Entry Commission v. Apokedak, 606 P.2d 1255, 1265-66 (Alaska 1980), but have given it little weight. Restricting the income tax to any narrow class of people, however arbitrarily it might be drawn, would achieve the same result of reducing the number of tax returns filed each year. For example, the income tax could be selectively imposed on those with social security numbers ending with an odd number. In a close case, administrative convenience might tip the balance in favor of the government, but standing alone this reason cannot justify selectively imposing a tax on new arrivals to the state. The fourth reason advanced by the state is that the present statute furthers the purpose of maintaining a progressive tax structure. What the state means by this is the familiar concept that those earning larger incomes will be in higher tax brackets and will pay a greater proportion of their income in taxes than those earning less income. The new tax law does not achieve this objective. At best it will produce a totally random tax rate, and at worst it will actually be regressive-forcing those with lower incomes to pay higher taxes. Under the new tax system, the tax will only be progressive within a given exemption year class. For example, if one compares two new one-year residents, one who earns $10,000 in a tax year and the other who earns $50,000, it is obvious that the taxpayer earning $50,000 will pay more income tax, both in absolute terms, and as a proportion of income, than the person who earns $10,000. But if one looks at the income earning population at large in the state, this result will not follow. A three-year resident of the state who earns $50,000 will, because of the exemption scheme, pay no state income tax, while the person who has recently migrated and earns $10,000 will pay a full share. Thus the exact opposite of a progressive tax structure has been achieved by the present legislation. [8] We cannot accept this rationale for taxing new residents. The essence of the state's fifth statement of purpose, as we understand it, is that, because former residents have had to pay income taxes for many years in the past, it would somehow not be fair to allow newcomers to escape this burden, even though the tax revenue itself may not be needed. If one were to accept the state's logic, it would lead to the absurd result that no tax could ever be completely repealed. The tax supposedly is needed today so that today's new residents can achieve parity with longer term residents. When today's new residents have achieved parity, future residents will be obliged to achieve parity with today's residents, ad infinitum, so that total repeal would always be unfair to the last preceding group that had achieved parity. A far more serious criticism of this rationale for a tax is that discussed in Shapiro v. Thompson, 394 U.S. 618, 632-33, 89 S.Ct. 1322, 1330, 22 L.Ed.2d 600, 614 (1969). The Supreme Court noted that awarding benefits to new residents based upon their past tax contributions would logically permit the State to bar new residents from schools, parks, and libraries or deprive them of police and fire protection. Indeed it would permit the State to apportion all benefits and services according to the past tax contributions of its citizens. The Equal Protection Clause prohibits such an apportionment of state services. [Footnote omitted.] While the Court in Shapiro was discussing the denial of welfare benefits, we think the same principle is applicable when forcing a state's new residents to bear a disproportionate tax burden. We believe that the reason the Supreme Court of the United States has indicated that it is not a constitutionally permissible state objective, Shapiro, 394 U.S. at 633, 89 S.Ct. at 1330, 22 L.Ed.2d at 614, to apportion state benefits and services according to the past contributions of its citizenry, is that such a rationale logically could lead to pervasive and profound inequality in nearly all phases of a state's relationship with its citizens. That, in any event, is our view of the implications of the argument. If we were to accept the state's argument, boroughs and cities in Alaska could begin granting tax exemptions in such a way that only newcomers would pay the costs of local government. Other states might decide to impose income tax surcharges on their new residents. Such a system would create a patchwork of tax havens for long term residents. Each time someone moved, he or she would face the prospect of buying in to a new community. Such a concept is more than an imaginary threat to the right to travel, and we conclude that it also violates our own constitutional right to equal treatment. We cannot accept the state's fifth statement of purpose as a legitimate goal of a state tax. Finally, while we can accept the state's sixth reason for maintaining an income tax-that individuals should not be totally exempt from an obligation to help defray the costs of government-we conclude that this purpose can be achieved by means which do not discriminate against new residents. We therefore conclude that AS 43.20.017(a)-(c) is unconstitutional. The dissenting opinion argues at some length, with frequent citation to federal authority, that the statute is constitutionally acceptable. Because the tax statute is violative of the Alaska Constitution, we do not reach the question of whether it violates the federal constitution. We do note, though, that the privileges and immunities clause of article IV, section 2 of the United States Constitution is generally regarded as prohibiting discrimination against nonresidents on fundamental matters such as, under the classic formulation of the doctrine by Mr. Justice Washington, taxes or impositions. [9] Under the privileges and immunities clause the United States Supreme Court has struck down two state tax schemes which are quite similar to Alaska's new statute. See Austin v. New Hampshire, 420 U.S. 656, 95 S.Ct. 1191, 43 L.Ed.2d 530 (1975), and Travis v. Yale & Towne Manufacturing Co., 252 U.S. 60, 40 S.Ct. 228, 64 L.Ed. 460 (1920). Both cases involved tax systems which had the effect of taxing nonresident commuters at higher rates than residents. In New Hampshire, which does not have a state income tax, the effect of the law was to force commuters from the bordering states of Maine and Massachusetts to pay income taxes to New Hampshire, while New Hampshire residents paid nothing. Although Alaska does not have nonresident commuters, the state does have something close to it in the highly transient workforce that is associated with the military and large construction projects. These Supreme Court decisions cast serious doubt on the validity of the Alaska tax law on federal constitutional grounds as well. [10] We also notice in the Travis and Austin decisions the wariness the Supreme Court has shown for tax schemes that impose disproportionate burdens on those persons who cannot adequately represent themselves in the legislatures of the states. This is a problem that occurs not only when states tax nonresidents, but also when states attempt to levy taxes on entities of the federal government, whose interests are similarly unrepresented in state legislatures. In M'Culloch v. Maryland, 4 Wheat. 316, 17 U.S. 316, 428, 4 L.Ed. 579, 607 (1819), which considered the validity of a state tax on a federal bank, Chief Justice Marshall wrote: In imposing a tax the legislature acts upon its constituents. This is in general a sufficient security against erroneous and oppressive taxation. .. . But the means employed by the government of the Union have no such security... . The logic of M'Culloch is applicable here. Although it is true that new residents are technically represented in the legislature, as a practical matter their interests may not be adequately protected. It takes time to participate meaningfully in the political mainstream of a community. New residents are likely to be poorly organized and fragmented, which makes it too easy to impose on them erroneous and oppressive taxation. Id. Furthermore, under article II, section 2, of the Alaska Constitution new residents must wait three years before they are eligible to run for election to the legislature-precisely the same period during which they must pay income taxes. For these reasons, we are not persuaded by the views expressed in the dissent. The Zobels have cross-appealed, contending that declaring these sections of the income tax law invalid should result in the repeal of the personal income tax. They frame the issue correctly as, Had the legislature known that this classification was impermissible, would it have repealed the tax for everyone, or would it have chosen to apply the tax across the board? However, we disagree with their conclusion. Here there are really two questions of severability: first, whether the prior filing requirement is severable from the tax exemption statute. If so, then the exemption would be effective without regard to the prior filing requirement-in effect, the exemption would swallow up the tax. The second issue is whether the tax exemption statute, as a whole, is severable from the remainder of the state income tax code. If not, then the entire state income tax would fall. The test to be applied is stated in Lynden Transport, Inc. v. State, 532 P.2d 700, 713 (Alaska 1975) (footnote omitted): The test for determining the severability of a statute is twofold. A provision will not be deemed severable unless it appears both that, standing alone, legal effect can be given to it and that the legislature intended the provision to stand, in case others included in the act and held bad should fall. We cannot sever the prior filing requirement from the tax exemption provision without substantially redrafting the statute. Without the phrases dealing with the prior filing requirement, the statute is meaningless. As such, we find that legal effect cannot be given to the tax exemption statute without the prior filing requirement, and thus the entire exemption provision must fall. Nor do we agree that the invalidity of the exemption statute must invalidate the entire state income tax code. Eliminating all the language of the 1980 amendment leaves the tax code intelligible, and thus legal effect can be given to it without the invalid exemption provision. The question then turns to legislative intent. The Zobels contend that, as the legislature has eliminated the income tax for the majority of Alaskans, total elimination conforms more closely to the legislative intent than total reinstatement and imposition of the income tax. For several reasons, we disagree. First, the entire code is preceded by a general severability clause, which expresses a general legislative intent in favor of severability, albeit a weak one. See Lynden Transport, Inc. v. State, 532 P.2d 700, 712-13 (Alaska 1975). Second, the permanent fund statute contains an explicit nonseverability clause, and the absence of such a clause in the tax exemption statute, enacted simultaneously, may indicate a legislative intent that the latter be severable. Last, the purposes put forward by the state indicate that the legislature may not have favored complete elimination of the income tax. Because we hold the tax exemption statute severable from the entire state income tax code, sections 2, 3, 10, and 11 of chapter 22, SLA 1980, are not affected by this decision. The judgment of the superior court insofar as it concerns the tax exemption statute, AS 43.20.017 (chapter 22, SLA 1980), is AFFIRMED. BOOCHEVER, J., not participating.