Opinion ID: 1689574
Heading Depth: 3
Heading Rank: 2

Heading: Does the Statute Have a Rational Basis?

Text: Having concluded racetracks and riverboats are similarly situated, we must determine whether the differential tax is rationally related to a legitimate government interest. Equal protection requires the same treatment for similarly situated individuals. Bowers, 638 N.W.2d at 689. `If people are not similarly situated, their dissimilar treatment does not violate equal protection.' Id. (quoting In re Morrow, 616 N.W.2d at 548). Because the classification of persons in this case involves neither a suspect class, nor a fundamental right, we need only find the legislature had a rational basis. Id. In reviewing an equal protection challenge, we first examine the legitimacy of the end to be achieved; we then scrutinize the means used to achieve that end. Arnold, 426 N.W.2d at 156. To satisfy the rational basis standard, the classification of persons must be reasonable and operate equally upon all within the class. Id. The Racetracks can overcome the presumption of constitutionality only by showing the statute is patently arbitrary and bears no rational relationship to a legitimate governmental interest. Bowers, 638 N.W.2d at 689. Overriding this entire issue is the fact that the 1994 legislation was designed to save the racetracks and riverboats from financial distress. The racing industry in Iowa initially saw some success. However, as time passed, the racetracks quickly began to lose significant revenue. [4] Likewise, the riverboats' initial success was soon followed by financial problems stemming from competition from other states. The primary reason the legislature authorized racetracks to operate slots was to provide them with increased revenue. Without revenue from the slot machines, the Racetracks' future was in question. In determining whether the tax statute is constitutional, we must consider whether the asserted purpose behind this tax could have been the genuine goal of the legislation. See Nordlinger v. Hahn, 505 U.S. 1, 15-16, 112 S.Ct. 2326, 2334-35, 120 L.Ed.2d 1, 15-16 (1992). The very same legislation designed to help the racetracks recover from economic distress also increased the tax on racetrack slots at a rate eighty percent higher than the tax imposed on riverboat slots. Though the State contends the stated purpose behind the racetracks is to encourage economic development and promote agriculture, this differential tax is contrary to such alleged intent. Moreover, any stated benefit from the 1994 legislation is substantially jeopardized by the new tax rate imposed on the racetracks. We need not in equal protection cases accept at face value assertions of legislative purposes, when ... the asserted purpose could not have been a goal of the legislation. Weinberger v. Wiesenfeld, 420 U.S. 636, 648 n. 16, 95 S.Ct. 1225, 1233 n. 16, 43 L.Ed.2d 514, 525 n. 16 (1975). We now turn to the effect the differential taxing scheme has on both racetracks and riverboats. Overall, the differential tax treats racetrack slot machines significantly differently than riverboat slot machines despite the fact slots make up the substantial portion of both gaming facilities' revenue. The direct result of the tax is that Racetracks must pay drastically more additional tax than riverboats are required to pay. As the tax rate increases, each of the racetracks has been and will continue to be forced to pay increasingly significant additional tax on gross receipts. For example, if Prairie Meadows' revenue remains the same as it was in 1999, it will pay almost $44 million dollars more in taxes for the years 2000-2002 than it would if it were a riverboat. The Dubuque Racing Association will pay an extra $9 million in taxes and the Iowa West Racing Association is expected to pay an additional $36 million dollars in taxes for these tax years. It is undisputed that because both racetracks and riverboats conduct gambling games, the two facilities are in direct competition. As a result of the differential tax rate, riverboats have a competitive advantage over racetracks. Because the differential taxing scheme forces racetracks to pay eighty percent more taxes than they would as riverboats, the tax frustrates the racetracks' responsibility to distribute money to local government and charitable organizations. The racetracks are statutorily required to distribute profits for educational, civic, public, charitable, patriotic, or religious uses. Iowa Code § 99F.6(4)(a). The thirty-six percent tax rate makes it difficult, if not impossible, for the racetracks to continue to make such societal contributions. When the gaming tax reaches thirty-six percent in 2003, many of the racetracks will have little, if any, profit. Without these grants and charitable gifts, many Iowa communities and charitable organizations will suffer. Similarly, this taxing scheme frustrates the racetracks' ability to contribute to the overall economy of this state. The racetrack industry is responsible for employing hundreds of Iowans. It also supports the horse industry by distributing millions of dollars to purse supplements. The differential tax takes away the money racetracks need to accomplish these legislatively mandated goals. Overall, the effect of the tax is contrary to the legislative purpose of promoting agriculture and economic development. A comparable situation is found in the dog-racing industry. The legislature stated the pari-mutuel dog racing industry is designed for the development and promotion of Iowa greyhound racing dogs in this state. Id. § 99F.6(4)(b). The viability of pari-mutuel dog racetracks is completely dependent on slot revenue. A certain percentage of the dog tracks' adjusted gross receipts must be used to supplement purses of live dog races. Id. § 99D.12. Given these facts the differential tax scheme frustrates the alleged purposes behind allowing racetracks to operate. Though allegedly the legislation including the differential tax was designed to help the racetracks, eventually the thirty-six percent tax on gross receipts will seriously jeopardize the racetracks' viability. Given the above facts, the inescapable conclusion is the differential tax is not rationally related to the main purpose of the legislation or to the intent behind authorizing racetracks to operate in this state. The stated purpose was allegedly to save the racetracks from economic distress. There can be no rational reason for this differential tax, unless the reason for it was to drive the racetracks out of business, thereby helping the riverboat industry. Unless we recognize the desire to discriminately tax one business for the purpose of supporting another similarly situated business as a legitimate government interest, we can find no other basis for upholding this law. When the stated purpose is not true or somehow misleading, we cannot find it was the real reason behind the legislation. If the offered purpose is not the genuine reason supporting the law, it likewise cannot be characterized as a rational reason. In the case before us, because the stated purpose of the legislation is frustrated by the legislation itself, it is impossible to conclude the legislature actually had its alleged purpose in mind when enacting this taxing statute. The State appears to suggest a reason for the tax is the pure fact that the market will allow itthat the racetracks can bear a higher tax than the riverboats. Even if this is true, it is not a rational basis for upholding the discriminatory tax. Though revenue production may be a legitimate state interest, this goal is not rationally served by a taxing scheme that discriminates against certain slot machines simply because of their geography. [A] revenue measure based on gross receipts must apply equally to all for the privilege of doing the same act. Finlayson v. Conner, 167 So.2d 569, 572 (Fla.1964); see also Tweel v. West Virginia Racing Comm'n, 138 W.Va. 531, 76 S.E.2d 874, 879 (W.Va. 1953) (statute must apply equally to those of the same class and each member of the class permitted to engage in such business must be treated substantially alike). If the legislature wants to increase state revenue, then it must tax racetracks and riverboats equally at a rate they both can bear. The State made other contentions not accepted by the trial court. We likewise find them unconvincing. None of the other justifications offered by the State in an effort to support the constitutionality of this tax scheme are rationally related to a legitimate state interest. Each justification ignores the plain fact that this differential tax completely defeats the alleged purpose of the 1994 legislation. The thirty-six percent tax rate does nothing to further the economic viability of the racetracks. Moreover, we are not persuaded that our state riverboat history can only be promoted through such favoritism as taxing racetracks at an eighty percent higher rate than riverboats. The State can make riverboats more competitive with other states without penalizing racetracks through a thirty-six percent tax on gross receipts. At a minimum, the tax frustrates the legislative purpose in permitting racetracks to operate. The legislation goes even further, however, by disabling an industry it was allegedly designed to aid. In sum, no legitimate reason has ever been offered for the differential tax rate. We can find no rational connection between the discriminatory tax and the alleged intent of promoting riverboat history. The reason for the tax is not that racetracks and riverboats are different. It is not that the two entities operate slightly different types of gambling games. We cannot justify this tax based on the fact racetracks operate on land whereas riverboats operate on water. And the tax is not designed to force the racetracks to make up for past tax breaks. Rather, it appears the purpose behind this discriminatory legislation was simply to allow the state to collect increased revenue from racetrack slots despite the fact they, like the riverboats, derive most of their revenue from slot machines. Where an additional tax based on gross receipts is imposed on only one member of the same class, purely for tax revenue purposes, the tax violates the federal and state equal protection clauses. See Volusia County Kennel Club v. Haggard, 73 So.2d 884, 890 (Fla.1954). We conclude the tax rate imposed upon the Racetracks is unconstitutional. We reverse and remand.