November 17, 2005

 

To:                   Members, Task Force on Utility and Tax Relief

From:               Dave Gruver, LSO

Subject:            Constitutional limitations

 

The following is provided for guidance to the Task Force in its deliberations in attempting to provide utility and tax relief.[1]

 

The first means of providing tax relief to citizens is to not levy the tax initially.  There generally is no requirement for the Legislature to tax.[2]  But if a tax is levied it must be for a public purpose and is subject to  constitutional constraints such as those requiring uniformity, or assessment at specified levels.  This limits the Legislature's ability to provide selective tax relief. 

 

For purposes of the Task Force's objective of relieving citizens of tax burdens, it should be aware of certain Wyoming Constitutional provisions which may restrict proposed statutory solutions.  Article 15, Section 11 of the Wyoming Constitution requires all property (except as otherwise provided in the Constitution) to be uniformly valued at its full value as defined by the Legislature, in three (3) classes: gross production of minerals, property used for industrial purposes as defined by the Legislature, and all other property, real and personal.  The percentage of value prescribed for industrial property cannot be more than forty percent (40%) higher nor more than four (4) percentage points more than the percentage prescribed for the all other property class.   The Legislature cannot create new classes or subclasses or authorize any property to be assessed at a rate other than the rates set for authorized classes.   All taxation must be equal and uniform within each class of property.[3]

 

The Constitution does allow for property to be exempted from taxation.  Property of the United States, the state, counties, cities, towns, school districts, municipal corporations, public libraries, buildings used exclusively for religious worship, parsonages, church schools and public cemeteries are all required to be exempted from taxation.  The Legislature may also exempt other property by general law.  In providing for exemptions, it is important to remember that, like other laws, an exemption must be by general law, rather than local or special law, which is prohibited by Article 3, Section 27 of the Wyoming Constitution.[4]

 

The legislative ability to exempt property from taxation has been exercised since territorial days.  Property owned by Civil War veterans and veterans of the Spanish American War has been exempted, subject to limitations, since statehood and this veteran's property tax exemption has been challenged on at least three occasions.  It has been upheld each time.  The first statute challenged provided an exemption from property tax to the amount of $2,000 for Civil War and other stated veterans and widows of veterans.  The State reimbursed counties for the tax revenues lost due to the exemption. 

 

The exemption was challenged on both uniformity grounds and the ability of the State to exempt property beyond the types of exemptions specified in the Constitution.  As to uniformity, the Court held that the Wyoming Constitution required only that property made subject to taxation shall be taxed equally and uniformly.  As to exemptions, the Court held that the Constitution permitted additional exemptions so long as the Legislature was acting within its discretion "reasonably exercised."[5]    That discretion was further defined in the Court's upholding of the exemption as a general not a special law.  Here the Court applied the test that to be a general law, rather than a special law, there must be a substantial distinction between that within the referenced legislation and that without, "the marks of distinction on which the classification is founded must be such,… as will, in some reasonable degree, … account for or justify the restriction of the legislation."  The distinction of property owned by veterans, those who have served in the country's armed forces, and property owned by those who had not, met the test.   All property within those general classes was treated uniformly, thus there was no special legislation.  In reaching its holding the Court stated that the discretion of the Legislature in exempting property from taxation cannot be arbitrary, but there must underlie in its exercise some principle of public policy which will support a presumption that the public interest will be subserved by the exemptions allowed.  The Court deferred to the Legislative determination of the public benefit being served with the exemption for veterans.  

 

The challenges in the veteran's tax exemption case were not limited to the Constitutional taxation provisions noted above, but involved other Constitutional provisions and precepts of law the Task Force should consider.  The challengers claimed that the exemption indirectly violated Constitutional provisions generally prohibiting donations to individuals.  Just as taxation and exemptions must be for the public good, appropriations can be made only for public purposes, and this is true whether the Constitution so expressly provides or not.[6]  Further, in Wyoming, the Constitution expressly provides limitations. 

 

First Article 3, Section 36 prohibits appropriating state funds for general benevolent and other purposes:

 

Prohibited appropriations.

No appropriation shall be made for charitable, industrial, educational or benevolent purposes to any person, corporation or community not under the absolute control of the state, nor to any denominational or sectarian institution or association.

 

Article 16, Section 6 prohibits specific funding to individual entities:

 

Loan of credit; donations prohibited; works of internal improvement.

Neither the state nor any county, city, township, town, school district, or any other political subdivision, shall loan or give its credit or make donations to or in aid of any individual, association or corporation, except for necessary support of the poor, ... The state shall not engage in any work of internal improvement unless authorized by a two-thirds (2/3) vote of the people.

 

Finally, appropriations to certain specified entities are prohibited under Article 1, Section 19:

 

Appropriations for sectarian or religious societies or institutions prohibited.

No money of the state shall ever be given or appropriated to any sectarian or religious society or institution.

 

While Constitutional debates and Wyoming caselaw interpreting and applying these provisions are not abundant, some does exist in the veteran's tax exemption cases and others to provide further guidance for Legislative actions. 

 

The donations prohibition is found with a prohibition on public ownership of private stocks in Article 16, Section 6.   "The origin of this Constitutional provision traces back to United States expansion to the West in the 19^th Century, and the need for an adjacent railroad for local economic growth.  States and municipal governments offered financial assistance to railroads, taking the form of stock or security purchases or cosigning on bonds issued by the railroads.  When the depression occurred, nine states defaulted on that type of debt.  Forty-five state constitutions thus prohibit the lending of credit.  The purpose was to prevent private speculation with public funds."[7] 

 

The language addressing donations as originally proposed could have been read as being limited to donations to companies and corporations.  It was amended by committee work in the drafting of the Constitution.  The change added the words "individuals and associations" and provided the sole exception for the necessary support of the poor.[8]  Thus as adopted, and as the pertinent language still reads, the prohibition was straightforward and broad "neither the state … nor any political subdivision thereof … shall…  make donations to or in aid of any individual, association or corporation, except for necessary support of the poor…"  

 

The exception for the necessary support of the poor might seem at odds with the general prohibition against donations and with that found in Article 3, Section 36, prohibiting appropriations for benevolent, charitable and other purposes.  As construed by the Wyoming Supreme Court the two can be read together; and the exception for the necessary support of the poor does not trump the prohibition on donations by a mere claim that the recipient is poor.[9]  State v. Carter.   A review of the facts of that case which resulted in this holding  provides enlightenment as to the meaning of both Constitutional provisions.

 

In the Carter case, the Legislature appropriated $3,000 "for the relief of Ida Geneva McPherren, for the loss of her husband, W.S. McPherren."  Mr. McPherren was an undersheriff killed in the line of duty by unknown bootleggers.  The widow was "left destitute and wholly dependent upon the charity and assistance of relatives and friends for the support of herself and two small children… and is now poor."  This statement of the widow's condition was recited by the Court from the petition and nothing in the case indicates any challenge to these facts.  That is important, for if the appropriation was valid under the exception for the necessary support of the poor as provided in Article 16, Section 6, the ruling could have been that simple.  But the Court's holding was not predicated on the exception for the poor.  The Court refrained from discussing "what the legislature may or may not do by way of making an appropriation in favor of a person simply because he or she may be poor, except to say, the constitutional provision that the legislature may appropriate money for the necessary support of the poor must necessarily be construed in the light of and in connection with the provision prohibiting the making of donations, and the latter provision could not be nullified by the simple claim that the appropriation is made pursuant to the former provision."  For the purposes of the case the Court assumed that if the appropriation was merely a donation, "it is void, because the purpose … would then be private and not public, for it is elementary that the legislature cannot levy a tax or make an appropriation except only for public purposes, and this is true whether the constitution so expressly provides or not." 

 

That general prohibition bears its repetition.   The necessary support of the poor exception could not be read to swallow this general prohibition nor the prohibition found in Article 3, Section 36, even for the limited situation of supporting an admittedly poor individual.  Rather, the Court went to great lengths to find that appropriation was in fulfillment of a moral obligation of the State, and thus not a donation at all and no violation of Article 16, Section 6.  Being in fulfillment of the State's moral obligation also meant the appropriation was for a public purpose, therefore not for a benevolent or charitable purpose, meaning there was no violation of Article 3, Section 36.

 

While tightening "the necessary support of the poor" exception, the Carter case does raise the potential of making appropriations and providing relief to citizens pursuant to a moral obligation of the State.  The existence of a moral obligation is admittedly difficult to determine.  It is a claim that while not legally enforceable, may be recognized by the State based on equity and justice.  It was described in Carter as a claim which is in furtherance of establishing a natural and social justice, such as the worker's compensation system.  But importantly, the Court in Carter stated that an appropriation cannot satisfy the moral obligation test if the appropriation could not have been made for the purpose in the first place.  Thus even an appropriation pursuant to a "moral obligation" of the State is hemmed in by the constrict that there must be a public purpose underlying the appropriation.

 

The veteran's exemption cases also provide help in determining the parameters of  providing monies from the public treasury to individuals.  The exemptions were challenged as indirect donations to the veterans and as a relinquishment of debt owed, in violation of the Wyoming Constitution.[10]  The Court held the statute provided for no relinquishment of debt as it applied to future taxes and exempted property not yet levied.  As to the claim that the exemption was a donation, the Court held that the statute may properly be assumed by the Court as having been intended to promote the public welfare, and that it must be regarded as having that effect, thus being for an accomplishment of a public purpose.  "A lawful exemption from taxation cannot, we think, be regarded as a gift or donation to or in aid of the individual, association or corporation in whose favor the exemption is declared."  Importantly, the Court  deferred to the Legislature as "final arbiter" as to the wisdom of granting the exemption.

 

Equally important, however, is acknowledgement of the Court's statement that the statute exempted only future taxes.  "It may be assumed that a statute retroactively exempting property upon which a tax had been lawfully assessed, or had become due and payable, would be void to that extent. (citation omitted)  But the statute in question is not to be regarded as intended to act or as acting retroactively. It was clearly intended to apply only to future taxes; and therefore it did not in any sense relinquish any obligation to the state or any political subdivision thereof."

 

Other challenges have been made to legislation providing monies to private persons or entities.  The unemployment compensation system was challenged in 1943 as using tax monies to provide donations to the unemployed.  The Court upheld the legislation, finding among other things that the unemployment compensation was not a gratuity, but part of the overall compensation package of the worker.  As to the contention that the system provided for payments to those who were not poor, but to all unemployed, the Court stated the Legislature had the right to take into consideration the difficulties which may be encountered in administration of the Act.  The Court refused to condemn the Act because in isolated incidents payment might be to those undeserving or not poor, rather it held the "rule of probability" should apply and that in the ordinary case the unemployed workman is in need of the payment under the Act.  Moreover, the system was not constitutionally dependent upon the exception for the necessary support of the poor, the Legislature could have properly enacted the system to cure other evils of unemployment, including the "gathering clouds of evils which beset the worker, his family and the community after wages cease and before destitution begins."   The distinctive features of unemployment authorized the Legislature to treat the unemployed as a distinct class and the payments were in furtherance of a legitimate public purpose.[11]

 

What is and is not a legitimate public purpose is repeatedly addressed throughout the cases addressing Article 16, Section 6.  Certainly the Courts give great, but not unlimited, discretion to the Legislature's determination as noted above.  It appears the trend over the past century has been toward greater likelihood of finding a public purpose exists. 

 

In 1918, a county appropriation to a county fair association was held to violate Article 16, Section 6.  The county fair association was incorporated and organized for the development of the county resources and  the association had expended money for county fair improvements.  The statute provided for a tax levy by the county commissioners for payment of expenditures for such purposes.  But the Court took a very broad view of the prohibition in Article 16, Section 6.  "In this case the constitutional limitation upon the power of the state, counties, etc., is expressed in clear and definite language susceptible of but one construction, viz.: the absolute prohibition of the state or any political sub-division thereof from loaning or giving its credit or making donations to or in aid of any corporation, except for the necessary support of the poor."  The appropriation by the county to the association was "unquestionably a donation".  "That it was the intention of the framers of the Constitution and the people in adopting it to prohibit all such donations as this statute attempts to authorize is made still more certain by the single definite exception contained in the section."[12]

By 1959, county commissioners were funding county fair boards, appointed by county commissioners to undertake county fair activities.  When such an appropriation was challenged, the Court held that constitutional provisions prohibiting counties from … giving any money or property … to or in aid of any individual, association, or corporation are generally construed to relate to private enterprises."  Thus the public financing of the functions of the county fair board as authorized by statute was not prohibited by Article 16, Section 6.[13]

 

Probably due to the magnitude of funds involved, more cases exist in which the lending of credit prohibition in Article 16, Section 6 is asserted as the Constitutional defect.  While perhaps not the direction of the Task Force's charge, those cases should at least be mentioned in summary fashion since they do stand for some broader propositions. 

 

In 1967, industrial development revenue bond financing was subject to multiple challenges, both for a lending of a city's credit to a private company (in issuing municipal revenue bonds to purchase a facility and then accepting lease payments from the private party who operated the facility) and as a donation (in providing for a nominal payment upon exercise of an option to turn the facility over to the private party at the end of the lease, coinciding with repayment of the bonds).  The Court held the nominal payment was merely part of the entire lease package and thus was not a donation.  The entire program was likewise upheld, although the existence of a public purpose was subject to question by the justices.[14]

 

The Wyoming Community Development Authority Act was enacted to, in part, help with a housing market and mortgage money shortage as a result of the "energy boom."  It was upheld in 1978, but with limitations on what could be done relating to State debt.  "Speaking only to the mortgage purchase and loans to lenders provisions," the Court held that as long as no debt of the State is created, as so limited by the ruling, there is no lending of the credit of the State in violation of Article 16, Section 6.  Perhaps as important for this Task Force is the concluding statement of the Court:  "It has not been seriously contended nor do we hold that the Act and its companion legislation are not formulated to serve a public purpose and can be considered praiseworthy. However laudable the program might be, that will not validate unconstitutional means."[15]

 

The discussion would not be complete without reference to Wyoming Attorney General opinions, which while not binding upon the Legislature or Courts certainly influence Legislative action.  Those opinions have stated that the Legislature may not provide public funding for AMTRAK;[16] the community college commission could not distribute state funds for repairs of privately owned property leased to a college district,[17] but could do so if the public entity was receiving appropriate and legally recognized consideration in return;[18] a county can use public funds for a senior citizen center which is a public entity authorized by statute, but could not if the program was a wholly private association;[19] and a city and county cannot donate funds to a private organization to  increase tourism and generally advertise the city and county on the organization's national tours, but it could do so if it can be shown that legitimate advertising services are being provided by the organization.[20]

 

Finally, the history of Wyoming's economic development loan program, found at Article 16, Section 12 (commonly known as the Amendment 4 program) should be considered.  The program provides for fully funded loan guarantees or loans to businesses which "will employ people within the state, provide services within the state, use resources within the state or otherwise add economic value to goods, services or resources within the state."  The program was first proposed by a mere statutory change, rather than a Constitutional amendment.  The Attorney General rendered an informal opinion dated January 15, 1985, viewing the bill as Constitutionally defective if it passed.  The Opinion stated that the provisions offended portions of the Wyoming Constitution because the grant and loan aspects constituted donations because of the bill's low interest rate and grant and loan forgiveness features.  The Attorney General acknowledged, however, that generally speaking, it has been recognized that the credit clauses of state constitutions do not prohibit loans of current revenues.  The Opinion stated that in order for a loan of State funds to be acceptable, a loan must be completely secured and there must be full payment of principal and interest.  The legislation was revised and passed as a Constitutional amendment, specifying that only earmarked funds appropriated by a two-thirds vote of the Legislature could be used for the program.

 

The above is distilled with reluctance into general guidelines.  The distillation is rendered in furtherance of the Task Force's assignment, but with caveats.  Nearly any summary of an area of law into simple enumeration of principles is oversimplification.   That is especially true in this area in which the outcomes appear extremely dependent on the facts of the case and judgment calls as to what is for a public purpose.  A final caveat is brought forth by conflicting court pronouncements - strict constructionist opinions stating that "a constitution is not to be made to mean one thing at one time, and another at some subsequent time;"[21] and more liberal application with statements such as: "it is the beauty and boast of the common law, that it is able to adapt itself to the changing conditions and requirements of society. Our constitution was adopted in the light of that fact."[22]  The guidelines:

 

            1.  Granting tax relief by not imposing a tax provides the least constitutional concern.

2.  Granting relief by exemption from taxation can be done, but there must be a public purpose and the application must be in such a manner that there is a furtherance of the public purpose and legitimacy in the distinction of that exempted and that not exempted.  As to property taxation, the legislature is further limited by additional requirements of uniformity and assessments provided by the Constitution.

3.  An exemption from future taxation does not incur the same prohibitions the Constitution places upon the forgiveness of obligations to the state.

4.  Forgiving debts owed is strictly restricted by the Constitution.

5.  Paying monies to private entities once the monies are deposited into the public treasury can be done only under limited circumstances.  There must be a public purpose.  While the Courts will give deference to legislative determinations that there is a public purpose, the Legislature cannot act arbitrarily and cannot by mere fiat, pronounce a strictly private benefit as for the public good.

6.  Donations can be made for the necessary support of the poor, but again there must be a public purpose.  The mere fact that the recipient is poor does not suffice.