WASHINGTON -- The Supreme Court on Friday struck down a sachusetts levy on dairy products sold within the state, saying it is effectively a discriminatory tax on milk from out-of-state producers.

The 7-2 decision has sweeping implications for state subsidies of local business, Chief Justice William Rehnquist said in a dissent. In an opinion concurring with the majority, Justice Antonin Scalia said that the ruling is "a broad expansion of current law."

Writing for the majority in West Lynn Creamery Inc. v. Healy, Massachusetts Commissioner of Food and Agriculture, Justice John Paul Stevens said a 1992 state pricing order designed to save Massachusetts dairy farmers from ruin violates the Constitution's commerce clause, which prohibits states from erecting barriers to interstate commerce.

The ruling overturned a decision by the Supreme Judicial Court of Massachusetts that upheld the state regulation, which imposed an assessment on all fluid milk sold by dealers to Massachusetts retailers.

Massachusetts dealers such as West Lynn Creamery Inc. and LeComte's Dairy Inc., which challenged the state order, are required to pay the assessment by making monthly payments to a state trust fund. The state then pays out the funds to instate farmers. The state paid out about $3 million in 1992.

Under a dual federal and state regulatory scheme, states are allowed to set nondiscriminatory minimum milk prices that are higher than the federal minimum price. In 1991, the federal government set the minimum to be paid New England dairy farmers at $12.64 per hundred weight. But Massachusetts farmers' production costs were $15.00 per hundred weight, so the state devised a formula for the dealer assessment based on the difference between the $15.00 and the federal price.

The state pricing order created tariff-like barriers to competition from lower cost out-of-state producers, the high court said. Tariffs have long been recognized as unconstitutional under the commerce clause, the court said.

Even though the Massachusetts levy applies to milk produced inside as well as outside the state, its effect on in-state producers is more than offset by the subsidy to them, the court said.

"Like an ordinary tariff, the tax is thus effectively imposed only on out-of-state products. The pricing order thus allows Massachusetts dairy farmers who produce at higher cost to sell at or below the price charged by lower cost out-of-state producers," the court said.

The court rejected the principal argument made by Massachusetts that the pricing order is constitutional because its components are lawful. The state argued that local subsidies and nondiscriminatory taxes are valid, and therefore the combination of the two in one program are valid.

"A pure subsidy funded out of general revenue ordinarily imposes no burden on interstate commerce, but merely assists local business," the court said. But in this case, the subsidy is funded from taxes on out-of-state milk, the court said. By combining the tax and subsidy, "Massachusetts has created a program more dangerous to interstate commerce than either part alone," the court said.

The coupling of a tax with a subsidy to one of the groups hurt by the tax means that the "state's political processes can no longer be relied upon to prevent legislative abuse, because one of the in-state interests which would otherwise lobby against the tax has been mollified," the court said.

Rehnquist, who was joined by Justice Harry Blackmun in his dissent, said the majority ruling "gratuitously casts doubt on the validity of state subsidies" and observes that the court has "never squarely confronted" their constitutionality.

States should be free to enact lawful subsidies as they see fit, Rehnquist said, noting that New Jersey has enacted a law similar to the Massachusetts program.

Scalia was joined by Justice Clarence Thomas in a concurring opinion that said the court has often held that the commerce clause is intended to create a national market.

"It does not follow from that, however, and we have never held, that every state law which obstructs a national market violates the commerce clause. Yet that is what the court says today," because it is holding as unconstitutional any state law or regulation that artificially benefits in-state production even when the same goods can be produced more cheaply elsewhere, Scalia said.

Scalia said the majority's reasoning "calls into question a wide variety of state laws that have hitherto been thought permissible."

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