WASHINGTON -- State coffers around the nation could be drained by an estimated $100 million if the U.S. Supreme Court rules in an upcoming case that Oregon's property tax system discriminates against railroads.
The justices will hear arguments in the case sometime during the court's 1993-94 term, which begins Oct. 4. No date for the hearing has been set.
At issue is disagreement about the proper interpretation of provisions in the federal Railroad Revitalization and Regulatory Reform Act of 1976, enacted as a means of prohibiting discriminatory state taxes on railroad property. Hanging in the balance is the ability of states to structure their property tax systems in a way that best promotes their interests.
The Washington-based State and Local Legal Center, which often files friend-of-the-court briefs on behalf of municipal interests, said in a brief to the court that with "more than $100 million in annual tax revenues at stake," the case "presents a grave threat to the existing tax schemes, revenue-raising powers, and legislative discretion of state and local governments."
Among other things, the railroad law forbids states to: assess real and personal property at a higher fraction of fair market value than they assess other commercial and industrial property; collect taxes based on such an assessment; or tax rail transportation property at a higher rate than other commercial and industrial property.
But it was another provision of the law that gave rise to the challenge against Oregon's property tax system: the prohibition against imposing "any other tax" that discriminates against a rail carrier.
Several years ago, ACF Industries Inc. and seven other carlines -- corporations that lease railroad cars to rail carriers -- asked a federal district court to declare that Oregon's property tax system unlawfully discriminates against them because it exempts some categories of personal property without extending exemptions to the categories of property held by the carlines.
The state exempts from taxation agricultural machinery and equipment, business inventories, livestock, poultry, bees, fur-bearing animals, and agricultural products in the possession of farmers. Motor vehicles also are exempt from property taxes, but are subject to fixed registration fees instead of taxes. Standing timber also is exempt from property taxes, but it is taxed under other provisions of state law when it is harvested.
The district court rejected the challenge, saying that the state's exemptions are neutral in application and are not directed at any particular class of taxpayer. The court concluded that property tax exemptions do not discriminate against railroads unless the percentage of exempt property is high enough to suggest that railroads are targets of special taxation.
But the U.S. Court of Appeals for the Ninth Circuit reversed the district court's decision, ruling on April 8, 1992, that "any exemption not also available to railroads violates the statute," although states may be able to provide small exemptions without being guilty of discrimination.
The appeals court went on the rule that the carlines are entitled to the same total exemption "preferred property owners" enjoy, and forbade the state from collecting property taxes from the carlines.
In seeking Supreme Court review of the decision, Oregon officials warned that the ruling erodes state autonomy.
"The Ninth Circuit has announced a per se rule of discrimination that leads to an extraordinary encroachment on the states' authority to levy taxes," state officials said in their legal brief. "Under the Ninth Circuit's decision, a state property tax system that exempts any class of property not owned by a railroad without exempting all property held by that railroad is per se discriminatory."
If allowed to stand, the appeals court's ruling would force the state either to eliminate all property tax exemptions or stop taxing any property held by railroads, Oregon officials argued. "The Ninth Circuit's decision permits no middle ground," they said in their brief.
The State and Local Legal Center in its brief noted that Congress in passing the railroad law was primarily concerned with ensuring that states not single out railroads, which are not often represented in state capitals, for burdensome taxation.
Oregon did not provide exemptions to all nonrailroad taxpayers, leaving rail carriers as the only remaining taxpayers. Thus, the center reasoned, "Congress' concern with legislative exploitation of unrepresented interests is not present."
And, Oregon officials said in their brief, there is not much chance that states would try to stick railroads with shouldering the entire property tax burden. "As a practical matter, states are far too reliant on property taxes from nonrailroad sources to be able to leave only the railroads subject to ad valorem taxation," the brief says.
Before the Bar: Oregon Department of Revenue v. ACF Industries Inc.
This case will be argued during the Supreme Court's 1993-94 term, which begins Oct. 4. No date has been set for arguments in the dispute. The justices are being asked to decide: 1) Whether a state imposes a discriminatory tax on railroad property in violation of the Railroad Revitalization and Regulatory Reform Act of 1976 if it exempts any class of property not owned by railroads from ad valorem property taxes. 2) Whether railroads are entitled to be exempt from all ad valorem property taxes if a state's tax is found to discriminate against railroads.