WASHINGTON -- Sen. Paul Coverdell, R-Ga., is leading an effort to amend the Constitution to prevent retroactive taxation, but a Senate hearing yesterday made clear that such action will not happen any time soon.
Coverdell, who requested the hearing by the Senate Judiciary Committee's subcommittee on the Constitution, said that the Supreme Court has failed to apply constitutional protections against after-the-fact laws, most recently in its June 13 decision in U.S. v. Carlton.
At a news briefing in late-June, Coverdell told reporters that "if it takes a decade or so" to pass an amendment, "so be it."
The Constitution provides that "no ex post facto law shall be passed," Coverdell told the subcommittee.
But subcommittee chairman Sen. Paul Simon, D-Ill., said that while retroactive taxation is "unwise," amending the Constitution "is something I have to be persuaded about."
However, Simon agreed with Coverdell that the prohibition against ex post facto laws appears to apply to civil as well as criminal law, even though the Supreme Court limited application of the phrase to criminal matters only in a 1798 case.
Simon said it would be "interesting" for someone to raise the issue again to the court.
Mortimer Caplin, an attorney and former U.S. commissioner of the revenue in the Kennedy and Johnson Administrations, said that a constitutional amendment would limit flexibility in the normal legislative process and that all tax laws have inherently retroactive features.
For example, Caplin said, owners of tax-exempt municipal bonds whose interest would become taxable only after a new effective date would still see the value of their assets and their expectations affected by a tax law change, regardless of whether the effective date is prospective.
Caplin, who is with the firm Caplin & Drysdale, and Ronald Pearlman, an attorney and former Internal Revenue Service and Treasury Department official and former chief of staff of the Joint Tax Committee, said a constitutional amendment would be "inappropriate."
Pearlman, who is with Covington & Burling, cautioned Congress against placing too much emphasis on the date of enactment of a tax law change. Individuals and corporations may deliberately engage in transactions that legislation is aimed at prohibiting in anticipation of the enactment of the tax law change, he said.
A constitutional amendment against retroactive taxation would leave Congress powerless to cover these pre-enactment transactions, Pearlman said.
For example, Pearlman said, taxexempt entity leasing transactions, such as the sale and leaseback of classrooms and dormitories by Bennington College from certain alumni and the sale and leaseback of Atlanta's city hall, came under Reagun Administration and congressional scrutiny in July 1983.
Legislation to restrict such leasing transactions was enacted that included a pare-enactment effective date that was more than a year old by the time the bill became law in July 1984. The tax-exempt entity leasing posed a threat to the income tax base, Pearlman said. The estimated revenue effect of the corrective legislation for the 1985-89 period was $16.6 billion, he said.
Had Congress been prevented by the Constitution from adopting an effective date of May 1983, "many more billions of dollars in revenue losses would have resulted from tax-motivated paper transactions with a further multibillion dollar increase in the federal deficit," Pearlman said.
But Coverdell said the imposition of retroactive taxation "is reprehensible and should be constrained swiftly and decisively ... Enactment of a constitutional amendment is the only way to ensure, without question, that Congress and the president will not impose" taxes retroactively.
In addition to the prohibition against ex post facto laws, the Constitution prohibits taking of property without just compensation, and Coverdell said that he considers the financial wealth of individuals and businesses to be property.
A third constitutional protection applies to last year's retroactive income tax increase, which was "designed to punish only the nation's wealthiest two percent of the population," Coverdell said. This tax violates the Constitution's prohibition against so-called bills of attainder, which are legislative acts designed to punish specific individuals, he said.
Coverdell and 41 other members of Congress had intervened on behalf of the taxpayer, Jerry Carlton, in the U.S.v. Carlton case. The high court ruled that a 1987 law that Congress passed to retroactively close an unintended and expensive loophole in the estate tax provisions of the Tax Reform Act of 1986 was rational and served a legitimate purpose.
The 1986 loophole established a tax deduction on half of the proceeds of any sale of employer securities by an executor of an estate to an employee stock ownership plan. Carlton, acting on behalf of the estate of Willamettta Day, structured a stock sale to take advantage of the deduction. But the court said he was not entitled to the deduction under the 1987 corrective law.
The ruling "suggests that the Supreme Court is unwilling to impose any meaningful restraints on Congress' ability to enact future retroactive tax increases," said attorney Joseph E. Schmitz, who represented Coverdell and his colleagues in the case.
The decision "is both a constitutional disappointment and a democratic call to arms for anyone committed to the principle of the rule of law," Schmitz said.
Simon asked Coverdell whether a constitutional amendment would preclude Congress from fixing technical errors. Coverdell said that Congress would take greater care to avoid errors under an amendment, but that he is generally in favor of prospectively closing any "floodgates" opened by an unintended loophole.
