WASHINGTON - The Supreme Court returns to the bench Monday, opening a term that may help more clearly delineate the bounds of municipal taxing authority and state autonomy.

Of the 1,500 cases the justices are expected to consider for review during their opening session Monday, a significant number involve the constitutionality of state taxes and policies.

In one such case, the justices are being asked to analyze whether cities may require companies to include interest income from U.S. government securities when calculating their tax liability.

In 1976, Bankers Trust New York Corp. earned about $47.7 million in interest income from U.S, government debt. New York City taxed the earnings despite a federal law generally prohibiting levies on interest earned from U.S. securities. Bankers Trust challenged the tax in state court, but the New York Court of Appeals said the tax fell within the exemption under federal law that allows taxation of government bonds in franchise taxes.

In its petition asking the justices to review the case, Bankers Trust argues the issue is of "vital importance" to the financial industry "because it is a common practice of banks and many financial institutions to hold substantial amounts of federal obligations."

A Minnesota case offers a variation on that theme, with Norwest Bank Duluth and Cambridge State Bank challenging a Minnesota Supreme Court ruling disallowing them refunds for taxes they were required to pay on federal bonds in 1979. The Minnesota Supreme Court in 1990 struck down the state levy on banks that imposed a tax on federal obligations but not on state debt, but nevertheless decided that refunds were not necessary.

The linchpin in the case is the technical issue of retroactivity. The Minnesota Supreme Court reasoned that until the U.S. Supreme Court struck down a similar taxing scheme in Tennessee in 1983, states had no reason to believe the taxes were illegal. Consequently, the Minnesota court decide, the state was not obligated to pay refunds.

In 1991, the U.S. high court ruled in James B. Beam Distilling Co. v. Georgia that its ruling generally should be given retroactive effect. As a result, refunds generally are necessary. In light of that ruling, the court instructed its Minnesota counterpart to reconsider the bank's pleas. The state court did so, but still concluded no refunds were necessary.

The Supreme Court may hold off on deciding whether to hear the Minnesota case, however. Last term, the court agreed to decide another retroactivity case involving the Virginia Supreme Court's refusal to require that state to pay refunds to federal retirees who were unconstitutionally taxed. No date has yet been set for arguments in the Virginia case.

In a major tax case out of California, Barclays Bank is asking the court to decide the constitutionality of the state's use of worldwide combined reporting for determining the tax liability of domestic companies owned by foreign parents.

Under worldwide combined reporting, the state ignores the separate corporate existence of parents, subsidiaries, and affiliates, pools their income together, and allocates a portion of the combined income to California based on an apportionment formula.

The internationally accepted way of allocating income for multinational firms is the separate accounting, or arm's-length, method. The separate accounting method treats each corporation as a distinct tax unit, doing business with every other corporation on an arm's length basis.

Barclays - joined by the governments of the United States, the United Kingdom, Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Australia, Austria, Canada, Finland, Japan, Norway, Sweden, and Switzerland - claims California's method violates the U.S. Constitution's foreign commerce clause.

In a brief urging the Supreme Court to review the matter, the U.S. government's top courtroom lawyer, Solicitor General Kenneth W. Starr, said California's practice "has created an irritant in the commercial relations of the United States and its major trading partners" and has undermined the federal government's ability to speak "with one voice" in dealings with foreign nations.

The high court in 1983 upheld the constitutionally of the California tax in a case involving a domestic parent corporation doing business in the state. But the court reserved the question of whether the tax would be constitutional when applied to foreign multinational firms. Given the vast interest in the issue expressed by the solicitor general and foreign governments, the court will likely decide to review the case.

In another case pitting the United States against California, the federal government is seeking more than $11 million in refunds from the state over disputed taxes. A key issue in the case is whether the federal government must comply with a state law that an administrative tax refund claim be filed as a precondition to a lawsuit. Because the federal government lost the case, the Supreme Court may be inclined to review it.

Airport user fees are also before the court, with Northwest Airlines Inc. and a host of other carriers challenging the way Kent County, Mich., assesses fees. The airlines charge that the county collects well in excess of the amount of money needed to run the airport, and deliberately discriminates against interstate airlines in favor of local carriers.

The airlines also question the method the county uses to determine fees assessed airport concessionaires, arguing that rental car companies and the like should shoulder a heavier tax load.

The U.S. Court of Appeals for the Sixth Circuit upheld the fess Feb. 3. But in a 1984 case, the U.S. Court of Appeals for the Seventh Circuit found similar fees in Indianapolis invalid.

Officials for Kent County distinguish their case from the Indianapolis dispute by noting that the Indianapolis airport is the only facility within a reasonable distance. But in Kent County, the airport is located less than an hour and a half from two other airports served by major airlines.

Kent County officials also noted that when Congress in 1990 allowed airports to impose a passenger facility charge of $1, $2, or $3, Congress gave no hint that it wanted to limit airport revenues or require airports to consider concession revenues when tabulating airline charges.

If the justices decide the case is different from the Indianapolis dispute, they may simply let the appeals court ruling stand. But if they believe the cases are indistinguishable, they may decide to take the dispute to settle the apparent conflict among the circuit courts.

The court's disposition of these and other cases could more clearly spell out the court's direction in cases involving clashes between state and federal interest.

At this time last year, many analysts were boldly predicting the Supreme Court would be run over by a conservative juggernaut. But now, court watchers instead wonder whether the moderate tone the court struck will carry over into the new term that begins Monday.

The answer to that question could be of major significance to state and local officials.

In general, conservatives tend to be sympathetic to the idea of state sovereignty. while liberals favor a federal judiciary with the freedom to pursue an activist agenda.

A more middle-of-the road court can be expected to produce mixed results for states, as demonstrated during the last term when states won important protections from congressional interference in their affairs, but overwhelmingly lost most tax cases before the justices.

In several high-profile cases decided at the end of the term in June, a moderate troika made up of Justice Sandra Day O'Connor, Justice David H. Souter, and Justice Anthony Kennedy developed.

Court watchers during a recent Supreme Court preview session put on by the Institute of Bill of Rights Law at the College of William and Mary said the emergence of a centrist position on the court was likely a reaction to the rising conservative tide. While Justice O'Connor, Justice Souter, and Justice Kennedy are undoubtedly conservative, they are deferential to legal precedent and bolted from their colleagues when Chief Justice William H. Rehnquist, Justice Antonin Scalia, and Justice Clarence Thomas pushed activist conservative views.

On the other hand, Justice O'Connor, one of the justices in the emerging moderate block, remains the staunchest defender of state autonomy. Whether she can forge a pro-states coalition on the court remains to be seen.

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