Link to Mo. Sup. Ct. Opinion
The Supreme Court of Missouri held that two taxpayers did not have standing to challenge the constitutionality of the Distressed Areas Land Assemblage Tax Credit Act because the issuance of tax credits was not a direct expenditure of funds generated through taxation. This holding makes it extremely difficult for taxpayers in Missouri to challenge the constitutionality of tax credits.
I. Facts and Holding
Barbara Manzara and Keith Marquard (the Taxpayers) lived in an area that qualified as an eligible project area under the Distressed Areas Land Assemblage Tax Credit Act[2] (the Act).[3] The Act established an income tax credit for qualified developers who purchased land for redevelopment in historically distressed or disadvantaged areas.[4] Under authority of the Act, the state of Missouri granted Northside Regeneration, L.L.C. (Northside) $28 million dollars in transferable tax credits.[5]
The Taxpayers filed a petition for declaratory judgment alleging that the Act violated art. III, § 38(a) of the Missouri Constitution because the tax credit was a grant or lending of public money to a private person, association, or corporation.[6] The taxpayers alternatively argued that the Act violated art. III, § 39(1)-(2) because the credit was a “‘lending of the credit of the state in aid or to any person, association, municipal or other corporation,’ or a ‘pledge [of] credit of the state for the payment of the liabilities…of any individual, association, municipal or other corporation.’”[7]
The circuit court held that the Taxpayers lacked standing to bring their claims, and that even if the Taxpayers did have standing, the Act was constitutional because it served a public purpose.[8] The Supreme Court of Missouri held that there was no taxpayer standing because the issuance of tax credits under the Act was not a direct expenditure of funds generated through taxation.[9] In reaching this conclusion, the court used dictionary definitions to define a “direct expenditure of funds generated through taxation,” as “a sum paid out, without any intervening agency or step, of money or other liquid assets that come into existence through the means by which the state obtains the revenue required for its activities.”[10] Although expenditures and tax credits both result in less money in the state treasury, the court reasoned that because there was no withdrawal of public funds when the state issued the tax credit, it was not an expenditure.[11] The court explained that a tax credit merely reduces the pool of taxable income from which the state can collect taxes.[12] The court also acknowledged that because the Taxpayers did not ask the court to revisit the requirements of taxpayer standing, it would not analyze whether taxpayer standing should be expanded in the context of tax credits.[13]
Judge Wolff’s concurring opinion held the tax credits in this case were expenditures of public funds, and thus the Taxpayers had standing to bring this lawsuit.[14] However, he found that the Act was constitutional because the tax credits served a public purpose.[15] He reasoned that the spending of public funds for the redevelopment of an economically-disadvantaged area was an expenditure for a public purpose.[16]
Judge Wolff criticized the majority’s standing analysis, alleging that it was unnecessary and that it posed substantial problems for Missouri law.[17] Judge Wolff claimed the majority opinion “provide[d] the legislature a roadmap to try to ensure that courts never will be able to review whether any grant of public money as a tax credit violates a specific prohibition in the Missouri Constitution.”[18] Additionally, he stated that the majority opinion “distort[ed] Missouri precedents that recognize standing to sue in cases involving transferable tax credits.”[19]
Judge Stith, in her concurring opinion, agreed with the majority’s analysis that the Taxpayers did not have standing and with the portion of Judge Wolff’s concurring opinion that held that the tax credits constituted a valid expenditure of funds for a public purpose.[20] Judge Stith also hinted that the Taxpayers should have raised the issue of modification of the standing requirements.[21] She stated that strong arguments could be made for allowing taxpayers to have standing to challenge an illegal tax credit because the policy underlying taxpayer standing would be the same for both tax credits and direct expenditures.[22] Additionally, she stated that a new taxpayer standing test could be supported based on the fact that the court’s current rules on taxpayer standing were established without consideration of tax credits.[23]
II. Legal Background
A. Distressed Areas Land Assemblage Tax Credit Act
The Act establishes an income tax credit for qualified developers who purchase land for redevelopment in historically distressed or disadvantaged areas.[24] A credit is allowed for fifty percent of the land acquisition costs and one hundred percent of the interest costs incurred for five years after the acquisition.[25] Interest costs are defined to include interest, loan fees, and closing costs.[26] If a taxpayer has insufficient income to use the credit, the credit may be carried forward for the succeeding six years.[27] Additionally, the tax credit may be transferred, sold or assigned.[28]
B. Standing
The current requirements for taxpayer standing are laid out in E. Mo. Laborers Dist. Council v. St. Louis County.[29] To have standing, a taxpayer must establish that one of the following conditions exists: a direct expenditure of funds generated through taxation, an increased levy in taxes, or a pecuniary loss attributable to the challenged transaction of a municipality.[30]
There are no Missouri cases discussing whether, for purposes of taxpayer standing, a tax credit is a direct expenditure of funds generated through taxation. But there are a few instructive cases on this issue.[31] The Supreme Court of Missouri in Curchin v. Mo. Indus. Dev. Bd. stated that a “tax credit is as much of a grant of public money or property and is as much a drain on the state’s coffers as would be an outright payment by the state.”[32] However, the court was not deciding the issue of standing in that case, but rather was adjudicating the merits of the case by deciding whether tax credits were a grant of public money.[33]
The court in W.R. Grace & Co. v. Hughlett held that a taxpayer did not have standing when bringing a constitutional challenge against a manufacturers’ tax.[34] The manufacturers’ tax provided property tax exemptions for certain types of tangible personal property.[35] The court concluded that the tax exemption was not a direct expenditure of funds generated through taxation.[36] Because tax credits are similar to exemptions in that they both result in a reduction of tax liability and less tax revenue for the government, W.R. Grace & Co. provides guidance on the tax credit issue.[37]
Additionally, the United States Supreme Court recently held that a tax credit is not a direct expenditure of funds generated through taxation.[38] The United States Supreme Court reasoned that unlike a government expenditure, a tax credit does not implicate every taxpayer.[39] It further explained that a tax credit only has an effect on the taxpayer who claims it.[40]
C. Public Purpose
There is no violation of art. III, § 38(a) of the Missouri Constitution when a grant of public money serves a public purpose.[41] This is true even though “public purpose” is not specifically mentioned in this constitutional provision.[42] The decision as to what constitutes a public purpose is left to the legislature, and the Supreme Court of Missouri will not overturn the legislature’s determination unless it is arbitrary and unreasonable.[43] The Supreme Court of Missouri has previously held that the redevelopment of blighted areas is a public purpose.[44]
III. Comment
The rationale behind tax credits is “to encourage private citizens or entities to spend their own money on a particular project to improve the lives of the public, while avoiding the need to spend public money.”[45] Logically, it is difficult to argue that tax credits are not an expenditure of public funds because a tax credit and a government expenditure are economically the same. Both tax credits and government expenditures result in fewer funds in the state’s coffers to be spent on the health and wellbeing of its citizens. As Judge Wolff stated in his concurring opinion, “[i]f it looks like money and acts like money, it is money.”[46] However, the majority’s detailed analysis of precedent arrived at a legally sound conclusion. It is troubling, though, that after this opinion taxpayers will have a very difficult time challenging the constitutionality of any tax credits. This is especially concerning when one considers the number of tax credit programs in Missouri and the amount of state funds allocated towards them.[47]
Although tax credits can be successfully used to promote worthy causes such as redevelopment, taxpayers need to have standing to challenge tax credits because there is always the possibility that tax credits could be used to benefit just a few, well-connected individuals. As Judge Wolff stated, “[t]he genius of those who enact transferable tax credit programs is that tax credits allow governments to bestow financial largess on well-connected recipients with little or no public scrutiny and – with this court’s indulgence – no judicial scrutiny.”[48] Hopefully, there will soon be another taxpayer who challenges a tax credit act and asks the court to modify its taxpayer standing rule.
- Lauren K. Shores, CPA
[1] No. SC91025 (Mo. Aug. 11, 2011) (en banc), available at http://www.courts.mo.gov/file.jsp?id=48249. The West Reporter citation is Manzara v. State, 343 S.W.3d 656 (Mo. 2011) (en banc).
[2] Mo. Rev. Stat. § 99.1205 (2010).
[3] Manzara, No. SC91025, slip op. at 3.
[4] Id. at 2.
[5] Id. at 3 (Wolff, J., concurring). The benefit of transferable tax credits is that they may be sold to a taxpayer who has sufficient income to use that tax credit. Id. at 5 (Wolff, J., concurring). Typically, the taxpayer who buys a tax credit will purchase the tax credit at a discount. Id. Thus, when Northside sells these tax credits, the sale will generate about $25 million dollars, which Northside can then spend on its redevelopment project in the city of St. Louis. Id.
[6] Id. at 4.
[7] Id. at 4.
[8] Id. at 4.
[9] Id. at 16.
[10] Id. at 6-7.
[11] Id. at 7.
[12] Id.
[13] Id. at 6, n.6.
[14] Id. at 1, 10 (Wolff, J., concurring).
[15] Id. at 23 (Wolff, J., concurring).
[16] Id. at 1-2 (Wolff, J., concurring).
[17] Id.
[18] Id. at 9 (Wolff, J., concurring).
[19] Id. at 8 (Wolff, J., concurring).
[20] Id. at 1-2 (Stith, J., concurring).
[21] Id. at 2 (Stith, J., concurring)
[22] Id. at 2 (Stith, J., concurring).
[23] Id. at 2 (Stith, J., concurring).
[24] Id. at 2.
[25] Id. at 3; Mo. Rev. Stat. § 99.1205.3 (2010)
[26] Mo. Rev. Stat. § 99.1205.2(9) (2010).
[27] Manzara,,No. SC91025, slip op. at 3; Mo. Rev. Stat. § 99.1205.4 (2010).
[28] Id.
[29] 781 S.W.2d 43, 46 (Mo. 1989) (en banc).
[30] Manzara, No. SC91025, slip op. at 5, (citing E. Mo. Laborers, 781 S.W.2d at 47).
[31] Id. at 8.
[32] Id. at 10-11 (quoting Curchin v. Mo. Indus. Dev. Bd., 722 S.W.2d 930, 933 (Mo. 1987) (en banc)).
[33] Id. at 11.
[34] Id. at 8-9 (citing W.R. Grace & Co. v. Hughlett, 729 S.W.2d 203, 206-07) (Mo. 1987) (en banc))
[35] Id. (citing W. R. Grace & Co., 729 S.W.2d at 207.)
[36] Id. at 9.
[37] Id.
[38] Id. at 12-13 (citing Ariz. Christian Sch. Tuition Org. v. Winn, 131 S. Ct. 1436 (2011)).
[39] Id. at 13; (citing Winn, 131 S. Ct. at 1447).
[40] Id.
[41] Id. at 23 (Wolff, J., concurring) (citing Fust v. Att’y Gen. of Missouri, 947 S.W.2d 424, 429 (Mo. 1997) (en banc); Menorah Med. Ctr. v. Health & Educ. Facilities Auth., 584 S.W.2d 73, 79 (Mo. 1979) (en banc).
[42] Id.
[43] Id. at 23 (Wolff, J., concurring) (citing Fust, 947 S.W.2d at 430).
[44] Id. at 24 (Wolff, J., concurring) (citing Tierney v. Planned Indus. Expansion Auth. of Kansas City, 742 S.W.2d 146, 150 (Mo. 1987) (en banc); State ex rel. U.S. Steel v. Koehr, 811 S.W.2d 385, 389 (Mo. 1991) (en banc); Mo. Const. art. VI, § 21 (“Laws may be enacted and any city or county operating under a constitutional charter may enact ordinance, providing for the clearance, replanning, reconstruction, redevelopment and rehabilitation of blighted, substandard or insanitary areas…”)).
[45] Id. at 15.
[46] Id. at 9 (Wolff, J., concurring).
[47] As of November 10, 2010, Missouri had sixty-one active tax credit programs. Report of the Missouri Tax Credit Review Commission, Nov. 30, 2011, at 3, available at http://tcrc.mo.gov/pdf/TCRCFinalReport113010.pdf.
[48] Id. at 9 (Wolff, J., concurring).
