In a recent post, Mike Dorf (tongue firmly in self-referential cheek) announced "Dorf's Law," which "states that courts do not provide a remedy for really really big constitutional problems where doing so would create chaos." He applied this anti-chaos rule to an argument by my GW Law colleague John Duffy that, if accepted by the courts, could invalidate patents worth hundreds of billions of dollars to their holders. Mike suggested that the Supreme Court regularly faces such possibilities, given that the Court is frequently asked to declare a constitutional principle that could upset years or even centuries of precedent. If, for example, the Court found a constitutional infirmity in the jury selection process, one could imagine such a result leading to a finding that every jury trial in the history of the country was invalid. That would, by any standard, create chaos.
If the anti-chaos rule exists, however, any student of the law would want to know just what constitutes enough chaos to be problematic in the eyes of the Court. Since every decision by the Court will upset some expectation or recalibrate someone's interests in property, etc., when will the Court say that they will set aside what otherwise would seem to be the correct Constitutional interpretation in the interest of not upsetting the status quo too much? If a ruling in an obscure tax case yesterday is any indication, the threshold for unacceptable chaos is surprisingly low.
In Dept. of Revenue of Kentucky v. Davis, a 7-2 majority of the Court held that the Commerce Clause does not prohibit a state from giving a tax preference to its citizens who own that state's bonds over its citizens who own another state's bonds. Put as simply as possible, Kentucky (which, like the great majority of states, has a state income tax that generally imposes a tax on income derived from any source whatever, including interest income) allows its citizens who put some of their savings into bonds issued by Kentucky or its subdivisions to exclude the interest on those bonds from state income tax. (The interest is already exempt from federal income tax, under a longstanding rule that applies to all state and local bonds.) The Davises were Kentucky taxpayers who had invested in other states' bonds and who thus paid Kentucky's income tax on the interest earned on those bonds. As this scheme clearly discriminated against other states, the Davises claimed that this violated the "negative" version of the Commerce Clause. The Kentucky Court of Appeals agreed, but the U.S. Supreme Court reversed.
In the context of the above discussion of an anti-chaos rule, the interesting aspect of the Court's ruling is its clear reliance on the idea that a contrary holding would be too disruptive to the world as we know it. Linda Greenhouse's article about the case in today's New York Times carries the sub-headline: "Supreme Court Votes 7 to 2 for Status Quo." As Greenhouse noted, every other state had signed onto an amicus brief urging the Court to uphold the tax preference, and the opinion "cited the states' unanimity as evidence of the enormity of what the court was being asked by the plaintiffs to do." The opinion rejects the idea that it was "being invited merely to tinker with details of a tax scheme; we are being asked to apply a federal rule to throw out the system of financing municipal improvements throughout most of the United States."
Strikingly, the evidence that this would create chaos is both completely lacking in the opinion and incredibly weak in any case. As Justice Kennedy argued in dissent, the states' unanimity in arguing for continuation of the preference is evidence that states want to continue to discriminate against outsiders, not that preventing them from doing so would be chaotic. Moreover, at least if applied prospectively, a ruling in favor of the Davises would be the kind of thing that financial markets are actually quite good at handling. The very size of the municipal bond market (over a trillion dollars), rather than increasing the risks of chaos, would serve to reduce or even eliminate it. Each person would be able to recalculate the returns from various bonds, and portfolios would be reshuffled. The idea that the market would collapse into chaos, though, is hard to swallow -- particularly because the ruling would mean that every state would be simultaneously required to eliminate its tax preferences. Subsequently, each state would need to determine whether it is raising more or less money in bonds and whether it is paying higher or lower interest rates, and it would have to determine whether there are better ways to subsidize local projects. Again, though, this is the bread and butter of local public finance. The real implications for states would play out over years, not overnight.
Whether or not the Court is right, though, that there is a grave risk of chaos, their ruling states pretty explicitly that the perceived risk of chaos trumps any Commerce Clause concerns. In other words, the anti-chaos rule seems to be a background Constitutional principle that trumps all other Constitutional principles. As a tax policy scholar and not a constitutional law professor, I'll leave for others a discussion of whether that is a good idea or a bad idea (or even all that surprising). I do, however, think that it would at least behoove the Supreme Court to hold litigants to higher (and more explicit) standards of what constitutes unacceptable levels of potential chaos. Without that, every case could ultimately come down to the Court's answering the following question: "Sure, this is unconstitutional; but dare we say so?" That may or may not be a prudent judicial approach, but at least as applied in Davis, it appears to have no coherent standards of evidence or proof.
Posted by Neil H. Buchanan