Lead Opinion
Thеse consolidated cases require us to decide whether a 1988 amendment of the Michigan Insurance Code’s retaliatory tax, MCL 500.476a, deprived plaintiffs TIG Insurance Company and TIG Premier Insurance Company of equal protection of the laws under US Const, Am XIV and Const 1963, art 1, § 2, or violated the Uniformity of Taxation Clause of Const 1963, art 9, § 3. Absent an imposition on a fundamental right or a suspect class, tax legislation is reviewed to determine whether its classifications bear a rational relation to a legitimatе state purpose. We conclude that the 1988 amendments of the retaliatory tax, which changed the tax calculation, axe rationally related to the legitimate state purpose of promoting the interstate business of domestic insurers, the same legitimate purpose behind the retaliatory tax itself. Thus, the amendments of the retaliatory tax do not violate equal protection, and also do not violate the Uniformity of Taxation Clause. Accordingly, the judgment of the Court of Appеals is reversed.
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This case involves the retaliatory tax that Michigan imposes on foreign insurers doing business in Michigan. Under the retaliatory tax, when an insurer’s state of incorporation imposes a larger aggregate tax burden on a Michigan insurer doing business in that state than Michigan imposes on a company from that state doing business in Michigan, the foreign insurer must pay Michigan a tax equal to the difference in the aggregate tax burdens. See MCL 500.476a. Thus, to compute the retaliatory tax due from a foreign insurer, if any, Michigan tallies all the taxes, fines, penalties, and other burdens it otherwise imposes on the foreign insurer doing business in Michigan. Michigan then tallies the burden a hypothetical Michigan insurer would pay to that insurer’s home state were the hypothetical Michigan insurer doing the same amount of business there. If the other state’s total burden on the hypothetical Michigan insurer doing the same amount of business in that state would be larger than the burden Michigan imposed on the foreign insurer, the actual burden Michigan imposes is subtracted from the other state’s burden on the hypothetical insurer, and the difference is the retaliatory tax the foreign insurer owes Michigan. These taxes have been common in insurance taxation since the nineteenth century, see Western & Southern Life Ins Co v State Bd of Equalization,
Until 1987, the retaliatory tax was one of two taxes imposed on foreign insurers. The other was the premiums tax, MCL 500.440, repealed by
In 1988, actual revenue from insurance taxes was below the level of projected revenue the Legislature had relied upon in enacting
After these facts were clear, the Legislature enacted
(5) Any premium or assessment levied by an association or facility, or any premium or assessment of a similar association or facility formed under a law in force outside this state, is not a burden or special burden for purposes of a calculation under section 476a, and any premium or assessment paid to an association or facility shall not be included in determining the aggregate amount a foreign insurer pays to the commissioner undеr section 476a.
(6) As used in this section, “association or facility” means an association of insurers created under this act and any other association or facility formed under this act as a non-profit organization of insurer members, including, but not limited to, the following:
(a) The Michigan worker’s compensation placement facility created under [MCL 500.2301 et seq.]
(b) The Michigan basic property insurance association created under [MCL 500.2901 et seq. ]
(c) The catastrophic claims association created under [MCL 500.3101 et seq.]
(d) The Michigan automobile insurance placement facility created under [MCL 500.3301 et seq.]
(e) The Michigan life and health insurance placement facility created under [MCL 500.7701 et seq.]
(f) The property and casualty guaranty association created under [MCL 500.7901 et seq.] [MCL 500.134(5), (6).[1 ]
Hence, payments to these and other similar facilities are not part of the Michigan burden on foreign insurers, and such payments required by other states cannot be considered part of those states’ burden when calculating retaliatory taxes.
The dispute in this case originally involved plaintiffs’ retaliatory tax returns for 1990, 1991, and 1996. In those years,
Plaintiffs appealed the denial of refunds to the Michigan Court of Claims,' which сonsolidated their cases. The Court of Claims held that MCL 500.134(5) violates equal protection because it was enacted to raise revenue rather than to deter other states from imposing discriminatory or excessive taxes on Michigan insurers doing business in those other states. Also, the court held that plaintiffs’ 1990 and 1991 claims were time-barred by MCL 205.27a(6). The court, therefore, ordered defendant to pay plaintiffs refunds consistent with their amended 1996 retaliatory tax returns.
Both parties appealed, and the Court of Appeals affirmed. That Court believed that when the Legislature revised the retaliatory tax in 1987, the Legislature did not intend to change the definition of “burden,” and later did so only because revenues did not meet expectations. Thus, the Court concluded that equal protection was violated because it was “abundantly clear that
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The United States Supreme Court addressed the constitutionality of retaliatory taxes in Western & Southern Life Ins Co v State Bd of Equalization, supra. In that case, California had adopted a retaliatory tax similar to Michigan’s, and an Ohio corporation challenged its constitutionality. The Supreme Court noted thаt several provisions of the constitution generally limit states’ ability to regulate foreign corporations, but under the Commerce Clause, US Const, art I, § 8, Congress has delegated insurance regulation to the states, see 15 USC 1011 et seq., and the privileges and immunities clause, US Const, art IV, § 2, does not apply to corporations, see Hemphill v Orloff
In light of Western & Southern, the general constitutionality of Michigan’s retaliatory tax is clear. The question in this case surrounds
As Western & Southern declared, rational basis review applies in challenges of retaliatory taxes. “Rational basis review does not test the wisdom, need, or appropriateness of the legislation, or whether the classification is made with ‘mathematical nicety,’ or even whether it results in some inequity when put into practice.” Crego v Coleman,
In this case, plaintiffs claim that Michigan has exceeded its authority to treat foreign corporations differently than domestic corporations because the different treatment does not bear a rational relation to a legitimate state purpose. This is so, plaintiffs claim, because
Initially, we emphasize that Michigan’s retaliatory tax has never, either before or after the 1988 amendment, treated foreign insurers as a single class. Rather, the
Absent a change in the legislative classification, we cannot agree with plaintiffs’ claim that a 1988 amendment converted the retaliatory tax into a tax designed to raise revenue from foreign insurers. Rather, the selective imposition of the tax on only those insurers incorporated in states that tax Michigan insurеrs more heavily than Michigan taxes them indicates that the purpose of the legislation is to pressure those states to reheve the tax burden on Michigan insurers doing business in those states. This is the precise purpose the Legislature stated for adopting the retaliatory tax, see MCL 500.476a(2), and the same purpose the Supreme Court found “not difficult to discern” in Western & Southern at 668. Further, in Western & Southern, the Supreme Court held, without discussing the means a state may adopt to calculate the retaliatory tax, that states are reasonable to suppose that a retaliatory tax will induce other states to lower their insurance tax rates. Id. at 672. Even with the change in the method of calculation of the burden of Michigan’s retaliatory tax, the tax remains rationally related to this legitimate purpose, and plaintiffs cannot prevail.
However, even presuming that
Plaintiffs maintain, however, that the 1988 amendment conflicts with the Supreme Court’s decision in Western & Southern because it was designed entirely “to generate revenue at the expense of out-of-state insurers.” As we have explained, the tax does not affect foreign insurers as a single class. Further, though, plaintiffs overlook the presumption of constitutionality, and cannot account for the legitimate bases of the legislation. Instead, plaintiffs seek one possible illegitimаte basis for the legislation. Plaintiffs’ approach conflicts with Supreme Court precedent because they have not shown that the legislation rests “solely on reasons totally unrelated to the pursuit of the State’s goals . . . .” Clements at 963. Because there is at least one conceivable rational basis that might support the legislation, plaintiffs have not “negative[d] every conceivable basis which might support” it, and cannot prevail. Lehnhausen at 364.
In response, plaintiffs have argued that they need not negate every conceivable basis for the legislation. This is because, they claim, in equal protection cases, the Court “need not . . . accept at face value assertions of legislative purposes, when an examination of the legislative scheme and its history demonstrates that the asserted purpose could not have been a goal of the legislation.” Weinberger v Weisenfeld,
Finally, plaintiffs attempt to distinguish this case from Western & Southern by arguing that the tax revenue generated in that case was “relatively modest,” see Western & Southern at 669, but under the amendment, Michigan’s retaliatory tax immodestly generates over a third of Michigan’s insurance tax revenue. As a preliminary point, the fact that the retaliatory tax raises revenue does nоt prove that raising revenue was the state’s goal in adopting the tax. On rational basis review, this Court only considers whether the legislation is reasonably related to a legitimate purpose, and does not test for “some inequity when [the legislation is] put into practice.” Crego at 260. But further, though the Western & Southern Court’s statement strikes us simply as an observation and not, as plaintiffs contend, as the linchpin of the Court’s analysis, even if it is an important point, this case is distinguishable. Michigan’s retaliatory tax may generate a third of Michigan’s insurance tax revenue, but the Supreme Court did not state that the retaliatory tax it approved raised a relatively modest amount of insurance tax revenue, just that it raised a modest amount of revenue. The joint appendix shows that although Michigan raised approximately $67 million annually in retaliatory taxes for the years 1991 through 1995, for example, when compared with Michigan’s overall tax revenue for that period, which ranged from $10.5 billion to $17.2
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In conclusion, neither Michigan’s retaliatory tax nor the 1988 amendment of that tax violates the state or federal constitutions, which are coextensive in their equal protection provisions. The retaliatory tax, and the amendments of it, are rationally related to the legitimate governmental purpose of promoting Michigan insurers in other states. Because the tax and its amendment do not violate equal protection, they also do not violate the Michigan Constitution’s Uniformity of Taxation Clause, which is not discemibly different from the Equal Protection Clause when the constitutionality of a tax statute is being reviewed. Plaintiffs have not carried their considerable burden, and the judgment of the Court of Appеals is reversed.
Notes
The Michigan Assigned Claims Facility created under MCL 500.3171 was subsequently added to the statute as subsection 6(g). See
We note that several other states similarly exclude payments to special associations and facilities from their retaliatory tax burdens. See, e.g., Conn Gen Stat, 12-211; 215 111 Comp Stat, 5/444.1(2).
Concurrence Opinion
(concurring). While I agree with the conclusion reached by the majority, I write separately to state my disagreement with certain of the reasoning it employs. Whereas the majority articulates what would be legitimate purposes for adoption of the amendment, it completely ignores the evidence presented by plaintiffs. This evidence throws into doubt whether the Legislature’s actual purpose was legitimate, as it has to be in order to conform with precedent from the United States Supreme Court.
The states cannot impose more onerous taxes or other burdens on foreign corporations than on domestic corporations, unless they bear a rational relation to a legitimate state purpose. Western & Southern Life Ins Co v State Bd of Equalization,
In evaluating the constitutionality of a challenged classification, we must consider two separate issues. First, whether the statute in question advances a legitimate purpose and, second, whether, in passing it, the Legislature reasonably could have beliеved that the classification would promote that purpose. Id. at 668. Only after a legitimate purpose is ascertained does a rational relationship between the classification and purpose become relevant. See Metropolitan Life Ins Co v Ward,
While this two-step inquiry does not require that the Legislature articulate its purpose in forming the challenged classification, it does require that a conceivable or reasonable purpose exist. Nordlinger v Hahn,
It seems unlikely that was the Legislature’s purpose because, as stated by the majority, the amendment appeared when the Legislature discovered that retaliatory tax revenue was far less than expected. See ante at 552-553. If sufficient evidence had been presented by plaintiffs that the purpose was to cover the shortfall, the legitimate purposes opined by the majority would not necessarily carry the day.
Therefore, this Court should state explicitly that the rational basis test, while deferential, does not ensure that all taxation legislation will pass constitutional muster. In this case, plaintiffs presented evidence that employees from the Department of Mаnagement and Budget and the Department of Treasury advocated the amendment for a purpose that was impermissible. This evidence does not overcome the presumption of constitutionality because it does not explicitly demonstrate that the “classification is a hostile and oppressive discrimination.” Lehnhausen v Lake Shore Auto Parts Co,
In failing to address this fact, it appears that the majority wоuld uphold any classification, regardless of evidence demonstrating an actual improper purpose for it. The majority’s scant treatment of the evidence presented seems to eliminate any possibility of future litigants demonstrating an improper purpose for a challenged classification. It reduces the test for evaluating the constitutionality of a classification to no more than abstract judicial imaginings with little or no apparent basis in fact. Moreover, it elevates a plaintiff’s burden of proof to insurmountable heights. Such reasoning is contrary to the United States Supreme Court precedent of Western & Southern Life and Metropolitan Life.