TIG INSURANCE COMPANY, INC v DEPARTMENT OF TREASURY; TIG PREMIER INSURANCE COMPANY, INC v DEPARTMENT OF TREASURY
Docket Nos. 115915, 115916
Supreme Court of Michigan
July 3, 2001
Argued March 6, 2001 (Calendar No. 3).
464 MICH 548
In an opinion by Justice CAVANAGH, joined by Chief Justice CORRIGAN, and Justices WEAVER, TAYLOR, YOUNG, and MARKMAN, the Supreme Cоurt held:
The plaintiffs have not carried their burden. Neither Michigan‘s retaliatory tax nor its 1988 amendment violates the equal protection provisions of the state or federal constitutions. Nor do they violate the Uniformity of Taxation Clause of the Michigan Constitution, which is not discernibly different from the Equal Protection Clause when the constitutionality of a tax statute is being reviewed.
1. The Michigan retaliatory tax is imposed on foreign insurers doing business in Michigan 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 stаte doing business in Michigan. The foreign insurer must pay Michigan a tax equal to the difference in the aggregate tax burdens. The selective imposition of the tax on only those insurers incorporated in states that tax Michigan insurers more heavily than Michigan taxes them indicates that the purpose of the legislation is to pressure those states to relieve the tax burden on Michigan
2. For plaintiffs to prevail, they must negate every conceivable basis of the challenged legislation. Because there is at least one conceivable rational basis that might support the legislation at issue, the plaintiffs have not negated every conceivable basis that might support it, and cannot prevail.
Justice KELLY, concurring, stated that the majority completely ignores the evidence presented by plaintiffs, which 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. A retaliatory tax act, like that in question, makes of foreign corporations a special classification of taxpayers.
In evaluating the constitutionality of a challenged classification, two separate issues must be considered. First, whether the statute in question advances a legitimate purpose and, second, whether, in passing it, the Legislature reasonably could have believed that the classification would promote that purpose. Only after a legitimate purpose is ascertained does a rational relationship between the classification and the purpose become relevant. While the Legislature is not required to articulate its purpose in forming the challenged classification, a conceivable or reasonable purpose must exist.
In Nordlinger v Hahn, 505 US 1 (1992), the United States Supreme Court rejected the proposition that promotion of domestic industry is always a legitimate purpose. Yet, this appears to be the rationale used by the majority in upholding the amendment at issue. The majority does not discuss the evidence presented by the plaintiffs or how the evidence is insufficient to overcome the presumption of the amendment‘s constitutionality. Rather, it concludes that the purpose of the amendment may have been the same as the purpose stated in the underlying retaliatory tax act, to promote domestic insurers abroad, a permissible purpose. It seems unlikely that 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.
The Supreme 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, the plaintiffs presented evidence that employees from the Department of Management and
Reversed.
Honigman, Miller, Schwartz & Cohn (by Patrick R. Van Tiflin), and Dorsey & Whitney, L.L.P. (by John W. Windhorst, Jr.), for the plaintiffs-appellees.
Jennifer M. Granholm, Attorney General, Thomas L. Casey, Solicitor General, and Kevin T. Smith, Assistant Attorney General, for the defendants-appellants.
Amicus Curiae:
Dykema, Gossett, P.L.L.C. (by Stewart L. Mandell and Lori M. Silsbury), for Michigan Insurance Federation.
OPINION OF THE COURT
CAVANAGH, J. These consolidated cases require us to decide whether a 1988 amendment of the Michigan Insurance Code‘s retaliatory tax,
I
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
Until 1987, the retaliatory tax was one of two taxes imposed on foreign insurers. The other was the premiums tax,
In 1988, actual revenue from insurance taxes was below the level of projected revenue the Legislature had relied upon in enacting 1987 PA 261 and 262. One of the reasons that revenue was lower than expected
After these facts were clear, the Legislaturе enacted 1988 PA 349. This provision did not affect the retaliatory tax‘s scope. Instead, it only changed the method of calculating the tax by providing that payments to private insurance associations and facilities are not counted as part of the Michigan burden when calculating retaliatory taxes. The resulting statute provides:
(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 рremium or assessment paid to an association or facility shall not be included in determining the aggregate amount a foreign insurer pays to the commissioner under 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 had made payments to the Worker‘s Compensation Placement Facility, the Basic Property Insurance Association, and the Automobile Insurance Placement Facility. Subsections 134(5) and (6), however, required plaintiffs to exclude those payments from their Michigan burdens when calculating the retaliatory tax they owed. Plaintiffs initially excluded these payments from their Michigan burden and fully paid their retaliatory tax for each year. Later, though, they filed amended returns that included these payments in their Michigan burdens, claiming that requiring them to exclude the payments violated the Equal Protection Clauses of the state and federal constitutions, as well as the Uniformity of Taxation Clausе of the Michigan Constitution. Plaintiffs, therefore, sought a refund of the alleged uncon-
Plaintiffs appealed the denial of refunds to the Michigan Court of Claims, which consolidated their cases. The Court of Claims held that
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 1988 PA 349 was enacted as a stop-gap measure to raise funds in response to a projected shortfall in insurance tax revenues. This is not a valid reason for discriminаting against foreign insurers.” 237 Mich App 219, 230; 602 NW2d 839 (1999). The Court of Appeals also affirmed the Court of Claims conclusion that plaintiffs’ 1990 and 1991 claims were time-barred, leaving plaintiffs with a judgment for refunds for 1996. Defendant appealed the Court of Appeals conclusion that 1988 PA 349 violates equal protection, we granted leave, 463 Mich 905 (2000), and we now reverse.
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 that several provisions of the constitution generally limit states’ аbility to regulate foreign corporations, but under the Commerce Clause,
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, 463 Mich 248, 260; 615 NW2d 218 (2000). Rather, it tests only whether the legislation is reasonably related to a legitimate governmental purpose. The legislation will pass “constitutional muster if the legislative judgment is supported by any set of facts, either known or which could reasonably be assumed, even if such facts mаy be debatable.” Id. at 259-260. To prevail under this standard, a party challenging a statute must overcome the presumption that the statute is
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 1988 PA 349, which excluded certain payments from plaintiffs’ Michigan burdens for retaliatory tax calculations, converted the retaliatory tax from a tax intended to discourage other states from imposing excessive levels of taxation on Michigan insurers to a tax designed to raise revenue at the expense of foreign insurers. Thus, plaintiffs argue that the 1988 amendment of the retaliatory tax cannot be constitutional.
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 subset of foreign insurers that must pay Michigan any retaliatory tax is actually determined by the laws of other states. Specifically, the subset is determined by the laws of those states that impose more onerous burdens on Michigan insurers than Michigan imposes on insurers from those states. 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 insurers more heavily than Michigan taxes them indicates that the purpose of the legislation is to pressure those states to relieve 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
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 illegitimate basis for the legislation. Plaintiffs’ approach conflicts with Supreme Court precedent becаuse 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, 420 US 636, 648, n 16; 95 S Ct 1225; 43 L Ed 2d 514 (1975).
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 rеtaliatory 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 not 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 billion annually, see Michigan Dep‘t of
III
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 discernibly 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 Appeals is reversed.
CORRIGAN, C.J., and WEAVER, TAYLOR, YOUNG, and MARKMAN, JJ., concurred with CAVANAGH, J.
KELLY, J. (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
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, 451 US 648, 667-668; 101 S Ct 2070; 68 L Ed 2d 514 (1981). A retaliatory tax act, like that in question, makes of forеign corporations a special classification of taxpayers.
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 believed 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, 470 US 869, 881; 105 S Ct 1676; 84 L Ed 2d 751 (1985).
While this twо-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, 505 US 1, 15; 112 S Ct 2326; 120 L Ed 2d 1 (1992). The United States Supreme Court rejected the proposition that promotion of domestic industry is always a legitimate purpose, reasoning that it “eviscerate[s] the Equal Protection Clause.” Metropolitan Life, supra at 882. The Court stated that, if this proposition were accepted, any discriminatory tax would
This appears to be the rationаle used by the majority in upholding the amendment at issue. The majority does not discuss the evidence presented by plaintiffs or how this evidence is insufficient to overcome the presumption of the amendment‘s constitutionality. Rather, it concludes that the purpose of the amendment may have been the same as the purpose stated in the underlying retaliatory tax act. That was to promote domestic insurers abroad, a permissible purpose.
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
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 Management and Budget and the Department of Treasury advocated the amendment for а 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, 410 US 356, 364; 93 S Ct 1001; 35 L Ed 2d 351 (1973). But this is not to say
In failing to address this fact, it appears that the majority would uphold any classification, regardless of evidence demonstrating an actual improper purpose for it. The majority‘s scant treatment of the evidence presentеd 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.