Prop. 30 retroactive tax violates Constitution

Nov. 18, 2012

By John Seiler

One little known aspect of Proposition 30 is that it increases income taxes retroactively for 2012. Approved by 54 percent of California on Nov. 6, the initiative grabs $6 billion a year, mainly by raising income taxes on “millionaires” who make $250,000 or more a year.

But $5 billion from “rich” people is going to be due quickly for the 2012 tax year.

The U.S. Constitution explicitly bans “ex post facto” laws, which are laws that affect actions from before the law was enacted. For example, if tomorrow the U.S. government brings back alcohol prohibition, it can’t jail you for the beer you chugged yesterday. According to Article I, Section 9 of the Constitution: “No Bill of Attainder or ex post facto Law shall be passed.”

And for good measure, Article I, Section 10 reiterates: “No State shall…pass any…ex post facto Law….”

Unfortunately, as in so many areas, federal courts have not enforced this part of the Constitution. The last time this came up was almost two decades ago, when President Clinton imposed higher taxes retroactive to Jan. 1 of that year.

Explained an Aug. 4, 1993 editorial in the Orange County Register, where I was an editorial writer:

“The retroactive scheme is a twist on what is called an ex-post-facto law, the unjust practice of making something illegal after the fact, so you imprison somebody for having done something in the past that was perfectly acceptable then but was declared illegal sometime later. 

“That kind of ‘justice’ is common in tyrannical states, but it is outlawed under the United States Constitution. 

“Not everyone will be hit with the new retroactive tax. In his speech last night plumping for the scheme, the president lamented, ‘I don’t like taxes any more than you do.’ No kidding. Perhaps that’s why the president’s wife, Hillary Rodham Clinton, cashed in the family investments last Dec. 31 [1992], just hours before the new fiscal year began.

“Last December, most Americans still believed the Clinton promises of a middle-class tax cut. Hillary presciently put less trust in her husband. 

“Last night Mr. Clinton announced, ‘It has been 30 years since a president asked Americans to take personal responsibility’ for American prosperity. That was when President John Kennedy cut taxes, producing a decade of prosperity. Mr. Clinton is doing the opposite. 

“As ‘Tonight Show’ host Jay Leno quipped, if Mr. Clinton makes the tax increase retroactive to January, voters should be given a new election retroactive to last November.”

Following that analogy from Leno, next June or so California should hold a special election to decide the fate of both Prop. 30 and its sponsor, Gov. Jerry Brown.

Court case

The next year, on June 17, 1994, a Register editorial explained the decision in the new case U.S. vs. Carlton:

“The U.S. Supreme Court has officially, perhaps even enthusiastically, opened the door for Congress and the IRS to levy retroactive taxes and get away with it….

“At issue was a revision made in 1987 to the comprehensive tax reform bill of 1986. The 1986 law sought to encourage the growth of employee stock ownership plans (ESOPs) by allowing an estate to deduct half the proceeds of any sale of company stock to the company ESOP. The executor of the will of Willametta Day, a Superior Oil Co. heiress, in December 1986, did just what the law invited people to do, losing $631,000 on the deal but saving $2.5 million in federal estate taxes.

“By January 1987, however, IRS bean counters had decided that the government would ‘lose’ more money to this ‘loophole’ than Congress had estimated, recommended that the law be changed, and announced that it wouldn’t allow such deductions unless the stock had been owned before a taxpayer’s death. Congress didn’t get around to changing the law to suit the IRS until December 1987, but made the new provision retroactive to October 1986.

“The government didn’t offer to make good the $631,000 loss the estate had suffered by acting in good faith on the basis of existing law, of course. It simply took the $2.5 million the executors had hoped to save. The attorneys filed suit to get it back.

“The U.S. Constitution (Article I, Section 9) states that ‘No Bill of Attainder or ex post facto law [setting punishment for an action done before the law was passed] shall be passed.’ The language in and of itself doesn’t specify that this clause shall apply only to criminal laws and not to the tax code. And in Federalist 44, Madison makes no such distinction, declaring such laws to be ‘contrary to the first principles of the social compact, and to every principle sound legislation … all of them are prohibited by the spirit and scope of these fundamental charters.’

“The Supreme Court has a long history of exempting tax laws from the prohibition against ex post facto laws. Even so, the 9th Circuit Court of Appeal found this change ‘so harsh and oppressive’ as to violate the constitutional guarantee of due process. ‘When the private sector performed the socially desirable action of selling shares at a discount to an ESOP,’ the court ruled, ‘the government reneged on its end of the deal.’ 

“It’s curious and dismaying that the U.S. Supreme Court — by a 9-0 margin! — gave Congress permission to change tax rules arbitrarily after the game has been played.”

Constitution overturned

So that settled that. Although the case decided by the court dated from 1987, the decision effectively legitimized Clinton’s ex post facto tax grab. Ever since Marbury vs. Madison in 1803, the U.S. Supreme Court decides what is constitutional, even if the explicit words of the Constitution say the opposite.

Just three weeks ago the Congressional Research Service published a paper discussing the constitutionality of ex post facto tax increases. It concluded that, unless such a tax was intended for individual persons, it now is allowed: “It is not uncommon for a bill to apply both retrospectively and prospectively, and it does not appear to be fatal to a bill of attainder challenge that the statute in question applies to both past and future behavior.”

So the ex post facto Prop. 30 tax will stand. Right now, rich people are adjusting to having $5 billion sucked from their portfolios and due by Tax Day next year, April 15, 2013. This money will reduce the equity invested in many California companies, and reduce economic activity in this state, killing scores of businesses and tens of thousands of jobs.

Far from stabilizing the states’s finances, as the Legislative Analyst maintained in his Nov. 14 paper on the fiscal effects of Prop. 30, the initiative will destabilize them.

Although the U.S. Supreme Court can repeal the clear intent of the Constitution, it cannot repeal economic law.


Tags assigned to this article:
ex post factoJerry BrownJohn SeilerProp. 30

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