[House Report 106-203]
[From the U.S. Government Publishing Office]



106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    106-203

======================================================================



 
  TO PROHIBIT A STATE FROM IMPOSING A DISCRIMINATORY COMMUTER TAX ON 
                              NONRESIDENTS

                                _______


 June 25, 1999.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Hyde, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 2014]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 2014) to prohibit a State from imposing a 
discriminatory commuter tax on nonresidents, having considered 
the same, reports favorably thereon without amendment and 
recommends that the bill do pass.

                           TABLE OF CONTENTS

                                                                  

                                                                 Page
Purpose and Summary........................................           2
Background and Need for the Legislation....................           2
Hearings...................................................           3
Committee Consideration....................................           3
Vote of the Committee......................................           3
Committee Oversight Findings...............................           4
Committee on Government Reform Findings....................           4
Committee Cost Estimate....................................           4
Constitutional Authority Statement.........................           4
Section-by-Section Analysis................................           4
Dissenting Views...........................................           5

                          Purpose and Summary

    H.R. 2014 provides that states must tax the income of 
residents and nonresidents in a substantially equal manner. The 
Committee hopes to codify the standard enunciated by the 
Supreme Court in Austin v. New Hampshire, 420 U.S. 656 (1974). 
That standard, affirmed by the Court in later cases, is a 
``rule of substantial equality of treatment for the citizens of 
the taxing state and the non-resident taxpayers.'' \1\ The case 
law, and this bill, are based on the Privileges and Immunities 
Clause, U.S. Const., art. IV, section 2, which provides that 
``citizens of each state shall be entitled to all privileges 
and immunities of citizens in the several states.''
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    \1\ Austin, 420 U.S. 662. See also Lunding v. New York Tax Appeals 
Tribunal,____U.S.____, 118 S.Ct. 766, 774 (1998).
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                Background and Need for the Legislation

    The Privileges and Immunities Clause, provides that 
``citizens of each state shall be entitled to all privileges 
and immunities of citizens in the several states.'' \2\ The 
Supreme Court has held the that the Clause ``plainly and 
unmistakably secures and protects the right of a citizen of one 
State to travel into any other State . . . [and to] be exempt 
from any higher taxes or excises than are imposed by the 
[other] State upon its own citizens.'' \3\ In applying the 
clause to states' taxation schemes, the Court has required that 
such schemes follow a ``rule of substantial equality of 
treatment for the citizens of the taxing state and the non-
resident taxpayers.'' \4\ The Court explained the rationale for 
requiring only substantial equality when it wrote:
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    \2\ U.S. Const., art. IV, section 2,
    \3\ Ward v. Maryland, 79 U.S. (12 All.) 418, 430 (1870). See also 
Shaffer v. Carter, 252 U.S. 37, 56 (1920) (describing the Clause as 
securing the right of a citizen of any state to ``remove to and carry 
on business in another without being subjected in property or person to 
taxes more onerous than the citizens of the latter State are subjected 
to'').
    \4\ Austin v. New Hampshire, 420 U.S. 656, 662 (1974). See also 
Lunding 118 S.Ct. at 774 (1998); Toomer v. Witsell, 334 U.S. 385, 396 
(1948); Chalker v. Birmingham & N. W. Ry. Co., 249 U.S. 522, 527 
(1919).

          As a practical matter, the Privileges and Immunities 
        Clause affords no assurance of precise equality in 
        taxation between residents and nonresidents of a 
        particular State. Some differences may be inherent in 
        any taxing scheme, given that, like many other 
        constitutional provisions, the privileges and 
        immunities clause is not an absolute, and that absolute 
        equality is impracticable in taxation.\5\
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    \5\ Lunding, id. (alterations, citations, and quotations omitted).

    Therefore, the Court's analysis under the Clause focuses on 
``the practical operation and effect of the tax imposed.'' \6\
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    \6\  Shaffer, 252 U.S. at 55; See also St. Louis Southwestern R.R. 
Co. v. Arkansas, 235 U.S. 350, 362 (1914)
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    Nonetheless, the Court has also held that disparate 
treatment of residents and nonresidents may be permissible 
under some circumstances, particularly ``in analyzing local 
evils and in prescribing appropriate cures.'' \7\ Specifically, 
such disparate treatment is allowed by the Clause if ``(i) 
there is a substantial reason for the difference in treatment; 
and (ii) the discrimination practiced against non-residents 
bears a substantial relationship to the State's objective.'' 
\8\ Although the Court has written little to further define the 
``substantial reason'' standard,\9\ commentators have written 
that the standard is the ``mirror image'' of a fundamental 
rights analysis and the exception to the Clause therefore 
covers those rights which are not fundamental.\10\
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    \7\ Toomer, 334 U.S. at 396.
    \8\ Lunding, 118 S.Ct. at 774 (quoting Supreme Court of New 
Hampshire v. Piper, 470 U.S. 274, 284 (1985)).
    \9\ See, e.g., Lunding, 118 S.Ct. at 774-75 (requiring a ``standard 
of review substantially more rigorous than applied to [intra]state tax 
distinctions among, say, forms of business organizations or different 
trades and professions'').
    \10\ See, e.g., The Supreme Court, 1997 Term--Leading Cases, 112 
Harv. L. Rev. 132, 141-42 (1998).
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    This bill, which codifies the common law standards 
elucidated by the courts, was introduced after the state of New 
York passed a law exempting New York state residents from New 
York City's commuter tax.\11\ The resultant situation is 
similar to that in Austin, where the Court struck down the 
discriminatory commuter tax.\12\ The New York State Legislature 
specifically contemplated that the tax might be declared 
unconstitutional and provided, in the legislation itself, that 
in that eventuality, the commuter tax be repealed in its 
entirety.\13\ At the time of the Committee vote to report the 
bill, there were at least two pending lawsuits against New 
York, filed by the Attorney Generals of Connecticut and New 
Jersey.\14\ The judge in those cases has ordered New York to 
show cause why the law should not be ruled facially 
unconstitutional.\15\
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    \11\ Senate Bill No. 5594, 222nd Leg., 1999-2000 Sess. (N.Y. 1999).
    \12\ See Austin, 420 U.S. at 665-68.
    \13\ N.Y. Senate Bill No. 5594 Sec.  9.
    \14\ Connecticut v. New York, No. 99-111325 (N.Y. Sup. Ct. filed 
May 31, 1999); Quinn v. Pataki, No. 99-111322 (N.Y. Sup. Ct. filed May 
31, 1999). See also Igoe v. Pataki, No. 99- 111230 (N.Y. Sup. Ct. filed 
May 31, 1999) (lawsuit filed by individual residents of Connecticut and 
New Jersey).
    \15\ Letter from Hon. Jerrold Nadler, Member of Congress, to Hon. 
Henry Hyde, Chairman, Committee on the Judiciary, U.S. House of 
Representatives 1 (June 22, 1999) (on file with the Committee).
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                                Hearings

    No hearings were held on this legislation.

                        Committee Consideration

    On June 22, 1999, the the Committee met in open session and 
ordered reported favorably the bill H.R. 2014 without amendment 
by a recorded vote of 17 to 7, a quorum being present.

                         Vote of the Committee

    Motion to report favorably the bill. Passed 17 to 7.

        AYES                          NAYS
Mr. Hyde                            Mr. Conyers
Mr. McCollum                        Mr. Nadler
Mr. Gekas                           Mr. Scott
Mr. Coble                           Mr. Watt
Mr. Smith                           Ms. Lofgren
Mr. Gallegly                        Ms. Waters
Mr. Canady                          Mr. Weiner
Mr. Bryant
Mr. Chabot
Mr. Barr
Mr. Jenkins
Mr. Cannon
Mr. Graham
Mr. Berman
Mr. Meehan
Mr. Wexler
Mr. Rothman

                      Committee Oversight Findings

    In compliance with clause 2(l)(3)(A) of Rule XI of the 
Rules of the House of Representatives, the Committee reports 
that the findings and recommendations of the Committee, based 
on oversight activities under clause 2(b)(1) of Rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

                Committee on Government Reform Findings

    No findings or recommendations of the Committee on 
Government Reform and Oversight were received as referred to in 
clause 2(l)(3)(D) of Rule XI of the Rules of the House of 
Representatives.

                        Committee Cost Estimate

    In compliance with clause 7(a) of Rule XIII of the Rules of 
the House of Representatives, the Committee believes that the 
bill will have no budget effect for fiscal year 2000.

                   Constitutional Authority Statement

    Pursuant to Rule XI, clause 2(l)(4) of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in Article I, clause 8, section 3 of the 
Constitution and in Article IV, clause 2, section 1 of the 
Constitution.

                      Section-by-Section Analysis

Sec. 1. Prohibition on imposing discriminatory commuter tax on 
        nonresidents
    Section 1(a) prohibits states from imposing an income tax 
on nonresidents which does not treat them substantially equal 
to citizens of the state. The Committee obviously does not 
intend to prohibit states from treating nonresidents more 
favorably than they do their own citizens, if they so 
determine, as that is clearly a matter of internal choice over 
which the taxpayers who would be adversely affected have 
political control. Taxpayers of another state, if subject to 
disparate taxation, would clearly have no ability to rectify 
such treatment.
    Section 1(b) designates both the District of Columbia and 
any political subdivisions of a state as states for purposes of 
section 1(a).
                            Dissenting Views

    This legislation was introduced on June 7, was never 
referred to the Subcommittee on Commercial and Administrative 
Law, which has jurisdiction over the matter under Committee 
Rule V(b)(3), and has never been the subject of any hearings, 
administration comment, or any review of which we are aware. 
Because this legislation would affect tax laws in almost every 
state, we believe it merits the careful consideration this 
committee has neglected. For the reasons stated below, we 
respectfully dissent.
    The bill would prohibit a state from ``impos[ing] a tax on 
the income earned in the State by nonresidents unless the tax 
is of substantial equality of treatment for the citizens of the 
State and the nonresidents so commuting.'' The legislation 
would appear to prohibit states from taxing non-residents more 
or less harshly than they do their own citizens. As discussed 
below, discriminatory treatment of non-residents in taxation is 
already prohibited by the Constitution. Thus, the proposed 
legislation would change existing law by barring more favorable 
treatment of non-residents by state tax laws. This change 
appears inadvertent.
    According to the sponsor, the legislation was introduced to 
prevent New York State from exempting New York State residents 
from New York City's non-resident income tax, while still 
allowing The City to collect such taxes from out-of-state 
residents who earned income in The City.\1\ By its terms, 
however, it applies to all states that tax non-residents on 
income earned within their borders.
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    \1\ ``To subject only out-of-state commuters to the New York City 
tax is unfair, unreasonable and may well be unconstitutional.'' New 
York City Commuter Tax, (Statement by Rep. Bob Franks), 
http:www.house.gov.bobfranksnyctax.shtml.
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    The legislation appears to be a response to legislation 
enacted by New York State which exempted residents of New York 
State from the payment of a non-resident income tax on income 
earned within The City, which has been in force for more than 
three decades.\2\ It did so by changing the definition of 
``city nonresident individual'' in sec. 1305(b) of the Tax 
Law\3\, and of ``nonresident individual'' in section 25-m(h) of 
the General City Law\4\ to mean a person who is not a resident 
of The City (as it is under current law) or the state, which 
effectively makes only residents of other states 
``nonresidents.'' The new law takes effect July 1, 1999. It has 
been challenged in numerous court proceedings. In one case 
brought by residents of New Jersey, a state trial court in New 
York has ordered the State to show cause why the legislation is 
not unconstitutional on its face.\5\
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    \2\ S. 5594B, 1999 N.Y. Laws 5 (May 27, 1999).
    \3\ Sec. 1.
    \4\ Sec. 2.
    \5\ Quinn et. al. v. Pataki et. al. N.Y.Sup.Ct. No. 111322/99.
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    Constitutional Issues: The Supreme Court has held that the 
Privileges and Immunities Clause of the Constitution\6\ 
protects the rights of citizens of any state to ``remove to and 
carry on business in another without being subjected in 
property or person to taxes more onerous than the citizens of 
the latter State are subjected to.'' \7\ As far back as 1871, 
the Court has held that a state may not discriminate 
substantially between residents and nonresidents.\8\ This 
principle has been interpreted by the court as requiring ``a 
rule of substantial equality of treatment'' (the same language 
which is used in H.R. 2014) for resident and nonresident 
taxpayers.\9\ This rule was reaffirmed by the Court as recently 
as last year.\10\ In both Shaffer, and in a companion case, 
Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920), the Court 
held that non-residents deductions may be tied to in state 
activities, but struck down a particular tax because it denied 
to non-residents exemptions which were allowed to residents. 
The Court has, however, granted states substantial deference in 
evaluating their tax laws, requiring not precise equality, but 
rather that ``the State has secured a reasonably fair 
distribution of burdens, and that no intentional discrimination 
has been made against non-residents.'' \11\
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    \6\ U.S. Const. Art. IV, Sec. 2.
    \7\ Shaffer v. Carter, 252 U.S. 37 (1920).
    \8\ Ward v. Maryland, 12 Wall. (79 U.S.) 418, 424 (1871).
    \9\ Austin v. New Hampshire, 420 U.S. 656, 665 (1975).
    \10\ Lunding, et. ux. v. New York Tax Appeals Tribunal, et. al., 
522 U.S. 287 (1998).
    \11\ Travellers' Ins. Co. v. Connecticut, 185 U.S. 364, 371 (1902).
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    This legislation deals with the very complex area of 
interstate taxation. It is not written specifically to address 
the New York and New Jersey case, but would apply to every 
jurisdiction in the United States. We believe that it is a 
mistake to report it with such undue haste without giving the 
Subcommittee the opportunity to hold hearings on it. The New 
York State legislation which gave rise to this bill is also the 
subject of pending litigation brought by citizens and officials 
of the States of New Jersey and Connecticut. A trial court in 
New York has already ordered the State to show cause why the 
law should not be ruled facially unconstitutional.
    To the extent that this bill reflects the current state of 
constitutional jurisprudence, we have no objections, but the 
Committee should take the time to understand what other effect 
in may have nationally on state tax laws. This we have not 
done, and that is a mistake.
    We do not necessarily approve of the New York law at issue, 
which summarily stripped the City of New York of its power, 
exercised for more than 30 years, to tax non-resident income, 
but only with respect to individuals who are not residents of 
New York City, but who are residents of New York State. The New 
York law would, therefore, allow New York City to continue to 
tax income earned by non-residents of New York State in New 
York City. This change has been estimated by New York City 
Comptroller to cut New York City tax revenues by approximately 
$4 billion over the next decade. We believe that jurisdictions 
have the right to tax economic activities within their borders 
so long as it is done consistent with the requirements of non-
discrimination as set out in the Constitution. New York's law, 
until the enactment of this recent change, was constitutional. 
We believe the courts will quickly invalidate this new law, but 
we do not think we should compound the error by rushing an ill-
considered bill through the process without careful review.
    Whatever the merits of the New York dispute with its 
neighboring states, the Committee needs to consider that this 
legislation would apply to every state which taxes income 
earned within its borders by non-residents. The normal process 
observed by our committee would be to assess the impact this 
legislation would have on the myriad state tax laws nationally, 
rather than focusing on one cross-border tax dispute. For 
example, Illinois has negotiated a reciprocal agreement on non-
resident income taxes with Wisconsin, because Illinois found it 
was losing revenue to neighboring states. It has yet to 
conclude a similar agreement with Indiana. How would this 
legislation affect the ability of Illinois to protect its 
rights in dealing with neighboring states? We need to look at 
these issues.
    We understand that this is a political hot potato in New 
Jersey and Connecticut, but that is no reason to rush this 
legislation though the process which could drastically alter 
state taxing authority without any review. For these reasons, 
we respectfully dissent.

                                   John Conyers, Jr.
                                   Jerrold Nadler.
                                   Robert C. Scott.
                                   Melvin L. Watt.
                                   Sheila Jackson Lee.
                                   Anthony D. Weiner.

                                  
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