Reply Brief — Department of Revenue of Ky. v. Davis

)

FILED ;

FEB’ § 2507:

No. 06-666 | orpce cr me cisnn

IN THE

Supreme Court of the Anited States

DEPARTMENT OF REVENUE OF THE

COMMONWEALTH OF KENTUCKY and

FINANCE AND ADMINISTRATION CABINET

OF THE COMMONWEALTH OF KENTUCKY,

Petitioners,

versus

GEORGE W. DAVIS and

CATHERINE V. DAVIS,

Respondents.

On Petition for a Writ of Certiorari to the

Court of Appeals of Kentucky

REPLY BRIEF FOR THE PETITIONERS

DOUGLAS M. DOWELL

Counsel of Record

Office of Legal Services for Revenue

Finance and Administration Cabinet

Commonwealth of Kentucky

200 Fair Oaks lane

P.O. Box 423

Frankfort, Kentucky 40602-0423

(502) 564-3112

Counsel for Petitioners

WrSTCRFicLO BOE | 6°9W KRENTUCAY-PO BOX 3751. LOUISVILLE. KY

i

TABLE OF CONTENTS

PAGE

EERE REINER ARO ae eT RCO i

ET A SAAT REIN aR ii

REPLY BRIEF FOR THE PETITIONER........................... 1

i i 6

‘3

TABLE OF AUTHORITIES

Cases: PAGE

Alden v. Maine, 527 U.S. 706 (1999) .............ccccccceseceeeeeeeees

Armour & Co. v. Wantock, 323 U.S. 126 (1994) ......0000......

Bonaparte v. Tax Court, 104 U.S. 592 (1881).................. 3,4

Boston Stock Exchange v. State Tax Commission,

EERE ETE eee EDIE

Davis v. Michigan Dept. of Treasury,

iii ceaiicrnailictiniseriitinananaaianianid

Dunn v. State, 635 S.E.2d 604 (N.C. App. 2006)............. 1,2

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)... ecco

Freeman v. Hewitt, 329 U.S. 249 (1946)... eee eee

Georgia v. Chattanooga, 264 U.S. 472 (1924)... eee

H.P. Hood & Sons, Inc. v. Du Mond,

ESTAR AS TAR

McKesson v. Division of Alcoholic Beverages

and Tobacco, Department of Business Regulation

Of Florida, 466 US. 18 (1G) ......cccccccccccoscssccccsccsssceceeees

New State Ice Co. v. Liebmann, 285 U.S. 262,

I ekrialaitinii tients dalla ie iaeteitenliae detlitaannnmmenetedl

New York v. United States, 505 U.S. 144 (1992) .....000.0... 4,5

Texas v. White, 7 Wall. 700,19 L.Ed. 227 (1869)................

Constitutional Provisions:

cal alain elail

1

REPLY BRIEF FOR PETITIONER

The Respondents’ Brief in Opposition (Opp. 18-19) ar-

gues that the petition is “premature” and that other courts

should be allowed to “weigh in” on the issue presented. The

petition is certainly not premature for the Commonwealth

of Kentucky, where the Constitution will have a meaning

different from that in Ohio (and all the other states) if the

Kentucky Court of Appeals decision is allowed +o stand. If

the petition is not granted, the Commonwealth will have to

accord its bonds the same tax treatment as bonds issued by

its sister states and their political subdivisions. See, e.g.,

McKesson v. Division of Alcoholic Beverages and Tobacco,

Department of Business Regulation of Florida, 496 U.S. 18

31-36, 51-42 (1990); Davis v. Michigan Dept. of Treasury, 489

U.S. 803, 817-18 (1989). Meanwhile, its sister states and

their political subdivisions will be under no obligation to do

the same with respect with to bonds issued by the Common-

wealth and its political subdivisions, unless their courts opt

for the approach taken by the Kentucky Court of Appeals in

this case over that taken by the Ohio courts.

Moreover, the Respondents do not make any showing as

to what benefit would be derived from “full develop[ment]”

of the issue in the Arizona and North Carolina courts. Opp.

19. They do not articulate what that “full develop[ment]”

would consist of, either. The reality is that no benefit would

lie in awaiting further state court decisions on the issue

presented. This issue is purely one of law that can only be

settled by this Court. The area of controversy presented by

this case is not one that is evolving in nature or depending

upon factual development or exploration of doctrinal rami-

fications.

Instead, the Respondents’ approach only significantly

delays the resolution of a question of great national impor-

tance. There has been no reported decision in the Arizona

case to which the Respondents refer. The North Carolina

litigation, which is also being handled by the Respondents’

counsel, is focused on the question of class certification and

2

not the merits, Dunn v. State, 635 S.E.2d 604 (N.C. App.

2006), and is on review to the North Carolina Supreme

Court. Dunn v. State, Supreme Court of North Carolina

Docket No. 605P06 (available at http:/Awww.aoc.state.nc.us/

www/public/sc/dsheets/605-06-1.htm).

At the same time, the Respondents have not disputed the

widespread and substantial impact of the issue presented

upon the great majority of the states. On this point, the Na-

tional Association of State Treasurers, a nonprofit associa-

tion whose members “include the Treasurers or similar State

financial officers of all 50 states,” has sought leave to file a

brief as amicus curiae in support of the Petitioners. Amicus

Br. 1. That brief explains the “vital importance” of munici-

pal bonds “to State and local government entities that issue

[them] and to citizens who benefit from government projects

and activities financed by [them],” and “the centrality of [the

bonds’] tax exempt status.” Amicus Br. 4-13. The National

Association of State Treasurers “strongly urges the Court to

grant review,” as the decision of the Kentucky Court of Ap-

peals “has created legal uncertainty that should be resolved

promptly, and can only be resolved by this Court.” Amicus

Br. 4, 5.

The Respondents assert that the petition should be

denied because the Kentucky Court of Appeals’ decision is

“wholly consistent with this Court’s extensive Commerce

Clause precedent.” Opp. 3. They fail to heed this Court’s ad-

monitions that “our opinions are to be read in the light of the

facts of the case under discussion,” Armour & Co. v. Wantock,

323 U.S. 126, 132-33 (1944), and especially so in the area of

the dormant Commerce Clause. Boston Stock Exchange v.

State Tax Commission, 429 U.S. 318, 329 (1977); Freeman v.

Hewitt, 329 U.S. 249, 252 (1946). The Respondents’ whole

case is premised upon the approach that principles enunci-

ated by this Court in its dormant Commerce Clause juris-

prudence must be inexorably followed as far as logic can

3

carry them, regardless of the context or the possibility of the

application of countervailing principles. None of the cases

upon which they rely bear any resemblance to the facts or

context presented by this case.

The Respondents’ argument extends the applica-

tion of the dormant Commerce Clause well beyond its

purpose as expressed by this Court in cases such as

H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525 (1949):

Our system, fostered by the Commerce Clause, is that

every farmer and every craftsman shall be encouraged

to produce by the certainty that he will have free access

to every market in the Nation, that no home embargoes

will withhold his export, and no foreign state will by

customs duties or regulations exclude them. Likewise,

every consumer may look to the free competition from

every producing area in the Nation to protect him from

exploitation by any. Such was the vision of the Found-

ers; such has been the doctrine of this Court which has

given it reality.

Id. at 539. This case does not involve a measure aimed at

the products of a farmer, craftsman or economic interest of

another state, but instead concerns whether the means cho-

sen by a state to raise funds to support general government

needs or to fund public works projects or programs is quali-

fied by some obligation to it’s sister states imposed by the

Commerce Clause. The proper answer is that the Constitu-

tion specifically addresses the obligations the states owe one

another and the obligation advanced by the Respondents

is not among them. Bonaparte v. Tax Court, 104 U.S. 592

(1881); U.S. Const. Art. IV, §§ 1-3.

To be sure, the states may not discriminate against in-

terstate commerce and Kentucky has not done so here. Ken-

tucky taxes interest derived from bonds issued by its sister

states and their political subdivisions in the same manner

as interest from bonds issued by Kentucky’s intrastate busi-

nesses. That is all the dormant Commerce clause requires

4

here, given the status of those bonds beyond their borders.

Bonaparte, 104 U.S. at 595; Georgia v. Chattanooga, 264 U.S.

472, 480-81 (1924).

Finally, the Respondents tout the virtues of their posi-

tion as imposing some form of fiscal discipline upon the

states. They assert that “[o]nce states compete in the finan-

cial markets without the protective benefit of coercive tax

schemes, they will have to be more selective in what projects

they choose to fund,” since “[t]hey will [be] competfing] for

investors’ dollars not just with respect to the interest rate

offered, but on the merits of the projects funded by the in-

vestment sales.” This theory is completely antithetical to

the status of the states under the Constitution as autono-

mous and independent sovereign entities. Alden v. Maine,

527 U.S. 706, 713-15 (1999); New York v. United States, 505

US. 144, 162-63 (1992); Erie R. Co. v. Tompkins, 304 US. 64,

78-79 (1938). The states vary considerably in the needs and

problems they and their citizens face and these needs and

aroblems can change over time and even suddenly, such as

in the event of a natura! disaster o> economic dislocation.

“[O|ne of the happy incidents of the federal system [is] that

a single courageous State may, if its citizens choose, serve as

a laboratory; and try novel social and economic experiments

without risk to the rest of the county.” New State Ice Co. v.

Liebmann, 285 U.S. 262, 311 (1932 Brandeis, J., dissenting).

The states may therefore undertake projects or programs

that may not necessarily be highly regarded by the financial

markets at the time of their adoption. These projects and

programs may be “experiments” that stand the test of time

and experience, however, and ultimately prove worthy of

emulation by other states and their local governments or

even by the National Government. Such is a large part of

the nature and genius of the federal system established by

the Constitution.

5

These programs and projects may also be devoted to

purposes and values that transcend any value that may

be placed upon them by the financial markets - - e.g., the

rebuilding of the infrastructure of a city stricken by natural

disaster, the establishment of war memorials, the erection of

courthouses and other public buildings. The states and their

political subdivisions should not be forced into competition

with other states, as the Respondents contend, in appealing

to their taxpayers for the funding of those programs and

projects. “In Chief Justice Chase’s much-quoted words, ‘the

preservation of the States, and the maintenance of their

governments, are as much within the design and care of

the Constitution as the preservation of the Union and the

maintenance of the National government. The Constitution,

in all its provisions, looks to an indestructible Union, com-

posed of indestructible States.” New York v. United States,

505 U.S. at 162 (quoting Texas v. White, 7 Wall. 700, 725, 19

L.Ed. 227 (1869)). The Respondents’ position is at odds with

this fundamental principle. Their position would deny the

states an important means of meeting their financial needs

and instead pit the states against each other for the funding

they need.

As sovereign entities under our federal system of govern-

ment, the states must necessarily have the flexibility to or-

der their fiscal affairs as they see fit to meet the challenges

they face. One of the means by which the states can finance

public projects and programs to address these challenges is

to appeal to their taxpayers for loans of the necessary funds,

employing the inducement of a tax exemption. As we have

seen, this is a widespread practice that lowers the cost of

borrowing for the many state and local governments that

employ it. Pet. 7-11; Amicus Br. 6-7, 8-10. The Respondents

may have policy arguments and studies that inveigh against

this practice, but these policy arguments and studies have

obviously not carried the day in the vast majority of the

states. Pet 7-8. In the final analysis, under the Constitu-

6

tion it is the prerogative of the states as sovereign entities

to decide for themselves the approach to take.

CONCLUSION

For the foregoing reasons and those stated previously,

the petition for a writ of certiorari should be granted.

Respectfully submitted,

Douglas M. Dowell

Counsel of Record

Office of Legal Services for Revenue

Finance and Administration Cabinet

Commonwealth of Kentucky

200 Fair Oaks Lane

P. O. Box 423

Frankfort, KY 40602-0423

Ph: (502) 564-3112

Counsel for Petitioners