Motion — Butcher v. Department of the Treasury

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86 -712 No. NOV 26 19386

HOSEPH F. SPA

IN THE em” JR.

SUPREME COURT OF THE UNITED STATES ~—J

October Term, 1986

ROBERT E. BUTCHER and GLADYS K. BUTCHER,

Appellants,

vs.

DEPARTMENT OF TREASURY, REVENUE

DIVISION, FOR THE STATE OF MICHIGAN,

ROBERT A. BOWMAN, Michigan State Treasurer, and

SYDNEY D. GOODMAN, Revenue Commissioner for

the State of Michigan, Appellees.

ON APPEAL FROM

THE MICHIGAN SUPREME COURT

MOTION TO DISMISS OR AFFIRM

FRANK J. KELLEY

Attorney General

Louis J. Caruso

Solicitor General

Counsel of Record

Thomas L. Casey

Assistant Solicitor General

Richard R. Roesch

Russell E. Prins

Assistant Attorneys General

Business Address:

761 Law Building

Lansing, Michigan 48913

Telephone: (517) 373-1124

PRINTED BY SPEAKER-HINES AND THOMAS, INC., LANSING, MICHIGAN—1986 } 7

cab

«\

STATE OF QUESTIONS INVOLVED

DOES 1967 PA 281, § 520(A), MCL 206.520(A); MSA

7.557(1520)(A) VIOLATE THE PROHIBITION OF

THE MICHIGAN CONSTITUTION OF 1963, ART 9°

§ 7?

DOES THE MICHIGAN INCOME TAX ACT, SUPRA,

IN GRANTING TO CERTAIN HOMEOWNERS AND

RENTERS A GRADUATED AD VALOREM REAL,

PROPERTY TAX CREDIT (GRADUATED AS TO

INCOME ENJOYED BY THE HOMEOWNER OR

RENTER) WHICH DOES NOT VIOLATE PROVI-

SIONS OF THE MICHIGAN CONSTITUTION,

NONETHELESS VIOLATE PROVISIONS OF THE

FEDERAL CONSTITUTION SECURING TO CITI-

ZENS, EQUAL PROTECTION AND DUE PROCESS

OF LAW?

PARTIES TO THE PROCEEDINGS

Defendants and Appellees are Department of Treasury,

Revenue Division, for the State of Michigan; Robert A.

Bowman, Michigan State Treasurer; and Susan Work Mar-

tin, successor to Sydney D. Goodman, Revenue Commis-

sioner for the State of Michigan.

Plaintiffs and Appellants herein are Robert E. Butcher

and Gladys K. Butcher, his wife, who bring the action in

their joint behalf and on behalf of all members of the class

similarly situated, as set forth in the Trial Court’s certifica-

tion of class action.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW ........ i

PARTIES TO THE PROCEEDINGS .............. i

TABLE OF CONTEN £0 s.:>isestspevecaeeeets cca

INDEX OF AUTHORED Se s is2ccocdeveeee ee iv

MOTION TO DISMISS OR AFFIRM .............. ]

COUNTERSTATEMENT OF THE CASE ......... 3

ARGUMENTS:

I THE CASE DOES NOT PRESENT A SUB-

STANTIAL FEDERAL QUESTION, THE

JUDGMENT RESTING ON AN ADEQUATE

NON-FEDERAL, BASED: v. ..iscguesaewanses sas 6

A.THE MICHIGAN INCOME TAX ACT, MCL

206.1 ET SEQ; MSA 7.557(1) ET SEQ, IMPOSES

A TAX UPON AN INDIVIDUAL’S TAXABLE

INCOME WHICH IS GRADUATED NEITHER

AS TO RATE NOR BABE a. ios sasbaueawdta eres 6

B. THE MICHIGAN INCOME TAX ACT GRANTS

TO CERTAIN HOMEOWNERS AND RENT-

ERS AN AD VALOREM REAL PROPERTY

TAX CREDIT WHICH DOES NOT VIOLATE

PROVISIONS OF ART 9, § 7 OF MICHIGAN

CONSTITUTION TG@e ... 5s. ..isteaka ees 10

. THE ALLOWANCE OR DISALLOWANCE OR

LIMITATION OF A MICHIGAN PROPERTY

TAX CREDIT DOES NOT IMPOSE AN

INCOME TAX GRADUATED AS TO RATE OR

. THE CASE OF KUHN V DEPARTMENT OF

TREASURY IS DISPOSITIVE, AND ITS

RATIONALE UPHOLDS THE 1982

2 Ses a5 ee i ew Sas bn Wes

. THE CHALLENGED 1982 AMENDMENT TO

THE MICHIGAN INCOME TAX ACT ESTAB-

LISHES A GRADUATED TAX CREDIT, BUT

IMPOSES NO INCOME TAX GRADUATED

Pee ee gO ee ern Pe ree

. THE UNANIMOUS OPINION OF THE MICH-

IGAN SUPREME COURT CORRECTLY AF-

FIRMS THE COURT OF APPEALS’ MAJOR-

ITY OPINION REJECTING ANY ARGUMENT

THAT THE TAX CREDIT FORMULA MAN-

DATED BY 1982 PA 269 VIOLATES MICHI-

GAN CONSTITUTION 1963, ART 9,§7 ......

Ili THE CASE PRESENTS NO SUBSTANTIAL

FEDERAL QUESTION AND IS MANIFEST

THAT THE QUESTIONS ON WHICH THE

DECISION IN THE CAUSE DEPENDS ARE

SO UNSUBSTANTIAL AS NOT TO NEED

PRUNE SUUN PRUIMO WI INOEGIN fee cece ene cennes

RR PrwR se ERO PRINS BORA URE eyes case ce cwkewne

INDEX OF AUTHORITIES

Page

Constitution:

Se RIC ct a ak ys crane mu eaan 17

RN SR ON Es ine le hy wee 4, 5, 13, 14, 17, 18

Cases:

American Amusement Co, Inc v Department of

Treasury, 91 Mich App 573; 283 NW2d 803 (1979) — 17

Brown v Lodbell, 36 Or App 399; 585 P2d 4 (1978) . 11

C F Smith Co v Fitzgerald, 270 Mich 659; 259 NW 352

CRE :iic:k we Vi8 yd nik aiand A eee A ce eae ee Nees 17

In re Smith Estate, 343 Mich 291; 72 NW2d 287(1955) 12

Kuhn v Department of Treasury, 384 Mich 378; 183

Pe SE oie ny hives trpnrdaaweadia 13, 14, 15, 17

Michigan C R Co v Powers, 201 US 245; 26 S Ct 459;

ase PCE a oss sp chs onan cae eed 17

State Board of Tax Commission of Indiana v Jackson,

283 US 527; 51S Ct 540; 75 L Ed 1240, 73 ALR 1464

PRNE5, virco on seta a a Sk es ee ener sk ha ek al oe ce be 73 22

Stowers \ Wolodzko, 386 Mich !19; 191 NW2d 355

CRs Pass Ben ance oe ca Ck ws EA eis Sorin a 12

Union Steam Pump Sales Co v Secretary of State, 216

Mich 261; 165 NW 353 (I@ER) 5... ccc ce ceedas 17

US v Muncie Trust Co, 332 US 234; 67 S Ct 1599; 91 L

sn ae tN 11

W S Butterfield Theatres v Revenue Department, 353

Mich 345; 91 NW2d 269 (1958) .................. 17

Statutes: Page

NOC, SGA; BORK TATE os see eet ees ec eee

MCL; SURG; SEGA TOGA G) oiecias cickn sane ueceuks 7

MCL SG.30; WHEAT oo ons ceded ei sadsawen 7

MAC, BOGS]: MEGA TAGE) oie oc os ee cee i hess 7

MCL, 206.255; MSA 7.557(1255) ..........0scccnees 9

MCL 206.257: MSA T.55 T3257)" .. 5.6 cence. 9

MCL, 206.258; MGA TSOTIGSS) «ww ccc cec scenes 16

MCL, 306,260; MSA T5357 1200)... 0 ccc cavkcncas 9

MCL, 206.962; MGA TBST(ESGZ) «oo. ccs pee cowensy: 9

MCL 206.502(3); MSA 7.557(1520)(3) ..............- 11

MCL 206.508(4); MSA 7.557(1508)(4) ............0.. 3

MCL, BOG. SIG; BARA TSH EGR) ccc icc sn ean cutee 3

MCL 206.520; MSA 7.557( 1520)

Amendatory Act 1982 PA 269 ................... 4,18

MCL 206.520(8); MSA 7.557(1520)(8) ...............3,5

MCL, BOG. See; MESA TIGR) on ccc ces cewtcans 3

MCL. SEG TOL: DESA DB. TSOCUE) occ cvtes sc iaecansawns 9

Miscellaneous:

Alaska, Laws of 1965, Chapter 69;

CCH State Tax Reporter 7 10-002 ..... 2... ccc cen 13

Federal Internal Revenue Code ................0055 3

No.

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1986

ROBERT E. BUTCHER and GLADYS K. BUTCHER.

Appellants,

VS.

DEPARTMENT OF TREASURY, REVENUE

DIVISION, FOR THE STATE OF MICHIGAN,

ROBERT A. BOWMAN, Michigan State Treasurer, and

SYDNEY D. GOODMAN, Revenue Commissioner for

the State of Michigan,

Appellees.

ON APPEAL FROM

THE MICHIGAN SUPREME COURT

MOTION TO DISMISS OR AFFIRM

Appellees move the Court to dismiss the appeal herein

or, in the alternative, affirm the judgment of the Michigan

Supreme Court, on grounds that (a) the appeal does not

present a substantial federal question, and the judgment

rests on an adequate non-federal basis, and (b) that it is

manifest that the questions on which the decision in the

cause depends are so unsubstantial as not to need further

argument.

In this cause, the appellants in challenging a statutorily

mandated graduated tax credit maintain:

“Such multiple assessments are asserted to violate the

equal protection mandate of the Fourteenth Amend-

ment, because the State is prohibited from classifving

those subject to assessment on the basis of income.”

(Jurisdictional Statement, p 2)

and

“... The effect of the tax ‘reduction’ amendment to the

general income tax act is to make an assessment against

income, ... resulting in a graduated income tax prohi-

bited by the Michigan Constitution. Being prohibited,

and not having been submitted for approval to the

electors, the ‘reduction’ or assessment is also a taking

which violates the Due Process Clause.”

(Jurisdictional Statement, p 2)

In addition to mischaracterizing or misclassifying the

homestead property tax credit as a tax or an assessment, the

appellants now advance, without any support the fallacious

proposition that

(a) the state’s may not constitutionally in imposing

taxes or assessments classify individuals on the

basis of income, and that

(b) every putative violation of rights guaranteed by a

state constitution gives rise to a claim of violation of

the federal constitution.

These propositions, the appellees claim, cannot

withstand any rational analysis.

COUNTERSTATEMENT OF THE CASE

The Michigan Income Tax Act, MCL 206.1 et seq; MSA

7.557(1) et seq, (Income Tax Act) allows at § 520 a credit for

property taxes paid on a homestead. The credit is

calculated by reference to property taxes paid and a per-

son’s total household income which is and has been

defined by § 508(4) of the Income Tax Act, MCL

206.508(4); MSA 7.557(1508)(4) as “. . . all income received

by all persons of a household in a tax year while members

of a household.” The term is further defined in §510, MCL

206.510; MSA 7.557(1510) which clearly indicates that it

includes both taxable items of income under the Federal

Internal Revenue Code, as well as income specifically

excluded or exempted from taxation, such as social security

pavments, tax exempt interest, etc.

In 1981, Plaintiffs-Appellants (hereinafter the Plaintiffs)

were entitled to claim a credit equal to 60% of the amount

by which their annual homestead property tax exceeded

3.5% of their total household income for that taxable vear.

The maximum credit allowed pursuant to this section is

$1,200. Paraplegics, guadriplegics, senior citizens, eligible

servicemen, veterans, their widows and blind persons

were entitled to claim a more substantial credit than

income taxpayers who do not fall into these categories,

such as the plaintiffs herein. MCL 206.522; MSA

7.557( 1522).

For tax years commencing after December 31, 1981, the

homestead property tax credit has been subjected to an

additional limitation set forth in amendatory 1982 PA 269,

§ 520(8). The property tax credit is to

“~..be reduced by 10% for each claimant whose

household income exceeds $65,000.00, as adjusted pur-

suant to this section, and by an additional 10% for each

oa eae

increment of $1,000.00 of household income in excess

of $65,000.00 or the adjusted base level... .”

Thus, for 1982 a taxpayer whose household income did

not exceed $65,000, was entitled to the full amount of

credit computed pursuant to the statutory formula, to 50%

of such computed credit if the household income exceeded

$70,000, and to zero credit if the household income ex-

ceeded $75,000!"!

The Plaintiffs brought an action in the Circuit Court for

Wayne County (Appellants’ Appendix 53a) seeking a judi-

cial declaration that the credit reduction created by the

1982 amendment to § 520 of the Income Tax Act was un-

constitutional and constituted a violation of the Const

1963, art 9, § 7 which states:

“No income tax graduated as to rate or base shall be

imposed by the state or any of its subdivisions.”

After both parties to the litigation moved for summary

judgment, the Circuit Court issued its Opinion which

specifically states:

“While not facially violative of the Michigan Constitu-

tion, the 1982 Amendment to § 520 of the Income Tax

Act of 1967, must be struck down as it indirectly vio-

lates Article 9, Section 7 of the Constitution.”

(Appellants’ Appendix 35a)

For 1983 and subsequent tax years, the base level of household income sub-

jecting the claimant to credit reductions is adjusted annually to reflect changes in

the ‘implicit price deflation for the gross national product.’ 1967 PA 281, § 520(8),

supra, For the 1983 tax vear, the base level was $68,500; zero credit being then

available if household income exceeded $78,500.

——

The decision of the Circuit Court was appealed by the _

Defendants to the Court of Appeals.

In its Opinion rendered October 18, 1984, the majority of

the Court of Appeals’ panel opined that § 520(8) of the

Income Tax Act, MCL 206.520(8); MSA 7.557(1520)(8)

does not violate Const 1963, art 9, § 7, and accordingly

reversed the Circuit Court. (Appellants’ Appendix 16-22a).

The Michigan Supreme Court thereafter granted Plain-

tiffs’ leave to appeal.

In its Opinion rendered June 27, 1986, the Michigan

Supreme Court unanimously held:

“...[Blecause the property tax credit is payable to the

property taxpayer irrespective of state income tax lia-

bility, an income graduated-reduction in that credit

aves not conflict with the constitutional prohibition

against a graduated income tax. We therefore affirm the

decision of the Court of Appeals.”

(Appellants’ Appendix la)

With respect to the Plaintiffs’ Federal constitutional

claims, the Court held:

Plaintiffs’ due process and equal protection arguments

were not raised in the Court of Appeals, and we there-

fore decline to consider them.”

(Appellants’ Appendix I4a)

Plaintiffs thereafter applied to the Michigan Supreme

Court for a rehearing. The Motion for Rehearing was

denied by the Michigan Supreme Court on September 12,

1986.

On October 17, 1986, the Plaintiffs filed their notice of

Appeal with this Court.

On or about October 30, 1986, the Plaintiffs filed their

Jurisdictional Statement with this Court.

ARGUMENT

THE CASE DOES NOT PRESENT A SUBSTANTIAL

FEDERAL QUESTION, THE JUDGMENT RESTING

ON AN ADEQUATE NON-FEDERAL BASIS.

THE MICHIGAN INCOME TAX ACT, MCL 206.1 ET

SEQ; MSA 7.557(1) ET SEQ, IMPOSES A TAX UPON

AN INDIVIDUAL’S TAXABLE INCOME WHICH IS

GRADUATED NEITHER AS TO RATE NOR BASE.

In this case, the Plaintiffs-Appellants argue that asserted

violations of the Michigan Constitution per se result in

violation of due process and equal protection guarantees of

the Federal Constitution. The assertion is clearly wrong

but further erroneously assumes as a predicate that the

Michigan Income Tax Act violates provisions of the State

Constitution. As the Michigan Supreme Court found in its

decision, no cited provisions of the constitution have been

violated. The appellants’ position misconstrues the vary

nature of the challenged credits.

The Appellants in this case needlessly confuse income

tax liability with the property tax benefits granted by the

Legislature to qualifving homeowners and renters. This

om.

property tax benefit, or rebate, is realized regardless of

whether the taxpayer has a tax liability or, for that matter,

taxable income of any kind.

The Michigan Income Tax Act, supra, provides for a tax

rate for the tax year of 1982 of 5.1%.'7! The Income Tax Act

does not provide for variable tax rates based on taxable

income, but only an ungraduated rate to be applied to

taxable income.

Base, or taxable income, was likewise ungraduated. Sec-

tions 28 and 30 of the Michigan Income Tax Act provide:

“Sec. 28. “Taxable income’ or ‘net income’ means,

unless specifically defined otherwise in this act, taxa-

ble income as defined in the internal revenue code for

the subject taxpayer for federal income tax purposes,

subject to any adjustment resulting from the election in

section 271 [footnote omitted] but without deduction or

credit for any tax on or measured by net income.”

“Sec. 30. (1) “Taxable income’ in the case of a per-

son other than a corporation, an estate, or trust means

adjusted gross income as defined in the internal re-

venue code subject to the following adjustments: .. .”

While there are various adjustments, both additions and

subtractions, allowed prior to applying the 5.1% tax rate,

these are not being drawn into question by the Appellants

in this matter. MCL 206.30; MSA 7.557(130).

An individual’s tax liability under the Michigan Income

Tax Act was determined in 1982 by multiplying the ad-

iz)

This percemtage is arrived at by annualizing the 4.6% tax rate and the 1%

temporary emergency rate contained in § 51 of the Michigan Income Tax Act,

MCL, 206.51; MSA 7.557(151).

nails

justed taxable income by 5.1%. It is readily apparent that

the tax imposed is graduated neither as to rate nor base.

The 5.1% is a flat rate and the base taxable income is

likewise not graduated.

Application of the Michigan Income Tax Act for 1982 to

the Plaintiffs in this case shows they:

(a) reported federal adjusted

gross income of $67 008.66

(b) claimed personal exemptions

totalling 7,500.00

(d) applied the tax rate of 5.1% to

the taxable income, determining

a tax of 3,039.02

The tax imposed was $3,039.02

The tax liability was $3,039.02

Plaintiffs’ tax liability for 1982 was $3,039.02. It is this

amount which was due the state from the Plaintiffs based

on their taxable income of $59,588.00. Once Plaintiffs’ tax

liability was determined, it was further determined that

they were entitled to certain credits on taxes they had paid;

a $200.00 credit for estimated tax payments, and a $960.00

property tax credit. These credits, however, did not affect

Plaintiffs’ tax liability. As the trial court found with regard

to the property tax credit:

“Income tax has been defined as ‘an assessment upon

the income of a person and not upon any particular

property from which that income is derived.’ Shivel v

Kent County Treasurer, 295 Mich 10, 19, 294 NW 78

(1940). However, the property tax credit in question is

‘EE

not an assessment of income. Rather, it is a benefit

conferred to property taxpayers, a bonus which is given

by the state in order to reduce property taxes. As a

credit for property taxes, it uses income as a factor in its

computation. Similarly, the reduction of the credit is

not a tax. If the tax credit cannot be deemed as being a

tax but rather a benefit, then reasoning bears out that

the reduction of the credit can also not be considered a

tax. Nothing in the tax credit or reduction provisions

amounts to a direct assessment on the taxpayer's

income. Hence, Article 9; Section 7 is not facially vio-

lated by this credit reduction scheme.” (Emphasis

Added)

Appellants’ Appendix, p 33a

As previously shown, the taxpayer was liable for taxes in

1982 in the amount of their adjusted taxable income mul-

tiplied by 5.1%. This tax liability should not be confused

with the means of satisfying the tax liability. What is

involved in this case is the use of a property tax rebate or

credit from the state to satisfy the tax liability of a

homeowner or renter. It should, however, be recognized

that there are many rebates of taxes or payments which

may be used to satisfy a taxpayer’s liability which are not in

issue before the Court. These credits or rebates include,

but are not limited to, such items as a credit for a portion of

income taxes paid to Michigan cities; a portion of public

contributions; and income taxes paid to other states as well

as solar energy credits and farmland preservation credits.

MCL 206.257; MSA 7.557(1257), MCL 206.260; MSA

7.557(1260), MCL 206.255; MSA 7.557(1255), MCL

206.262; MSA 7.557(1262), MCL 554.701 et seq; MSA

26.1287(1) et seq.

These rebates or credits are used to offset; i.e., to satisfy a

portion of the tax liability and do not in any way reduce the

taxpayer's tax liability to the state.

ani

THE MICHIGAN INCOME TAX ACT GRANTS TO

CERTAIN HOMEOWNERS AND RENTERS AND AD

VALOREM REAL PROPERTY TAX CREDIT WHICH

DOES NOT VIOLATE PROVISIONS OF ART 9} § 7

OF MICHIGAN CONSTITUTION 1963.

THE ALLOWANCE OR DISALLOWANCE OR LIMI-

TATION OF A MICHIGAN PROPERTY TAX CREDIT

DOES NOT IMPOSE AN INCOME TAX

GRADUATED AS TO RATE OR BASE.

In 1982, the property tax credit was a benefit available to

certain property owners (or lessees) with household

income of less than $75,000. The maximum credit available

was $1,200. The maximum credit available to a taxpayer

was reduced proportionately (incrementally) as household

income increased above $65,000, dropping to zero at

$75,000. The property tax credit was designed to afford

relief to payers of ad valorem real property taxes, in es-

sence to provide a rebate of property taxes already paid by

the taxpayer. While credit benefits are distributed through

the tax refund process, a recipient need not have owned or

paid any income taxes to be eligible for the property tax

rebate.

The property tax credits do not increase or decrease a

taxpayer's tax liability. The property tax credit process

could have been a separate operation from the collection of

the income taxes; i.e., requiring a taxpayer to personally

pay his tax liability without regard for any possible tax

credits available to the taxpayer. Then at a different point

in time, those taxpayers eligible for property tax relief

could file for their rebate with the state. The Legislature,

ee Yee

however, chose not to bifurcate the process of imposition

and collection of income taxes and granting of property tax

relief; and for the ease of administration combined these

two processes.

That the state should use a credit to offset known tax

liability is no novelty. The state has, as does the federal

government and any other creditor, the common law right

to set off any liquidated sums which may be due it by a

citizen. Brown v Lobdell, 36 Or App 399; 585 P2d 4 (1978):

US v Muncie Trust Co, 332 US 234; 67 S Ct 1599; 91 L Ed

2022 (1946). In this case, the amount of any benefit is first

applied to satisfy any tax liability. Any amount remaining

after the setoff is paid to the homeowner. It follows that a

homeowner or renter who has no state tax liability is enti-

tled to payment from the state of the entire amount of his

property tax relief. MCL 206.502(3); MSA 7.557(1520)(3).

The Legislature, in allowing property tax credits or re-

bates to those without any tax liability to the state, recog-

nized that the property tax credit is not a tax but is a benefit

granted to qualifed homeowners and renters. Tax liability

to the state is irrelevant to the determination and extension

of property tax credits or rebates.

Further, the Legislature in granting the property tax re-

lief, determined that the homeowner or renter whose

household income was in excess of $65,000 was not in

need of property tax relief to the same extent as those with

less household income. The decision to limit the rebate

was clearly a legislative decision based on need. Just as the

Legislature may determine how much an individual can

earn before welfare payments from the state cease, it may

also reduce or eliminate payments of property tax rebates

for those with household incomes above $65,000.

The graduation of benefits cannot by any logic be consi-

dered a tax upon individual recipients since the property

pon

tax credit does not in any way affect the homeowner's tax

liability. Further, a tax requires not only, as Appellants

suggest, a base and a rate, but contemplates as well pay-

ment to the state of funds to satisfy the taxpayer's tax

liability. The property tax credit does not seek payment of

funds to the state, but the state paying funds to a qualified

homeowner or renter.

Appellants would truncate computation of credit “‘enti-

tlement” by arguing that entitlement is determined after

calculating the 60% amount by which real property taxes

paid exceed 3.5% of household income without regard to

any other requirements. The arithmetic computation can-

not by any logic be so truncated or interrupted. Statutory

provisions must be interpreted by reference to all words,

phrases, sections, etc. Stowers v Wolodzko, 386 Mich 119;

191 NW2d 355 (1971).

The credit or entitlement to a property tax rebate is not

determined until all operations of the formula have been

carried out. The computation is not complete until consid-

eration is given to whether the household income is in

excess of $65,000. Until the statute, § 520, is applied in its

entirety, no entitlement or rebate can be determined,

neither does it exist. Simply put, employment of an income

test, in determining entitlement to credits or rebates on

property taxes cannot rationally be characterized as taxa-

tion, or more specifically, the taxation of income.

It is axiomatic that exclusions, exemptions, deductions

and tax credits are matters of legislative grace*! It should

“... Taxation, like rain, falls on all alike. True, there are, in any taxing act,

certain exceptions, certain favored classes, who escape the yoke. But one

claiming the unique and favored position must establish his right thereto

beyond doubt or cavil...” In re Sn ith Estate, 343 Mich 291, 297; 72 NW2d

287 (1955). -

pee es

logically follow, therefore, that the legislative favor of a tax

credit or rebate cannot possibly be considered the imposi-

tion of a tax. Since the Const 1963, art 9, § 7 is only con-

cerned with the imposition of an income tax, ‘ie legislative

provisions for tax exemptions, exclusions, or credits are not

within its contemplation.

THE CASE OF KUHN V DEPARTMENT OF TREASURY

IS DISPOSITIVE, AND ITS RATIONALE UPHOLDS

THE 1982 AMENDMENT.

In Kuhn v Department of Treasury, 384 Mich 378, 389;

183 NW2d 796 (1971), the Court explained the thrust of the

Const 1963's, art 9, § 7:

“... Undoubtedly what the drafters and adopters of

that provision in the 1963 Michigan Constitution had in

mind was the graduated scheme of the Federal income

tax in which rates increase as taxable income does, and

that power they wished to deny to the state... .”

This observation explains the prohibition of an income

tax graduated as to rate. The prohibition of base gradation

requires additional comment.

When the Michigan Income Tax was first enacted, there

were suggestions that it be imposed at a flat rate upon

federal tax liability!" Since federal tax liability is heavily

graduated, even a flat rate imposed upon such base would

result in a graduated income tax very much like the federal

income tax.

CASO xie

The State of Alaska, for example, fixed its income tax as 16% of the federal

income tax liability of individuals and 18% of the federal income tax for

corporations. Alaska, Laws of 1965, Chapter 69; CCH State Tax Reporter,

It should be perfectly clear that the gradation of the

homestead property tax credit pursuant to the 1982

amendment of the Michigan Income Tax Act does not

result in converting the Michigan Income Tax to an exac-

tion which parallels or resembles the graduated scheme of

the federal income tax. Thus, such gradation of a tax credit

is not within the contemplated prohibition of.the Const

1963, art 9, § 7.

THE CHALLENGED 1982 AMENDMENT TO THE

MICHIGAN INCOME TAX ACT ESTABLISHES A

GRADUATED TAX CREDIT, BUT IMPOSES NO

INCOME TAX GRADUATED AS TO RATE OR BASE.

The 1982 amendment to § 520 of the Income Tax Act

clearly establishes an inversely graduated tax credit, which

is not prohibited by the Michigan Constitution.

As a result of the 1982 amendment, a taxpayer with

$65,000 of household income in 1982 is entitled to a credit

of 60% of the amount of his annual property tax exceeds

3.5% of his household income for that year. A taxpayer with

a $66,000 household income is entitled to a credit which

equals 54% of that amount. For each additional $1,000 of

household income, the percentage of credit is reduced by

an additional 6%, i.e., to 48% ($67,000); 42% ($68,000):

36% ($69,000); 30% ($70,000); 24% ($71,000); 18%

($72,000); 12% ($73,000); 6% ($74,000) and finally zero for

household incomes in excess of $75,000.

At this juncture, it is instructive to examine the actual

holding in Kuhn, supra. Specifically, it upheld the con-

stitutionality of the personal exemptions from income tax.

An example will illustrate the effect of allowing personal

exemptions. Let us start with taxpayers “A” and “B” who

—

will have four personal exemptions of $1,500 each and are

subject to a tax rate of 5%.

~~ a

Adjusted Gross Income®™! $10,000 $50,000

Personal Exemptions (4) 6,000 6,000

Taxable Income 4,000 44,000

Tax Liability at 5% 200 2,200

Effective Tax Rate on AGI: 2% 4.4%

The personal exemptions have clearly resulted in diffe-

rent percentages of AGI being exacted. It is the personal

exemption upheld in Kuhn, supra, which causes the diffe-

rential exaction as herein clearly demonstrated. If no per-

sonal exemption were allowed, both “A” and “B” would

pay a tax on 5% of their respective incomes.

Kuhn, supra, must therefore stand for the proposition

that any indirect gradation resulting from the allowance of

tax exemptions is permissible.

Kuhn also upheld the credits for property and city

income taxes. Yet, these credits have the same effect as the

personal exemptions, i.e., they result in and they magnify

the exaction of different percentages of AGI as state

income tax. Let us assume that both “A” and ““B” paid a

city income tax on their respective incomes:

«e 4 ’» —

Adjusted Gross Income $10,000 $50,000

Less 4 Personal Exemptions

($600 each) 2400 2.400

City Tax Base 7,600 47,600

Tax at 1% 76 476

City Income Tax Credit 15.20 46.10

{5}

“Adjusted gross income” will hereinafter be referred to as “AGI”.

= an

Since the city income tax credit is heavily graduated,

“B” gets a credit only three times as large as “A,” although

he pays over six times as much in city income taxes.

The foregoing examples may be summarily illustrated as

follows:

sé ” yt

Adjusted Gross Income $10,000 $50,000

4 Personal Exemptions 6,000 6,000

Taxable Income 4,000 44,000

Tax Liability (5%) 200 2,200

City Income Tax Credit 15.20 46.10

State Tax Due 184.80 2,153.90

As Percentage of AGI 1.848% 4.3078%

Kuhn clearly upheld the foregoing scheme of taxation. It

was not the type of gradation scheme which art 9, § 7

prohibits.

Finally, let us assume that both “A” and “‘B” paid prop-

erty taxes of $1,000. Pursuant to the original § 258 of the

Michigan Income Tax Act, MCL 206.258: MSA

7.557(1258), both “A” and “B” would have been entitled to

a property tax credit against state income tax amounting to

$72.50. Taxpayer “A’’’s state income tax liability due

would consequently have been reduced from $184.80 to

$112.30; and “B”’’s liability due would have been reduced

from $2,153.90 to $2,081.40. Thus, the final state income

tax due expressed as a percentage of adjusted gross income

amounts to 1.123% for taxpayer “A” and amounts to

4.1628% for taxpayer “B.”

—

The foregoing comparisons of effective tax rate are all

consistent with the reasoning of Kuhn, which permits gra-

dations occurring as a result of the Legislature’s exercise of

its power of classification establishing exemptions, exclu-

sions and credits. It recognizes that the constitutional pro-

hibition contemplates only a gradation of rate or base, but

that it does not prohibit any gradation resulting from

exemptions, exclusions, or credit.

The State Legislature's power of classification is derived

from Const 1963, art 4, § 1, which is of equal dignity as

the income tax limitation contained at Const 1963, art 9,

§ 7. Consequently, the prohibition of an income. tax

graduated as to vate or base must be balanced and har-

monized with the legislative power of classifying persons

and property for taxation. In Kuhn, the Court of Appeals ~

and this Court clearly accommodate the legislative power

of classification which co-exists with the interdiction of an

income tax graduated as to rate or base.

Kuhn, in this sense, is one of a series of tax cases which

recognize the power of the Legislature to classify subjects

of taxation. Union Steam Pump Sales Co v Secretary of

State, 216 Mich 261; 185 NW 353 (1921); C F Smith Co v

Fitzgerald, 270 Mich 659; 259 NW 352 (1935); WS Butter-

field Theatres v Revenue Dep't, 353 Mich 345; 91 NW2d

269 (1958); American Amusement Co, Inc. v Dep't of

Treasury, 91 Mich App 573; 283 NW2d 803 (1979) lv den

407 Mich 942; Michigan C R Co v Powers, 201 US 245; 50

L Ed 744; 26 S Ct 459 (1906). The opinion and judgment of

the circuit court would deny to the Legislature the power

of classification by prohibiting the gradation of the

homestead property tax credit.

The graduated reduction of the homestead property tax

credit mandated by 1982 PA 269'results from the exercise

of the legislative power of classification. It does not result

in the imposing of an income tax, but merely in the grant-

ing of favorable tax treatment, specifically, the granting of

property tax relief. When contemplating the prohibition of

an income tax graduated as to rate or base, neither the

framers of the Constitution nor the adopting electorate had

any intention of denying to the Legislature the right of

classification by the enactment of exemptions, deductions

or tax credits.

Const 1963, art 9! § 7 was only intended to abrogate

legislative authority to enact an income tax with a

graduated scheme similar to that imposed by the Federal

Congress.

THE UNANIMOUS OPINION OF THE MICHIGAN

SUPREME COURT CORRECTLY AFFIRMS THE

COURT OF APPEALS’ MAJORITY OPINION RE-

JECTING ANY ARGUMENT THAT THE TAX CRE-

DIT FORMULA MANDATED BY 1982 PA 269

VIOLATES MICHIGAN CONSTITUTION 1963,

ART 9, §7.

The result achieved by the Michigan Supreme Court and

its Court of Appeals is, we submit, correct. The appellate

courts’ analysis did differ from that advanced by the state.

By either analysis, however, Plaintiffs were not entitled to

any relief.

The Court of Appeals’ Opinion quoted with approval by

the Supreme Court finds that the credit formula does not

indirectly create a progressive or graduated income. tax

rate. To quote from the Opinion of the Supreme Court:

wajlliiiens

“We believe, however, that the property tax credit

reduction in question here is of a different nature than

the credits examined in Kuhn and Rosenbaum, and that

the Court of Appeals has perceptively and clearly lo-

cated the distinguishing feature:

“While it is true that the property tax credit is

allowed against income tax liability with regard to a

taxpayer's taxable income, we still find no constitu-

tional violation. The dispositive question is

whether the credit at issue indirectly creates a pro-

gressive or graduated income tax rate.

“The § 520(8) property tax credit incremental re-

duction formula does not affect the fixed flat rate

income tax liability imposed upon taxpayers with

adjusted household income over $65,000. Their

income tax liability remains the same, the only tax

liability the § 520(8) formula affects, either directly

or indirectly, is the property tax liability on their

homestead. We reach this conclusion after carefully

considering the nature of the property tax credit.

“The property tax credit provisions of the income

tax act create a property tax rebate program. The

program is primarily designed to relate local prop-

erty taxes to income or to the ability to pay those

taxes rather than to the actual value of the property

so taxed. The major recipients of this property tax

rebate program are senior citizens, veterans, the

blind and disabled, and the low-incomed. See,

MCL 206.522; MSA 2.577(1522).

“Those eligible for this property tax rebate under

the formula, MCL 206.522: MSA 7.577(1522),

Rosenbaum, supra, may receive the rebate in the

form of an income tax credit. Indeed, a property

taxpayer may file for this property tax rebate and

receive such a rebate even if the computed rebate

exceeds the amount of income taxes the property

taxpayer might owe or even if the property taxpayer

has no state income tax liability whatsoever. MCL

206.520(3); MSA 7.557(1520)(3). The [sic] essence,

then, the property tax credit is a convenient and

practical means for the state to administer this prop-

erty tax rebate program. [141 Mich App 121-122.

Emphasis in original.}”

Appellants’ Appendix | la-12a

In other words, the tax imposed is graduated neither as to

rate nor base. The tax is imposed at a flat rate upon all

taxpavers, regardless of the amount of their adjsuted gross

income.

That the Legislature should afford to individuals the

payment of benefits or rebates measured in part by house-

hold income does not result in the imposition of any tax.

The challenged legislation is concerned with grants or

rebates, not taxes, and does not violate the Michigan Con-

stitution.

The final decision of the Michigan Supreme Court rests,

therefore, on a sound non-federal basis. No further consid-

eration of appeallants’ appeal is, therefore, merited.

ARGUMENT

THE CASE PRESENTS NO SUBSTANTIAL FEDERAL

QUESTION AND IS MANIFEST THAT THE QUES-

TIONS ON WHICH THE DECISION IN THE CAUSE

DEPENDS ARE SO UNSUBSTANTIAL AS NOT TO

NEED FURTHER ARGUMENT.

The Michigan Supreme Court decided in this cause that

the statutory provisions complained of violate no provi-

sions of the State Constitution.

The entire predicate of plaintiffs-appellants federal

claims are that a violation of the Michigan Constitution is

ipso facto a violation of the equal protection and due pro-

cess clauses of the federal constitution.

In the appellants’ words:

“The Michigan Constitution of 1963 prohibits the im-

position of an income tax graduated as to rate or base.

The ‘reductions’ are made at the rate of 10% of the

taxpayer's property tax credit entitlement for each

$1,000 increments, or portion tuned, by which the

claimant’s household income exceeds $65,000. Such

multiply assessments are asserted to violate the equal

protection mandate of the Fourteenth Amendment be-

cause the state is prohibited from classifying those

subject to assessments on the basis of income:

‘{T}he effect of the ‘reduction’ amendment to the gen-

eral income tax act is to rate an assessment against

income... resulting in a graduated income tax prohi-

_—

bited by the Michigan Constitution. Being prohibited,

and not having been submitted for approval to the

electors, the ‘reduction’ or assessment is also a taking

which violates the Due Process Clause.”

Jurisdictional Statement, pp 1-2

The appellants egregiously err. First, the predicate of

each of their contentions has been rejected by the Michi-

gan Supreme Court. No violation of state constitutional or

statutory provisions has occurred.

Even assuming, arguendo, that state constitutional or

statutory provisions were violated, we look fruitlessly for

case authority supporting propositions made by the appel-

lants. None of the cases cited by appellants support their

case. This case quite obviously does not involve claims of

arbitrary or invidious discrimination against foreign corpo-

rations or non-resident individuals. Neither do they sup-

port any contention that a violation of state law is ipso facto

a violation of federal law.

As this Court stated in State Board of Tax Commis-

sion of Indiana v Jackson, 283 US 527, 537; 51 S Ct 540; 75

L Ed 1240, 73 ALR 1464.

“<“The principles which govern the decision of this

cause are well settled. The power of taxation is funda-

mental to the very existence of the government of the

States. The restriction that is shall not be so exercised

as to deny to any the equal protection of the laws does

not compel the adoption of an iron rule of equal taxa-

tion, nor prevent variety or differences in taxation, or

discretion in the selection of subjects, or the classifica-

tion for taxation of properties, businesses, trades, call-

ings, or occupations. Bell’s Gap R. Co. v. Pennsylvania,

134 US 232 (10 S Ct 533, 33 L ed 892); Southwestern

Oil Co. v. Texas, 217 US 114 (30 S Ct 496, 54 L ed 688):

Brown-Forman Co. v. Kentucky, 217 US 563 (30 S Ct

578, 54 L ed 883). The fact that a statute discriminates

in favor of a certain class does not make it arbitrary, if

the discrimination is founded upon a reasonable dis-

tinction, American Sugar Refining Co. v. Louisiana,

179'US 89°(21 S Ct 43, 45 L ed 102), or if any state of

facts reasonably can be conceived to sustain it. Rast v.

Van Deman & Lewis Co., 240 US 342 (36 S Ct 370, 60 L

ed 679, LRAI917A, 421, Ann Cas 1917B, 455); Quong

Wing v. Kirkendall, 223 US 59 (32 S Ct 192, 56 L ed

350). As was said in Brown-Forman Co. v. Kentucky,

supra, at p 573:

“*“A very wide discretion must be conceded to the

legislative power of the State in the classification of

trades, callings, businesses or occupations which may

be subjected to special forms of regulation or taxation

through an excise or license tax. If the selection or

classification is neither capricious nor arbitrary, and

rests upon some reasonable consideration of difference

or policy, there is no denial of the equal protection of

the law.”

“ “Tt is not the function of this court in cases like the

present to consider the propriety or justness of the tax,

to seek for the motives or to criticize the public policy

which prompted the adoption of the legislation. Our

duty is to sustain the classification adopted by the

legislature if there are substantial differences between

the occupations separately classified. Such differences

need not be great. The past decisions of the court make

this abundantly clear.’ ”

The State is not precluded from adopting and adminis-

tering a credit-rebate program based upon income levels of

those enjoying extraordinary levels of income. It may be

—24—

rationally reasonable to conclude that those so blessed do

not requre tax relief or may be afforded it less abundantly.

CONCLUSION AND PRAYER

WHEREFORE, Appellees respectfully submit that:

a) the appeal does not present any, let alone a substan-

tial federal question and the judgment rests on an adequate

non-federal basis, and

b) itis manifest that the questions on which the decision

in the cause depends are so unsubstantial as not to need

further agrument

and therefore Appellees respectfully move the Court to

dismiss the appeal herein or in the alternative affirm the

judgment of the Michigan Supreme Court.

Respectfully submitted,