J. Thomas Zaber, On Behalf Of Himself And All Others Similarly Situated Vs. City Of Dubuque, Iowa ( 2010 )

IN THE SUPREME COURT OF IOWA
No. 07–1819
Filed June 4, 2010
J. THOMAS ZABER, On Behalf of Himself
and All Others Similarly Situated,
Appellant,
vs.
CITY OF DUBUQUE, IOWA,
Appellee.
Appeal from the Iowa District Court for Dubuque County, Alan L.
Pearson, Judge.
City resident appeals from a district court ruling granting the city’s
motion for partial summary judgment on plaintiff’s refund claim.
AFFIRMED AND CASE REMANDED.
Terry M. Giebelstein, Thomas D. Waterman, and Richard A.
Davidson of Lane & Waterman LLP, Davenport, for appellant.
Ivan T. Webber and James R. Wainwright of Ahlers & Cooney, P.C.,
Des Moines, for appellee.
Terrence L. Timmins, Des Moines, for amicus curiae Iowa League
of Cities.
Bruce H. Stoltze of Stoltze & Updegraff, P.C., Des Moines, and
Brad A. Schroeder of Hartung & Schroeder LLP, Des Moines, for amicus
curiae Iowa Trial Lawyers Association.
2
TERNUS, Chief Justice.
The appellant, J. Thomas Zaber, appeals the district court’s
dismissal by summary judgment of his claim for a refund of cable
television franchise fees imposed by the appellee, City of Dubuque, in
excess of the city’s cost of regulation. The district court ruled Iowa Code
section 477A.7(5) (Supp. 2007) retroactively authorized these fees,
rejecting the plaintiff’s contention section 477A.7(5) violated his due
process rights. We affirm the district court’s judgment in favor of the
city.
I. Scope of Review.
Because this appeal arises from a ruling on a motion for summary
judgment, we preface our discussion of the facts and issues with a review
of the principles governing our examination of the district court’s ruling.
“ ‘To obtain a grant of summary judgment on some issue in an action,
the moving party must affirmatively establish the existence of
undisputed facts entitling that party to a particular result under
controlling law.’ ” Baker v. City of Iowa City, 750 N.W.2d 93, 97 (Iowa
2008) (quoting Interstate Power Co. v. Ins. Co. of N. Am., 603 N.W.2d 751,
756 (Iowa 1999)); see Iowa R. Civ. P. 1.981(3) (authorizing summary
judgment when “there is no genuine issue as to any material fact” and
“the moving party is entitled to a judgment as a matter of law”). Neither
party points to any issue of material fact with respect to the application
of section 477A.7(5). Thus, the disposition of this case rests on a
determination whether the city is entitled to judgment as a matter of law
under the undisputed facts.
Whether the city is entitled to judgment as a matter of law turns
on whether section 477A.7(5), which ratifies fees imposed and collected
prior to its enactment, is a proper and constitutional exercise of
3
legislative power. The plaintiff does not dispute that the legislature’s
intent in enacting this provision was to retroactively authorize illegal
franchise fees already assessed by municipalities and paid by their
residents. Rather, he claims the legislature’s action violates his due
process rights. We consider the plaintiff’s constitutional claim de novo.
Varnum v. Brien, 763 N.W.2d 862, 874 (Iowa 2009).
II. Background Facts and Proceedings.
The plaintiff, Thomas Zaber, sued the City of Dubuque on
September 5, 2006, claiming the city had collected an illegal tax from
him and others similarly situated in the form of franchise fees for gas
and electric utilities and for cable television services in excess of the
reasonable cost of regulating these industries. 1 Zaber sought a refund of
the illegal taxes based on this court’s decision in Kragnes v. City of
Des Moines, 714 N.W.2d 632 (Iowa 2006). In that case, we held franchise
fees assessed by the City of Des Moines on gas and electric power
services constituted an illegal tax to the extent such fees exceeded the
reasonable costs of regulating the franchised activity. Kragnes, 714
N.W.2d at 642–43.
The City of Dubuque filed a motion for partial summary judgment,
requesting dismissal of the plaintiff’s claim for the refund of franchise
fees paid for cable television services. This motion rested on the General
Assembly’s enactment of Iowa Code section 477A.7, which authorized
franchise fees on cable television services in excess of the cost of
regulation, including fees “assessed by and paid to a municipality prior
to May 29, 2007[, the effective date of the act].” Iowa Code § 477A.7(4),
1This case was certified as a class action pursuant to Iowa Rule of Civil
Procedure 1.262(1). Nonetheless, we will refer to the plaintiff in his individual capacity
for the sake of simplicity.
4
(5); see 2007 Iowa Acts ch. 201, § 15 (providing the act, “being deemed of
immediate importance, takes effect upon enactment,” May 29, 2007).
The plaintiff resisted this motion on the ground the retroactive aspect of
the statute violated his due process rights in two ways: (1) it deprived
the plaintiff of an accrued refund claim, and (2) the period of retroactivity
exceeded the “modest” period constitutionally permitted.
The district court granted the city’s motion for partial summary
judgment on the plaintiff’s refund claim for cable television fees. It
concluded the retroactive provision in the statute was curative legislation
that bore a rational relationship to a legitimate governmental purpose,
namely, preserving “the revenue cities need to carry out their lawful
functions.” The district court rejected the plaintiff’s due process
challenge, ruling retroactive authorization of taxes already collected or
assessed was constitutionally permissible and “need not be limited to one
year or the previous legislative session,” as the plaintiff contended.
The plaintiff filed an application for interlocutory appeal, which
this court granted. 2 On appeal, the plaintiff claims the legislature’s
retroactive authorization of franchise fees in excess of the cost of
regulation violates his rights to substantive due process for two reasons.
First, it takes away his accrued right to a refund of illegal taxes assessed
and collected by the city. Second, the period of retroactivity exceeds the
modest period that is constitutionally allowed. To put these issues in
context, we first review the events leading up to the enactment of section
477A.7(5).
2This case was consolidated for appeal with Curtis v. City of Bettendorf, No. 07–
1856; Kleiman v. City of Waterloo, No. 07-1855; and Lindstrom v. City of Des Moines, No.
07–1641. The clerk docketed the combined appeal under No. 07–1641. We have issued
separate opinions in these cases.
5
III. Enactment of Iowa Code Section 477A.7(5).
As noted above, in Kragnes, this court examined a municipality’s
power to charge fees for gas and electric services in excess of the cost of
regulating those activities. 714 N.W.2d at 637–43. We held:
Our decisions reveal that even after the adoption of the
home-rule amendment and the enactment of the Home Rule
for Cities bill, we have continued to adhere to the position
that a fee imposed by a city needs to be related to the
reasonable costs of inspecting, licensing, supervising, or
otherwise regulating the activity in order to be permitted
under a city's home-rule authority. If a fee charged by a city
exceeds the amount necessary to inspect, license, supervise,
or otherwise regulate the activity, it is nothing more than a
tax levy, which the legislature has strictly prohibited.
Id. at 641. We concluded that, to the extent the franchise fees charged
by the defendant city exceeded its cost of regulation, the fees constituted
an illegal tax. Id. at 642–43. In the wake of this decision, several
lawsuits, including the present case, were filed by residents of various
Iowa cities, claiming a five percent franchise fee for cable television
services charged by the defendant cities was an illegal tax and should be
refunded. See Lindstrom v. City of Des Moines, 470 F. Supp. 2d 1002,
1004–05 (S.D. Iowa 2007). 3
While these actions were pending, the Iowa General Assembly
enacted a law relating to franchise fees for cable television services. See
2007 Iowa Acts ch. 201. The following provisions of this act are
pertinent to our discussion:
4. A franchise fee may be assessed or imposed by a
municipality without regard to the municipality’s cost of
inspecting, supervising, or otherwise regulating the
franchise, and the fees collected may be credited to the
3Seven cases filed in state court seeking refunds of illegal “franchise fees” were
removed to federal court, where they were consolidated. See Lindstrom, 470
F. Supp. 2d at 1004 n.1. Eventually, all seven cases, including the present case, were
remanded back to state court for lack of federal court jurisdiction. Id. at 1013.
6
municipality’s general fund and used for municipal general
fund purposes.
5. To the extent that any amount of franchise fees
assessed by and paid to a municipality prior to the effective
date of this Act, pursuant to a franchise agreement between
a municipality and any person to erect, maintain, and
operate plants and systems for cable television, exceeds the
municipality’s reasonable costs of inspecting, supervising or
otherwise regulating the franchise, such amount is deemed
and declared to be authorized and legally assessed by and
paid to the municipality.
Id. ch. 201, § 8(4), (5) (emphasis added) (codified at Iowa Code
§ 477A.7(4), (5)). It is clear from the timing of the enactment and the
language used in the statute that the legislature intended section
477A.7(5) to validate any municipality’s collection of fees on cable
television services in excess of the reasonable costs of inspecting,
supervising, or otherwise regulating the franchise, regardless of when the
fees were assessed and paid.
The district court relied on the legislature’s authorization of past
fees in subsection (5) in granting the city’s motion for partial summary
judgment. It is the constitutionality of this retroactivity provision that
lies at the heart of this appeal.
IV. Nature of Issue Presented.
Before we address the constitutionality of section 477A.7(5), we
emphasize the issue presented involves taxes that were not authorized at
the time they were exacted by the municipalities, 4 but which could have
been authorized by the state. See Iowa Const. art. III, § 38A (“Municipal
corporations are granted home rule power and authority . . . except that
they shall not have power to levy any tax unless expressly authorized by
4As this case is before the court on interlocutory appeal, there has yet to be a
final determination on the validity of the franchise fees assessed and collected by the
municipality. For purposes of our review of the city’s motion for partial summary
judgment, however, we assume the five percent franchise fee exceeded the cost of
regulation and so, as to such excess, was not authorized.
7
the general assembly.” (Emphasis added.)). Therefore, we are not faced
with a situation in which the legislature attempted to ratify or cure a tax
that it lacked the underlying power to authorize. As we held in Kragnes,
the defect in the city’s imposition of a tax on cable television services was
simply its lack of legislative authority to do so. See Kragnes, 714 N.W.2d
at 641 (declaring similar charge on gas and electric services to be an
unauthorized and illegal tax). Consequently, this case involves not the
collection of taxes that government for constitutional reasons lacks the
power to impose in some or all instances, but instead involves local taxes
that the state has the power to authorize. In other words, this case and
others like it do not involve battles between taxpayers and municipalities
regarding the inherent power of government to tax. Instead, the real
conflict in this case is between the city and state government as reflected
in legislation regarding the authority of municipalities to impose certain
fees.
In the end, the fundamental issue presented is whether the state
as principal could exercise its power to ratify the unauthorized, but
otherwise constitutional, acts of its political subdivisions. We turn now
to a review of the principles that control our resolution of this issue.
V. General Principles Governing Substantive Due Process
Claims.
To the extent that legislation is made retroactive, it is not
inherently unconstitutional. As this court has noted with respect to
retroactive laws in general, “ ‘In the absence of an express constitutional
inhibition retrospective laws are not prohibited as such.’ ” State ex rel.
Turner v. Limbrecht, 246 N.W.2d 330, 334 (Iowa 1976) (quoting 73
Am. Jur. 2d Statutes § 347, at 485–86), overruled on other grounds by
State ex rel. Miller v. Hydro Mag, Ltd., 436 N.W.2d 617, 622 (Iowa 1989);
8
accord 2 Norman J. Singer & J.D. Shambie Singer, Statutes and
Statutory Construction § 41:3, at 398 (7th ed. 2009) [hereinafter Singer on
Statutory Construction] (“The fact that a statute is retroactive is not
sufficient by itself to invalidate it.”). The “express constitutional
inhibition” claimed by the plaintiff in this case is the Due Process Clause.
The plaintiff asserts the Due Process Clause is violated because the
legislature’s ratification of the franchise fee deprives cable subscribers of
a vested right to a refund of the illegally imposed fees, and the five-and-
one-half-year period of retroactivity exceeds that which is constitutionally
permitted. 5 These arguments implicate substantive due process. 6 See
State ex rel. Miller v. Smokers Warehouse Corp., 737 N.W.2d 107, 111
(Iowa 2007) (concluding defendants asserted substantive due process
claim because “they do not discuss any notice or hearing deficiencies”).
Generally speaking, “[s]ubstantive due process principles preclude
the government ‘from engaging in conduct that “shocks the conscience,”
or interferes with rights “implicit in the concept of ordered liberty.” ’ ”
Atwood v. Vilsack, 725 N.W.2d 641, 647 (Iowa 2006) (considering state
due process claim) (quoting United States v. Salerno, 481 U.S. 739, 746,
107 S. Ct. 2095, 2101, 95 L. Ed. 2d 697, 708 (1987)); see also
Blumenthal Inv. Trusts v. City of W. Des Moines, 636 N.W.2d 255, 265
(Iowa 2001) (noting it “is not easy to prove” a substantive due process
5The parties agree the plaintiff’s refund claims are governed by a five-year
statute of limitations. See Iowa Code § 614.1(4) (2005).
6The plaintiff relies on both the Federal Constitution and our state constitution.
See U.S. Const. amend. V; Iowa Const. art. I, § 9. The plaintiff does not suggest we
should employ a different standard under the Iowa Constitution than we use for its
federal counterpart. Although we make no distinction in our discussion of the plaintiff’s
due process argument between the state and federal constitutional claims, we preserve
our exclusive prerogative to determine the constitutionality of an Iowa statute
challenged under the Iowa Constitution. Callender v. Skiles, 591 N.W.2d 182, 187
(Iowa 1999).
9
violation because “ ‘substantive due process is reserved for the most
egregious governmental abuses against liberty or property rights’ ”
(quoting Rivkin v. Dover Twp. Rent Leveling Bd., 671 A.2d 567, 574–75
(N.J. 1996))).
A substantive due process analysis begins with an
identification of the nature of the right at issue, as that
determines the test to be applied. . . . When . . . a
fundamental right is not involved, the Due Process Clause
“demands no more than a ‘reasonable fit’ between
government[al] purpose . . . and the means chosen to
advance that purpose.”
Smokers Warehouse Corp., 737 N.W.2d at 111 (citation omitted) (quoting
Reno v. Flores, 507 U.S. 292, 305, 113 S. Ct. 1439, 1448–49, 123
L. Ed. 2d 1, 18 (1993)).
As noted earlier, the plaintiff claims he was deprived of his right to
a refund of fees imposed in excess of the city’s authority. The plaintiff’s
right to a refund is not a fundamental right, and therefore, there need
only be a “reasonable fit” between the legislature’s purpose in ratifying
the past imposition of franchise fees and the means chosen to advance
that purpose. See Home Builders Ass’n of Greater Des Moines v. City of
W. Des Moines, 644 N.W.2d 339, 353 (Iowa 2002) (holding imposition of
unauthorized fee did not infringe on a fundamental right, so rational-
basis test applied). Additionally, we must presume the 2007 enactment
is constitutional. Smokers Warehouse Corp., 737 N.W.2d at 111. This
deferential standard is particularly appropriate when we consider the
constitutionality of economic legislation. Fed. Land Bank of Omaha v.
Arnold, 426 N.W.2d 153, 156 (Iowa 1988). Moreover, the “strong
deference” accorded economic legislation “is no less applicable when that
legislation is applied retroactively.” Pension Benefit Guar. Corp. v. R.A.
Gray & Co., 467 U.S. 717, 729, 104 S. Ct. 2709, 2717, 81 L. Ed. 2d 601,
10
611 (1984), superseded by statute on other grounds as stated in Orrego v.
833 W. Buena Joint Venture, 943 F.2d 730, 735 n.7 (7th Cir. 1991). It is
the plaintiff’s burden to prove the legislature’s act is unconstitutional by
negating “ ‘every reasonable basis upon which the [act] may be
sustained.’ ” Exira Cmty. Sch. Dist. v. State, 512 N.W.2d 787, 793 (Iowa
1994) (quoting Kent v. Polk County Bd. of Supervisors, 391 N.W.2d 220,
225 (Iowa 1986)).
VI. Classification of Legislation as Curative.
As noted above, the district court decided section 477A.7(5) was a
curative act that could constitutionally be applied retroactively. The
plaintiff claims this preliminary determination by the district court was
wrong, leading the court to the erroneous conclusion that the statute
could be applied retroactively to extinguish his claim to a refund. We
think the district court correctly classified the provision at issue as a
curative act.
One type of curative act is a statute passed “to validate legal
proceedings” or “acts of public . . . administrative authorities.” Singer on
Statutory Construction § 41:11, at 503. In line with this general principle,
our court has long recognized the legislature’s power to cure defects in
acts by local government that are undertaken without authority or
without compliance with the requirements for exercising authority. See,
e.g., Schwarzkopf v. Sac County Bd. of Supervisors, 341 N.W.2d 1, 4–5, 8
(Iowa 1983); City of Muscatine v. Waters, 251 N.W.2d 544, 548–50 (Iowa
1977), superseded by statute on other grounds as stated in City of
Des Moines v. City Dev. Bd., 473 N.W.2d 197, 199 (Iowa 1991); Cook v.
Hannah, 230 Iowa 249, 253–59, 261, 297 N.W. 262, 264–67, 269, cert.
denied, 314 U.S. 691 (1941); Chicago, R.I. & P. Ry. v. Rosenbaum, 212
Iowa 227, 229–34, 238, 231 N.W. 646, 647–49, 651 (1930); Windsor v.
11
City of Des Moines, 110 Iowa 175, 179–80, 81 N.W. 476, 477 (1900);
Chicago, R.I. & P. Ry. v. Indep. Dist. of Avoca, 99 Iowa 556, 561–62, 68
N.W. 881, 882 (1896); The Iowa R.R. Land Co. v. Soper, 39 Iowa 112,
116–24 (1874); Boardman v. Beckwith, 18 Iowa 292, 294–95 (1865).
Although the plaintiff contends the legislature can only validate a
defective exercise of power and cannot supply authority that did not exist
at the time it was exercised, he is mistaken.
One of our earliest cases dealing with curative tax legislation is
Boardman v. Beckwith, 18 Iowa 292 (1865). In Boardman, the legislature
repealed the provisions of a law that allowed a county to levy and assess
property taxes for the year of 1858. 18 Iowa at 293–94. During the next
legislative session in 1860, the legislature passed a law to enforce
delinquent taxes from 1858 that the county assessed and levied in 1858.
Id. at 294. This court held the 1860 law was a curative act legalizing the
taxes assessed and levied by the county in 1858. Id. at 294–95.
Another decision dealing with the same issue is The Iowa Railroad
Land Co. v. Soper, 39 Iowa 112 (1874). In 1873 our court held a tax
levied by Sac County for the purpose of paying a judgment rendered
against the county was illegal. Soper, 39 Iowa at 114. Shortly after this
decision, the legislature passed a bill legalizing the judgment taxes levied
by the county in 1873. Id. at 114–15. A taxpayer challenged the tax,
claiming the legislature did not have the authority to legalize the
judgment tax. Id. at 118. In response to the taxpayer’s claim, we stated:
[T]he General Assembly possesses the power to cure and
render legal and valid, by subsequent laws, defective or
irregular proceedings, wherever it would have the power to
authorize such proceedings in the first instance. Since,
therefore, it is within the proper scope of legislative authority
to pass general laws for the assessment and collection of
taxes, the passage of a general law curing and legalizing the
levy and collection of taxes irregularly or illegally levied, is
12
also an exercise of legislative authority as essentially as is
the passage of an original act authorizing the taxation.
Id. at 124. In reaching this conclusion, our court did not make a
distinction between legislation that attempts to cure the acts of officers
void for informality or mistake and legislation that seeks to legalize
official acts void for want of authority. Such a distinction is not
recognized in this state. Id.
In cases decided after Soper, we have continued to uphold curative
acts ratifying taxes that had been imposed without authority. E.g., Cook,
230 Iowa at 261, 297 N.W. at 269; Rosenbaum, 212 Iowa at 238, 231
N.W. at 651. Therefore, under Iowa law, so long as the legislature had
the power to confer authority on the local public body to so act, it has the
power to cure or ratify the local body’s act exercised without the requisite
authority. 7 See Singer on Statutory Construction § 41:11, at 504 (stating
“a curative act may validate any past action which the legislature might
have authorized beforehand”); id. § 41:15, at 514 (stating “legislative and
administrative actions of . . . cities . . . may be validated by properly
enacted curative statutes”).
The present case clearly falls within this well-settled law. Under
the Iowa Constitution, “[m]unicipal corporations are granted home rule
power and authority . . . except that they shall not have power to levy
any tax unless expressly authorized by the general assembly.” Iowa
Const. art. III, § 38A (emphasis added). Here, the local body––the City of
Dubuque––imposed a tax on cable television services that it had no
7The legislative act considered in City of Modesto v. National Med, Inc., 27 Cal.
Rptr. 3d 215 (Ct. App. 2005), can be helpfully contrasted. In that case the court held a
municipal tax that violated due process and equal protection concepts in the state
constitution could not be cured. City of Modesto, 27 Cal. Rptr. 3d at 223. This tax is
an example of one that the government had no power to impose under any
circumstances because its flaw was its discriminatory effect, not a simple absence of
taxing authority by the taxing body.
13
authority to impose. See Kragnes, 714 N.W.2d at 641, 643 (declaring
similar charge to be an unauthorized and illegal tax). In the next
legislative session, the legislature cured the lack of authority to collect
such a tax by enacting section 477A.7(5) and by ratifying the taxes that
had been previously assessed and paid. Because the legislature had the
power to authorize this tax prior to May 29, 2007, it also had the power
to validate unauthorized taxes imposed prior to this date. Therefore,
section 477A.7(5) is properly classified as a curative act. See State ex rel.
Van Emmerik v. Janklow, 304 N.W.2d 700, 703 (S.D. 1981) (holding
legislative act ratifying unauthorized collection of tax overcharge was a
curative act).
VII. Distinction Between Ratification of Past Tax and
Retroactive Imposition of New Tax.
Before we discuss whether section 477A.7(5) violates principles of
substantive due process, it is helpful to understand the distinction
between legislative ratification of a tax that has been previously assessed
and collected, i.e., curative legislation, and legislation that imposes a new
tax or liability on past transactions. The plaintiff relies on cases in the
latter category, which involve fundamentally different considerations
than those applicable to curative acts, as we will explain in more detail
later in our opinion.
The plaintiff claims the “leading modern case on a due process
challenge to retroactive tax legislation” is United States v. Carlton, 512
U.S. 26, 114 S. Ct. 2018, 129 L. Ed. 2d 22 (1994). While that statement
may be true, it is also true that the legislation at issue in the case before
us is not a retroactive tax statute like the one considered in Carlton. The
Iowa legislature did not impose a tax on cable television services; it
ratified a tax that cities had previously assessed. A tax statute imposing
14
a new tax, such as the one in Carlton, is fundamentally different than
curative legislation ratifying or authorizing a tax that has already been
imposed and collected, both in purpose and in its impact on taxpayers.8
To demonstrate this distinction, we begin with an examination of the
Carlton decision.
The taxpayer’s claim in Carlton was based on changes made by
Congress to the federal estate tax statute. 512 U.S. at 27, 114 S. Ct. at
2020, 129 L. Ed. 2d at 26. In 1986, Congress adopted an estate tax
deduction for the proceeds of sales of stock to employee stock-ownership
plans. Id. In 1987, Congress amended this deduction to close a
loophole, limiting its availability to decedents who directly owned the
securities that were sold immediately before death. Id. at 29, 114 S. Ct.
at 2021, 129 L. Ed. 2d at 27. Congress made this amendment
retroactive, as if the limitation had been included in the original 1986
8Notwithstanding the distinctions between curative legislation and retroactive
tax legislation, the test applied to retroactive tax legislation is the same as that applied
to curative legislation, i.e., the test “generally applicable to retroactive economic
legislation”:
The due process standard to be applied to tax statutes with retroactive
effect, therefore, is the same as that generally applicable to retroactive
economic legislation:
“Provided that the retroactive application of a statute is supported
by a legitimate legislative purpose furthered by a rational means,
judgments about the wisdom of such legislation remain within the
exclusive province of the legislative and executive branches. . . .
“To be sure, . . . retroactive legislation does have to meet a burden
not faced by legislation that has only future effects. . . . ‘The retroactive
aspects of legislation, as well as the prospective aspects, must meet the
test of due process, and the justifications for the latter may not suffice
for the former’ . . . . But that burden is met simply by showing that the
retroactive application of the legislation is itself justified by a rational
legislative purpose.”
Carlton, 512 U.S. at 30–31, 114 S. Ct. at 2022, 129 L. Ed. 2d at 28 (emphasis added)
(quoting Pension Benefit Guar. Corp., 467 U.S. at 729–30, 104 S. Ct. at 2717–18, 81
L. Ed. 2d at 611).
15
provision. Id. The impact of this law was that past transactions were
now subjected to a greater tax than they were at the time the
transactions occurred. In determining whether the retroactive aspect of
the 1987 estate tax amendment met the requirements of due process, the
Carlton Court noted the purpose of Congress was reasonable––to avoid “a
significant and unanticipated revenue loss . . . by denying the deduction
to those who had made purely tax-motivated stock transfers”––and the
one-year period of retroactivity was “modest.” Id. at 32, 114 S. Ct. at
2023, 129 L. Ed. 2d at 29. The Court concluded the retroactive
application of the tax statute was “rationally related to a legitimate
legislative purpose” and, therefore, was “consistent with the Due Process
Clause.” Id. at 35, 114 S. Ct. at 2024, 129 L. Ed. 2d at 31.
Contrary to the plaintiff’s assertion in his brief, the statute
considered in Carlton was not a curative act. The plaintiff cites to the
Court’s statement that the statute challenged in that case “was adopted
as a curative measure.” Id. at 31, 114 S. Ct. at 2022, 129 L. Ed. 2d at
28. It would be inaccurate to construe this comment as an indication
that the tax statute considered in Carlton was considered a “curative act”
as that term is specially defined under the law. In concluding its
discussion of the nature of the statute at issue in Carlton, the Court
observed that “Congress acted to correct what it reasonably viewed as a
mistake in the original 1986 provision that would have created a
significant and unanticipated revenue loss.” Id. at 31–32, 114 S. Ct. at2022–23, 129 L. Ed. 2d at 29. Justice O’Connor, in her concurring
opinion, noted the majority’s discussion of Congress’s “subjective
motivation,” and observed:
Every law touching on an area in which Congress has
previously legislated can be said to serve the legislative
purpose of fixing a perceived problem with the prior state of
16
affairs––there is no reason to pass a new law, after all, if the
legislators are satisfied with the old one.
Id. at 36, 114 S. Ct. at 2025, 129 L. Ed. 2d at 32 (O’Connor, J.,
concurring). Thus, the comment in Carlton with respect to the curative
nature of the statute was really a reference to Congress’s purpose in
enacting the statute––the correction of an unanticipated problem in the
original legislation, not whether the statute was classified as a curative
act for purposes of retroactivity analysis. See Mont. Rail Link, Inc. v.
United States, 873 F. Supp. 1415, 1421 (D. Mont. 1994) (stating, in
reference to this discussion in Carlton, “the real issue identified by the
Court and addressed in that discussion is whether the retroactive effect
is supported by a legitimate purpose and furthered by rational means”),
aff’d, 76 F.3d 991 (9th Cir. 1996).
A review of legal authorities considering when an act is curative
confirms the conclusion that the tax statute at issue in Carlton was not a
curative act. The question of when an act is “curative” for purposes of
retroactivity analysis is addressed in Singers’ noted treatise on statutes
and statutory construction, which states in its discussion of retroactivity:
A curative act is a statute passed to cure defects in
prior law, or to validate legal proceedings, instruments, or
acts of public or private administrative authorities. In the
absence of such an act the statute would be void for want of
conformity with existing legal requirements.
Singer on Statutory Construction § 41:11, at 503 (emphasis added); accord
Schwarzkopf, 341 N.W.2d at 4; Waters, 251 N.W.2d at 548. In Carlton,
there was no defect in the original statute that would render it void.
Congress simply realized in retrospect that the deduction it enacted in
1986 was too broad.
Our court recently recognized such a distinction––between the
purpose of a legislative act and its classification for purposes of
17
considering its retroactivity––in Anderson Financial Services, LLC v.
Miller, 769 N.W.2d 575 (Iowa 2009). In Anderson Financial, the attorney
general claimed an amendment to a credit statute was remedial in nature
and, therefore, applied retroactively under the presumption that remedial
statutes are presumed to have retrospective operation. 769 N.W.2d at579–80. We rejected this argument, stating:
While the purpose of the law may be characterized as an
effort to “remedy” an unintended gap in the statutory
prohibition of usurious interest rates, the statute is not
remedial in the sense contemplated by the rule that remedial
statutes are presumed to apply retroactively. . . .
....
. . . It would not be an exaggeration to suggest that the
legislature nearly always has in mind some problem that it
seeks to address in a legislative enactment. So, if a mere
legislative purpose to remedy a perceived defect in the law
made a statute remedial, very few statutes would not fall
within this classification.
Id. at 580 & n.4.
The same distinction is appropriate when considering the
applicability of Carlton and similar cases cited by the plaintiff. Clearly,
Congress’s purpose in enacting the 1987 amendment to the estate tax
deduction at issue in Carlton was to remedy a perceived defect in the
breadth of the deduction, but that is not the type of defect that is
contemplated in classifying legislation as “curative” for purposes of
retroactivity analysis. The type of defect addressed by a curative act, as
defined for purposes of retroactivity analysis, is a failure of the prior
legislation to conform to existing legal requirements. That was not the
type of legislation involved in Carlton. In Carlton, Congress changed the
law that applied to past transactions; it did not ratify a law that had
already been applied to transactions when they occurred, as is the case
18
here. Thus, the amendment at issue in Carlton was not a “curative” act,
as that term of art is used in the context of retroactivity.
In summary, Carlton and like cases cited by the plaintiff address
the retroactivity of a new tax––one that is being assessed and collected
after enactment of the new statute, i.e., the tax is imposed after the event
being taxed has occurred. 9 That is not what we have in the present case.
Here the legislature did not enact a new tax; it ratified a prior tax that
had been assessed and collected for many years before the legislature’s
authorization of the tax. This distinction is one that makes a difference in
retroactivity analysis. As our later discussion will illustrate, the purpose
of curative, ratifying legislation is sufficient to justify longer periods of
retroactivity in contrast to the so-called modest period of retroactivity
accorded the imposition of a new tax.
VIII. Application of Substantive Due Process Test.
We turn now to the application of the substantive due process test
identified earlier in our opinion. As we have observed, due process
9The cases cited by the plaintiff in support of his position, including the Iowa
cases, involve tax statutes (statutes imposing a new tax), not curative acts (acts
authorizing a previously imposed tax). See, e.g., United States v. Hemme, 476 U.S. 558,
106 S. Ct. 2071, 90 L. Ed. 2d 538 (1986) (considering application of law that
established unified credit for lifetime and testamentary gifts to gifts made prior to
enactment); United States v. Hudson, 299 U.S. 498, 57 S. Ct. 309, 81 L. Ed. 370 (1937)
(considering application of tax on transfers of interest in silver bullion to transfers made
before the adoption of the tax); Nichols v. Coolidge, 274 U.S. 531, 47 S. Ct. 710, 71 L.
Ed. 1184 (1927) (considering imposition of an estate tax on transfers that predated
imposition of tax); Shell Oil Co. v. Bair, 417 N.W.2d 425 (Iowa 1987) (considering
application of statute disallowing a deduction to transaction occurring prior to adoption
of statute, citing another tax statute case, Welch v. Henry, 305 U.S. 134, 59 S. Ct. 121,
83 L. Ed. 87 (1938), which considered statute imposing an income tax on corporate
dividends that had been received prior to adoption of tax); City Nat’l Bank of Clinton v.
Iowa State Tax Comm’n, 251 Iowa 603, 102 N.W.2d 381 (1960) (considering application
of tax law to transaction that occurred prior to enactment of law, citing Welch, 305 U.S.
134, 59 S. Ct. 121, 83 L. Ed. 87). Therefore, these cases are distinguishable from the
present case, just as Carlton is, because the purpose of the tax statute considered in
these cases is not the same as the purpose of curative legislation, such as that at issue
in the case before us.
19
requirements are satisfied “simply by showing that the retroactive
application of the legislation is itself justified by a rational legislative
purpose.” Pension Benefit Guar. Corp., 467 U.S. at 729, 104 S. Ct. at
2718, 81 L. Ed. 2d at 611. Here, the legislature’s purpose in ratifying
cities’ past imposition and collection of franchise fees in excess of their
regulatory costs was protection of the cities’ financial condition. The
legislature wanted to ensure cities could retain the franchise fees/illegal
taxes they had previously collected, thereby avoiding economic hardship
to the cities, their taxpayers, and the public who rely on city services if
the cities were required to refund these fees. Given that cities had used
the fees they had already collected for public expenditures, the
legislature acted to avoid a situation in which cities would have to refund
monies they had already spent.
This purpose––to protect the financial stability of local
municipalities––is entirely consistent with “the positive policy . . . served
by curative legislation, to sustain the reliability of official actions and
secure expectations formed in reliance thereon.” Singer on Statutory
Construction § 41:11, at 506; see also id. § 41:17, at 521 (noting curative
legislation as to tax matters is necessary “in order to safeguard the
public treasury against erosion of revenues”). As one court has noted in
denying a refund to taxpayers who had paid unauthorized county fees,
later validated by the legislature, “If there are ‘settled expectations’ in
this case, they are the County’s, not the taxpayers.” King v. Campbell
County, 217 S.W.3d 862, 870 (Ky. Ct. App. 2006), review denied, (Ky.
2007).
Having identified the purpose of this act––protection of the public
fisc, we now must consider whether this purpose justifies the retroactive
aspect of the legislation––ratification of past franchise fees. It is at this
20
juncture that the distinction between tax statutes and curative acts
becomes most important. Unlike the revenue-raising tax statutes at
issue in Carlton and like cases, which were designed to ensure tax
collections remained at the same level or increased in the future, the
curative act at issue here was designed to avoid the refund of monies
already collected and spent. We agree with the district court that these
purposes (maintaining revenue at the same or a higher level and avoiding
refunds of past receipts) are fundamentally different. One need only put
oneself in the position of the city to appreciate the distinction between
the retroactivity of tax statutes versus the retroactivity of curative
legislation. It is one thing to learn you will not be getting a raise as large
as you anticipated and will have to adjust future expenditures
accordingly (similar to allowing tax statutes limited retroactivity resulting
in decreased future revenues); it is quite another matter to learn that you
will have to return a portion of the income you have already received and
spent (similar to the situation of denying retroactive authorization of
taxes already collected and spent by the city). Clearly, the latter
situation provides a more compelling justification for retroactivity than
does the former.
Moreover, the fairness of retroactivity vis-à-vis the taxpayer is
fundamentally different in these situations. In the context of retroactive
tax legislation, the taxpayer has conducted himself in accordance with
the laws in effect at the time of a particular transaction and then
subsequently, due to the retroactivity of a new tax statute, is taxed on
the past transaction. In contrast, when curative legislation is at issue,
the taxpayer has entered into the transaction knowing the transaction is
burdened with a particular fee or tax. Ratification of the tax or fee does
not change the rules of the game after the taxpayer has placed his bet, as
21
is the case with retroactive tax legislation. See Charles B. Hochman, The
Supreme Court and the Constitutionality of Retroactive Legislation, 73
Harv. L. Rev. 692, 704, 705–06 (1960) [hereinafter The Constitutionality
of Retroactive Legislation] (noting “the interest in the retroactive curing of
. . . a defect in the administration of government outweighs the
individual’s interest in benefiting from the defect”); cf. Miller v. Johnson
Controls, Inc., 296 S.W.3d 392, 401 (Ky. 2009) (allowing retroactive
“clarification” of tax statute to conform to interpretation made by taxing
authority, noting “the clear and lengthy notice, the lack of settled
expectations and lack of detrimental reliance”), cert. denied, ___ U.S. ___
(2010).
The period of retroactivity justified by the purpose and effect of
these clearly different statutes has been recognized by courts and
scholarly authors alike. In a Kentucky case, the court noted the
situation in Carlton was “significantly different” from the facts presented
in the Kentucky case in which the taxpayers sought refunds of fees the
municipality had already collected. King, 217 S.W.3d at 870 (concluding
nineteen-year period of retroactivity did not violate taxpayers’ due
process rights). In his treatise, Singer also recognizes the singular
nature of curative acts when he discusses the constitutionality of such
legislation: “[T]he very reason for curative legislation is to fulfill and
secure expectations rather than to frustrate and defeat them. The
principles governing decisions about the validity of retroactive legislation
do not work to render curative acts invalid.” Singer on Statutory
Construction § 41:12, at 509 (emphasis added). Another author notes,
“[c]ases involving the retroactive imposition of taxes must be treated
separately” from curative statutes “which ratify prior official conduct of
government officers who have acted without the requisite authority.” The
22
Constitutionality of Retroactive Legislation, 73 Harv. L. Rev. at 704, 706.
Thus, it is inaccurate to suggest curative statutes are subject to the same
retroactivity concerns and limitations as tax statutes.
The justification for allowing curative acts to operate retroactively
has been explained as follows:
Non-substantive laws that operate retroactively help to
rectify or prevent injustices that may have been caused by
the previous law. For example, so-called “curative
legislation” will be upheld when the legislation: (1) ratifies
prior official conduct of government officials who acted
without the requisite authority, or (2) retroactively cures
defects in an administrative system. Retroactive curative
rules are acceptable because of the strong public interest in
a fair government system, and because they merely produce
the same result that would have occurred had the lawmaker
(usually an agency) promulgated the original rule correctly.
Jan G. Laitos, Legislative Retroactivity, 52 Wash. U. J. Urb. & Contemp.
L. 81, 95 (1997) (footnotes omitted); accord Stephen R. Munzer, A Theory
of Retroactive Legislation, 61 Tex. L. Rev. 425, 470 (1982) (suggesting
retroactivity of curative legislation is justifiable because “[i]t tends to
confirm expectations and to protect those who rely on the underlying
merits of a claim rather than those who grasp at legal technicalities”);
Laura Ricciardi & Michael B.W. Sinclair, Retroactive Civil Legislation, 27
U. Tol. L. Rev. 301, 338 (1996) (“Such curative legislation affirms as
proper what everyone had taken to be the law anyway: it ‘restores a
situation that was affirmatively anticipated and provided for.’ ”). Thus,
“[w]here legislation is curative, retroactive application may be
constitutional despite a long period of retroactivity.” Wiggins v. Comm’r
of Internal Revenue, 904 F.2d 311, 316 (5th Cir. 1990).
The United States Supreme Court long ago recognized the very
distinction we note. In United States v. Heinszen, 206 U.S. 370, 27 S. Ct.
742, 51 L. Ed. 1098 (1907), the Court reversed a judgment refunding
23
duties illegally collected on imports to the Philippine Islands under
executive branch authority, relying on curative legislation passed by
Congress. In 1898, the President imposed tariff duties on imports to the
Philippine Islands. Heinszen, 206 U.S. at 378, 27 S. Ct. at 743, 51
L. Ed. at 1100. In 1899, a treaty of peace was ratified, which had the
effect of taking away the President’s power to impose these duties; yet the
President continued the duties in force. Id. Three years later, in 1902,
Congress expressly authorized the imposition of duties. Id. at 378, 27
S. Ct. at 743, 51 L. Ed. at 1100–01. In 1905, the Supreme Court heard
two appeals from parties who had been denied refunds of duties paid
between 1899 and 1902, before the duties were authorized. Id. at 380–
82, 27 S. Ct. at 744–45, 51 L. Ed. at 1101–02. The Court reversed the
judgments in favor of the government and held the President was without
power to impose the duties after the treaty of peace was ratified in 1899.
Id. Thereafter, in 1906, Congress passed an act legalizing and ratifying
the collection of the unauthorized duties between 1899 and 1902. Id.A year later the Heinszen appeal reached the Court. The district
court in Heinszen had held duties paid by the claimants between 1899
and 1902 were illegal and had refused to give effect to the 1906
ratification of the unauthorized duties. Id. at 382, 27 S. Ct. at 745, 51
L. Ed. at 1102. The claimants asserted on appeal that application of the
ratifying act would deprive them of their property without due process of
law, arguing they had a vested right in the monies illegally exacted from
them. Id. at 386, 27 S. Ct. at 746, 51 L. Ed. at 1104. The Supreme
Court noted the general principle that Congress “had [the] power to ratify
the acts which it might have authorized.” Id. at 384, 27 S. Ct. at 745, 51
L. Ed. at 1103. Of particular significance to the present case is the
Court’s refusal to consider the legalizing act as a taxing statute:
24
As to [the claim] the duties collected were illegal, it is
insisted that, for the purpose of testing the validity of the act
of Congress, the fact of such collection must be put out of
view, and the act ratifying the exaction must be treated as if
it were solely an original exercise by Congress of the taxing
power. This being done, it is said, reduces the case to the
inquiry, had Congress power, years after goods which were
entitled to free entry had been brought into the Philippine
Islands, to retroactively impose tariff duties upon the
consummated act of bringing the goods into that country?
But the proposition begs the question for decision, by
shutting out from view the potential fact that when the goods
were brought into the Philippine Islands there was a tariff in
existence under which duties were exacted in the name of
the United States. . . . Moreover, the fallacy which the
proposition involves becomes yet more obvious when it is
observed that the contention cannot even be formulated
without misstating the nature of the act of Congress; in other
words, without treating that act as retrospective legislation
enacting a tariff, when, on its very face, the act is but an
exercise of the conceded power dependent upon the law of
agency to ratify an act done on behalf of the United States,
which the United States could have originally authorized.
Id. at 385–86, 27 S. Ct. at 746, 51 L. Ed. at 1103–04. The Court went on
to reject the claimants’ due process claim, noting any right to a refund
held by the claimants “was subject to the exercise by Congress of its
undoubted power to ratify.” Id. at 386, 27 S. Ct. at 746, 51 L. Ed. at
1104. The Court stated the fact that the instant suit was pending at the
time Congress ratified the illegal duties did not “cause the statute to be
repugnant to the Constitution,” as “[t]he mere commencement of the suit
did not change the nature of the right.” Id. at 387, 27 S. Ct. at 747, 51
L. Ed. at 1104.
Heinszen was followed by the Court’s 1937 decision in Swayne &
Hoyt, Ltd. v. United States, 300 U.S. 297, 57 S. Ct. 478, 81 L. Ed. 659(1937). In Swayne & Hoyt, steamship corporations challenged an order
of the Secretary of Commerce canceling higher rates the corporations
had been charging shippers through the Panama Canal. 300 U.S. at299–300, 57 S. Ct. at 478–79, 81 L. Ed. at 661–62. The corporations
25
claimed, correctly, that the Secretary acted without authority, but the
Court found Congress had subsequently validated the Secretary’s action
through various legislative acts. Id. at 300–01, 57 S. Ct. at 479–80, 81
L. Ed. at 662–63. As in Heinszen, the Court pointed out “a distinction
must be taken ‘between a bare attempt of the Legislature retroactively to
create liabilities for transactions . . . fully consummated in the past . . .
and the case of a curative statute aptly designed to remedy mistakes and
defects in the administration of government where the remedy can be
applied without injustice.’ ” Id. at 302, 57 S. Ct. at 480, 81 L. Ed. at 663
(quoting Graham v. Goodcell, 282 U.S. 409, 429, 51 S. Ct. 186, 194, 75
L. Ed. 415, 440 (1931)). The Court held “the retroactive application of
the curative act impair[ed] no substantial right or equity of [the
corporations]” and was not “unreasonable and arbitrary.” Id. at 302, 57
S. Ct. at 480, 81 L. Ed. at 663–64.
A review of the Van Emmerik case cited above is also helpful
because it relies on Heinszen and has facts strikingly similar to the case
before us. See Van Emmerik, 304 N.W.2d at 701–05, 707. In
Van Emmerik, the state of South Dakota had collected a four percent
sales tax on the sale of utility services beginning in 1969, even though
the tax statute applicable to utilities imposed only a three percent tax.
Id. at 701–02. In 1979, a class action seeking refunds of the one percent
illegal tax was brought against the utilities and the state on behalf of all
South Dakota residents who had paid the excessive sales taxes on their
utility bills. Id. at 701. Thereafter, in 1981, the South Dakota legislature
enacted a law imposing a four percent tax on utilities and making it
retroactive to 1969. Id. at 702. The class action petitioner challenged
the constitutionality of this legislation, claiming it constituted “a taking
26
of property without just compensation in violation of the Due Process
Clauses of the Fifth and Fourteenth Amendments.” 10 Id. at 703.
In addressing this claim, the South Dakota Supreme Court first
noted that the act “purports to ratify the unauthorized collection by state
officials of sales tax overcharges and to that extent, the law is a curative
act.” Id. It rejected the petitioner’s argument that the utility customers
had a right to a refund, stating:
The unauthorized tax had been mistakenly collected without
interruption since 1969 and petitioner presumably shared in
whatever public benefits the tax funded. Where an asserted
vested right that is not linked to any substantial equity
arises from the mistake of officers purporting to administer
the law in the name of the State, the Legislature is not
prevented from curing the defect in administration simply
because the effect may be to destroy claims that would
otherwise exist. . . . Petitioner (having shared in the benefits
10At the time of this decision, the test of reasonableness for purposes of
determining whether a taking had occurred was substantially the same as the test for a
substantive due process claim. See Lingle v. Chevron U.S.A., Inc., 544 U.S. 528, 541–
42, 125 S. Ct. 2074, 2083, 161 L. Ed. 2d 876, 889–90 (2005) (discussing evolution of
takings analysis, noting its “reliance on due process precedents”). This court has also
equated the two tests. In Home Builders, this court considered a claim that an illegal
tax in the form of a park dedication fee constituted a Fifth Amendment taking. Home
Builders Ass’n, 644 N.W.2d at 351. We concluded it did not because “the fees were
‘reasonably related to a substantial public purpose.’ ” Id. (quoting Swisher Int’l, Inc. v.
United States, 178 F. Supp. 2d 1354, 1362 (Ct. Int’l Trade 2001), aff’d, Arbon Steel &
Serv. Co. v. United States, 315 F.3d 1332 (Fed. Cir. 2003)). See generally Penn Cent.
Transp. Co. v. City of New York, 438 U.S. 104, 127, 98 S. Ct. 2646, 2660, 57 L. Ed. 2d
631, 650 (noting “a use restriction on real property may constitute a ‘taking’ if not
reasonably necessary to the effectuation of a substantial public purpose”), reh’g denied,
439 U.S. 883, 99 S. Ct. 226, 58 L. Ed. 2d 198 (1978), modification recognized by Palm
Beach Isles Assocs. v. United States, 231 F.3d 1354 (Fed. Cir. 2000). In considering the
plaintiff’s substantive due process claim, we noted there must merely be “ ‘ a
“reasonable fit” between governmental purpose . . . and the means chosen to advance
that purpose.’ ” Home Builders Ass’n, 644 N.W.2d at 353 (quoting ACCO Unlimited
Corp. v. City of Johnston, 611 N.W.2d 506, 510 (Iowa 2000)). We concluded this test
was met, stating, “[w]e have already determined in connection with our takings analysis
that the parks fee is reasonably related to the City’s goal of establishing neighborhood
parks. This conclusion also disposes of the plaintiff’s substantive due process claim.”
Id. at 354. Thus, even though Van Emmerik involved a takings claim, the court applied
substantially the same test we must employ in the present case for substantive due
process.
27
funded by the tax) effectively seeks a windfall in claiming
that a vested right has arisen here since, had the official
action in question had the effect it was intended to and could
have had, no such right would have arisen.
Id. at 705; cf. Johnson Controls, 296 S.W.3d at 397 (holding taxpayers
had no “vested right in the Kentucky Revenue Code”). The court also
held the petitioner’s claim that the law “is invalid due to its eleven and
one-half year period of retroactivity . . . lack[ed] merit.” Van Emmerik,
304 N.W.2d at 706. The court noted the temporal element of
retroactivity is relevant to the fairness of applying the legislation
retroactively. Id. (“The obvious reason for this concern is rooted in the
principle that a person should be able to plan his conduct with
reasonable certainty of the legal consequences.”). Although this
consideration is “[a]n important element” in cases involving “retroactive
taxation,” the court noted, this principle of fairness was “not threatened
here.” Id. Accordingly, the court gave full effect to the legislature’s
ratification of eleven and one-half years of unauthorized taxation. Id.
The petitioner’s subsequent appeal to the United States Supreme Court
was dismissed “for want of a substantial federal question.” Van Emmerik
v. Janklow, 454 U.S. 1131, 102 S. Ct. 986, 71 L. Ed. 2d 285 (1982).
A more recent decision of the United States Court of Appeals for
the District of Columbia Circuit is also factually on point. See Thomas v.
Network Solutions, Inc., 176 F.3d 500 (D.C. Cir. 1999), cert. denied, 528
U.S. 1115 (2000). In this case, the National Science Foundation (NFS),
an agency of the federal government, contracted with Network Solutions,
Inc., a private corporation, to provide domain registration services for the
Internet. Id. at 504. Pursuant to the contract, Network Solutions
charged domain name registrants a yearly registration fee, with seventy
percent of the fees kept by Network Solutions and the remaining thirty
28
percent deposited in an account on NFS’s behalf “for preserving and
enhancing the ‘Intellectual Infrastructure of the Internet.’ ” Id. at 505.
Plaintiffs, registrants who paid the annual registration fees, brought suit,
seeking refunds of the so-called preservation assessment. Id. The
district court held the preservation assessment “was an above-cost tax
Congress had not authorized and hence was unconstitutional.” Id.
Congress immediately enacted a law that “legalized and ratified” the
preservation assessment that had been illegally collected for over two
years. Id. The district court then dismissed the plaintiffs’ claims as
moot. Id. at 506.
On appeal, the court of appeals considered the effect of
Congressional ratification of the illegal tax. Id. Quoting Heinszen, it
noted “that Congress ‘has the power to ratify the acts which it might
have authorized’ in the first place, so long as the ratification ‘does not
interfere with intervening rights.’ ” Id. (quoting Heinszen, 206 U.S. at
384, 27 S. Ct. at 745–46, 51 L. Ed. at 1103). The court affirmed the
district court’s denial of the plaintiffs’ claim. Id. at 512.
An analogous case involving an act characterized as clarifying prior
law is also enlightening. In Robert Morris College v. United States, 11 Cl.
Ct. 546, 547 (Cl. Ct. 1987), a taxpayer sought a refund of FICA taxes
paid for the years 1979–1983. These taxes were calculated pursuant to a
1965 revenue ruling issued by the Department of Treasury interpreting
the governing statute. Robert Morris Coll., 11 Cl. Ct. at 547. The
taxpayer claimed the Department’s interpretation was inconsistent with a
decision of the United States Supreme Court, Rowan Cos. v. United
States, 452 U.S. 247, 101 S. Ct. 2288, 68 L. Ed. 2d 814 (1981), and
therefore, it was entitled to a refund of the erroneously paid taxes. Id. at
547–48. In 1983, Congress, concerned about the impact of Rowan on
29
taxes already collected, passed a law that in effect amended the
governing statute to make it consistent with the revenue ruling. Id. at
549, 551. In 1984, Congress made the 1983 statute effective for years
prior to 1983 “to preclude the possibility of refunds of FICA taxes paid in
conformity with [the revenue ruling].” Id. at 551.
The taxpayer challenged the retroactive application of the new law,
claiming it deprived the taxpayer “of its right to recover an overpayment.”
Id. at 553. The taxpayer also claimed “that since the 1984 Act covers
retroactively such a long period of time, it violates due process.” Id. The
court rejected this claim, stating:
Plaintiff was not deprived of any amounts to which it was
entitled, nor did the legislation change its status by requiring
plaintiff to pay additional amounts. Instead, Congress in
pursuit of rational purposes––protection of the Social
Security base and prevention of the potential disruption
Rowan could cause––codified a revenue ruling which had
been in force during the period in question. Plaintiff
complied with [this revenue ruling] throughout, and it
should not be considered arbitrary or unfair that it cannot
reclaim amounts paid to Social Security which it never
expected to be refunded.
Id. at 553–54; accord Canisius Coll. v. United States, 799 F.2d 18, 26–27
(2d Cir. 1986), cert. denied, 481 U.S. 1014 (1987); Temple Univ. v. United
States, 769 F.2d 126, 135 (3d Cir. 1985), cert. denied, 476 U.S. 1182(1986); Johnson Controls, 296 S.W.3d at 401.
A final case that is factually similar, and therefore helpful, is the
Kentucky Court of Appeals’ King decision previously mentioned. In King,
two counties had for many years imposed a “fee” on individual incomes
and business net profits without giving those paying the fees a credit for
similar city fees paid by the taxpayers. 217 S.W.3d at 865–66. In 2001,
taxpayers challenged the county fees, and the Kentucky Supreme Court
held in 2004 that the counties should have been giving the taxpayers a
30
credit for city fees the taxpayers had paid. Id. Based on this decision,
the taxpayers filed an action on their own behalf and on behalf of all
other persons who had paid the county fees seeking refunds of the
excessive fees charged by the counties since 1986. Id. In response to
the same decision, the legislature enacted a law providing that no
taxpayer was entitled to a refund for any overpayment and making the
statute retroactive. Id. at 866–67. The district court ruled the statute
was not unconstitutional and dismissed the taxpayers’ suit for refunds.
Id. at 865.
On appeal, the appellate court held the statute precluding refunds
of all excessive fees did not violate due process notwithstanding its long
period of retroactivity, noting the legislature had enacted this provision
“to shield [the counties] from what it believed could be the devastating
[financial] consequences of the Supreme Court’s decision.” Id. at 870(distinguishing Carlton as dealing with a situation “significantly
different”). The court noted, “If there are ‘settled expectations’ in this
case, they are the County’s, not the taxpayers.” Id.; see also Jasinski v.
City of Miami, 269 F. Supp. 2d 1341, 1347 (S.D. Fla. 2003) (“When a
legislative body, in good faith, enacts a curative law to ratify, validate and
confirm any act that it could have authorized in the first place, . . . it
would contravene public policy to award plaintiffs a windfall for asserting
a cause of action that the legislative body may constitutionally eliminate
by curing any defects in the law.”), aff’d, 99 Fed. App’x 887 (11th Cir.
2004); Johnson Controls, 296 S.W.3d at 401 (upholding retroactive
“clarifying” legislation denying taxpayer refunds, noting taxpayers’ “lack
of settled expectations and lack of detrimental reliance”).
The plaintiff claims the cases we have discussed are not good law
in light of the United States Supreme Court’s decision in McKesson Corp.
31
v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 110 S. Ct.
2238, 110 L. Ed. 2d 17 (1990). In McKesson, the Florida Supreme Court
had ruled that a Florida “tax scheme unconstitutionally discriminated
against interstate commerce,” but the court had refused to provide the
taxpayer a refund for taxes it had already paid. 497 U.S. at 22, 110
S. Ct. at 2242, 110 L. Ed. 2d at 26. On certiorari to the United States
Supreme Court, the Court held “the Due Process Clause requires the
State to afford taxpayers a meaningful opportunity to secure
postpayment relief for taxes already paid pursuant to a tax scheme
ultimately found unconstitutional.” Id. at 22, 110 S. Ct. at 2242, 110
L. Ed. 2d at 26–27.
Clearly, McKesson addressed the taxpayer’s procedural due process
rights; it did not consider the validity of curative legislation under the
doctrine of substantive due process. Moreover, the tax at issue in
McKesson was one that was inherently unconstitutional or illegal, one
that the state had no power to authorize under any circumstances. As
we have already noted, the tax at issue here was not one that was
inherently unconstitutional; it had simply not been authorized by the
legislature at the time it was assessed and paid. McKesson plainly does
not stand for the proposition that principles of substantive due process
are violated by the enactment of a curative statute that retroactively
ratifies a taxing authority’s imposition of an otherwise permissible tax.
See Atchison, Topeka & Santa Fe Ry. v. United States, 61 Fed. Cl. 501,
508 (Fed. Cl. 2004) (rejecting due process challenge to retroactivity of
statute, distinguishing McKesson from cases involving curative
legislation); Johnson Controls, 296 S.W.3d at 402–03 (rejecting
applicability of McKesson to due process challenge to legislature’s
retroactive confirmance of state taxing authority’s interpretation of tax
32
statute). Therefore, McKesson does not undermine the validity of the
cases upon which we rely.
In summary, then, the cases and legal authorities addressing the
retroactive application of curative legislation establish: (1) ratification of
a tax already imposed and collected cannot be equated with the
retroactive imposition of a new tax for purposes of determining the
constitutionality of retroactive application of a curative act, (2) curative
acts do not impair any vested right of the taxpayer, 11 (3) there is no
litmus test for a reasonable period of retroactivity for curative acts, and
(4) ratification of a tax collected without authority is given full
retroactivity so long as the retroactivity furthers a legitimate purpose.
The legislative purpose behind the curative act in this case was
clearly to allocate the burdens of government and to avoid financial
disruption to the finances of the cities involved. Importantly, this
situation in not one in which taxpayers have reasonably relied upon tax
11We note that Iowa law regarding the impairment of vested rights is consistent
with the authorities we have discussed. In fact, the precise argument plaintiff makes
here––that he has a vested right to a refund––was made and rejected in our early Soper
case. 39 Iowa at 117–18. In that case, the plaintiff argued “that before the passage of
the curative act, the plaintiff had a right of action to recover back the illegal taxes paid,
and that this is a vested right.” Id. at 121. We rejected the plaintiff’s argument there
and have continued to hold in subsequent cases that curative legislation ratifying an
invalid exercise of governmental power, including previously imposed taxes, does not
interfere with vested rights. Id. at 124; see Schwarzkopf, 341 N.W.2d at 8; Iowa Elec.
Light & Power Co. v. Inc. Town of Grand Junction, 221 Iowa 441, 452–53, 264 N.W. 84,
90 (1935); Rosenbaum, 212 Iowa at 232–34, 231 N.W. at 648–49; Chicago, R.I. & P. Ry.
v. Streepy, 211 Iowa 1334, 1338, 236 N.W. 24, 26 (1931); Indep. Dist. of Avoca, 99 Iowa
at 561–62, 68 N.W. at 882; Boardman, 18 Iowa at 294–95.
The plaintiff places great reliance on our decision in Thorp v. Casey’s General
Stores, Inc., 446 N.W.2d 457 (Iowa 1989), in which this court held the retroactive
application of an amendment to Iowa’s dramshop law that eliminated a plaintiff’s
accrued tort claim deprived her of a vested right in violation of due process. Thorp, 446
N.W.2d at 462. We specifically noted in our decision, however, that a similar
conclusion does not prevail when the retroactive legislation is a curative act. Id. Such
statutes, we stated, survive constitutional scrutiny even if they deprive a plaintiff of a
vested cause of action. Id.33
law and structured their affairs in a fashion that is prejudiced by the
retroactive legislation. The fee payers in this case paid unauthorized
franchise fees that were later ratified by the state. If the taxpayers in
these municipalities had known that ratification would be forthcoming,
they would not have altered their conduct in any material way.
Certainly the legislature could have refused to ratify the acts of the
cities, requiring the burden of tax refunds resulting from the unlawfully
collected taxes to be borne by current city taxpayers, either in the form of
increased taxes or reduced services. Instead, however, the legislature
decided to avoid these disruptions by retroactively ratifying the taxes
already paid. 12 One may, of course, question the wisdom of these
ratifying decisions on the ground that cities should be left to their own
devices after pushing the tax envelope too far. The issue of the degree to
which municipalities must be held on a short leash through a refusal to
ratify unauthorized tax collections is generally a political question for the
legislature to decide. In this case, the legislature’s determination that
the interest in stable municipal finances trumps the need to discipline
city management does not amount to an arbitrary or irrational choice
under the facts and circumstances.
IX. Period of Retroactivity.
As a backup argument, the plaintiff contends that, if we hold the
legislature had the power to retroactively authorize the illegal taxes
imposed by cities on cable television services, the retroactive application
12Notably, no taxpayer has been arbitrarily or irrationally singled out for special
treatment. See Commonwealth Edison Co. v. Will County Collector, 749 N.E.2d 964, 975
(Ill. 2001) (upholding legislative act validating taxes predating effective date of
legislation, noting the general assembly was not targeting any particular group of
taxpayers “for retribution or other illegitimate purpose”); cf. Carlton, 512 U.S. at 32, 114
S. Ct. at 2023, 129 L. Ed. 2d at 29 (concluding retroactive amendment to tax statute
did not violate due process, in part, because “Congress’ purpose in enacting the
amendment was neither illegitimate or arbitrary”).
34
of this authorization should be limited to “one year or the adjournment of
the previous legislative session, May 3, 2006.” He claims courts applying
Carlton use a “bright line one year rule as the constitutionally
permissible period of retroactivity for state tax legislation.” The plaintiff’s
suggestion that a one-year retroactive period approaches the due process
limit is based on dicta in Justice O’Connor’s concurring opinion in
Carlton. See Carlton, 512 U.S. at 38, 114 S. Ct. at 2026, 129 L. Ed. 2d at
33 (“A period of retroactivity longer than the year preceding the legislative
session in which the law was enacted would raise, in my view, serious
constitutional questions.”) (O’Connor, J., concurring).
In our view, however, Justice O’Connor’s comments were not
meant to amount to a per se rule in all cases of every variety involving
taxes. Moreover, a majority of the Supreme Court in Carlton did not
embrace a one-year rule, but instead provided a more flexible framework
for deciding the due process question. See Montana Rail Link, Inc., 873
F. Supp. at 1421 (rejecting plaintiff’s argument that all retroactive
legislation must have a “short and limited period” of retroactivity, stating
“in Carlton the Court did not establish a specific time frame for the
validity of retroactive legislation”); Enter. Leasing Co. of Phoenix v. Ariz.
Dep’t of Revenue, 211 P.3d 1, 5–6 (Ariz. Ct. App. 2008) (rejecting
interpretation of Carlton as standing for proposition that “retroactivity in
excess of one year . . . creates a due process issue” and holding six-year
period of retroactivity did not violate due process), review denied, (Ariz.
2009); Johnson Controls, 296 S.W.3d at 399 (rejecting “a specified
modesty period,” noting eight of the nine justices in Carlton did not
subscribe to a one–year limit on retroactivity); see also Canisius Coll.,
799 F.2d at 26–27 (rejecting “a one-year bench mark as the
constitutional limit of retroactivity,” and holding four–year retroactive
35
application of curative statute was not violative of due process); cf. Licari
v. Comm’r of Internal Revenue, 946 F.2d 690, 695 (9th Cir. 1991)
(rejecting due process challenge to statute retroactively increasing tax
penalty, noting a four-year period of retroactivity was not, by itself,
sufficient to violate due process), aff’d, 946 F.2d 898 (9th Cir. 1991);
Temple Univ., 769 F.2d at 135 (in case involving clarifying legislation
applied retroactively to plaintiff’s tax returns going back six years, court
stated, “no federal court of appeals has yet adopted an absolute temporal
limitation on retroactivity,” citing case allowing a nine-year period of
retroactivity). Moreover, to the extent Carlton stands for the proposition
that tax statutes must have a certain period of retroactivity, that
proposition is inapplicable here because the legislation authorizing the
city’s franchise fees is a curative act.
It is, of course, possible under the Iowa due process clause to
adopt a different approach from the federal model. Our recent cases
emphasize that we jealously protect our right to engage in independent
analysis of state constitutional claims, both with respect to the standards
to be utilized and the application of those standards to the facts and
circumstances of a given case. See, e.g., State v. Bruegger, 773 N.W.2d
862, 883 (Iowa 2009); Racing Ass’n of Cent. Iowa v. Fitzgerald, 675
N.W.2d 1, 6–7 (Iowa 2004). Here, however, the plaintiff does not propose
a wholesale abandonment of established federal doctrine under the Iowa
Constitution, but instead implies that the dicta in Justice O’Connor’s
concurring opinion in Carlton should provide the basis for a decision in
his favor under the Iowa Constitution. This dicta does not present a
basis for decision under the Iowa Constitution in light of the nature of
the dispute presented here and the lack of detrimental reliance by the
taxpayers. While there are Iowa cases that suggest a short period of
36
retroactivity for tax legislation, these cases do not involve ratification of
prior acts of municipalities by the state. See, e.g., Shell Oil Co. v. Bair,
417 N.W.2d 425, 431–32 (Iowa 1987); City Nat’l Bank of Clinton v. Iowa
State Tax Comm’n, 251 Iowa 603, 608–09, 102 N.W.2d 381, 384 (1960).
Having rejected a rigid limit on the allowable period of retroactivity
for curative legislation, we will consider the plaintiff’s argument that only
a modest period of retroactivity can satisfy due process using the
substantive due process principles outlined above. As we have
discussed, the purpose of the 2007 act passed by the Iowa legislature
was to safeguard the financial stability of municipalities by ensuring they
would not be required to refund substantial sums that they had already
collected––and spent. Clearly, the validation of past collections was a
reasonable fit with this legislative purpose. The plaintiff has not
demonstrated why this purpose––to safeguard the public fisc––is
advanced by allowing the city to retain the past one or two years of taxes,
but not the past five and one-half years of taxes. See The
Constitutionality of Retroactive Legislation, 73 Harv. L. Rev. at 704
(“[W]hen dealing with curative statutes, the Court has consistently held
that the legislative purpose is of itself sufficient to justify the concomitant
retroactivity.”); cf. Rocanova v. United States, 955 F. Supp. 27, 30
(S.D.N.Y. 1996) (holding six-year period of retroactivity for lengthened
statute of limitations governing government claims for back taxes did not
violate due process as “[t]he very purpose of the Amendment required its
application to all existing tax liabilities”), aff’d, 109 F.3d 127 (2d Cir.),
cert. denied, 522 U.S. 821 (1997); Johnson Controls, 296 S.W.3d at 401
(rejecting due process challenge to 2000 statute that gave effect to taxing
authority’s interpretation of tax statute from 1988 to 1994, an
interpretation that was held erroneous by the Kentucky Supreme Court
37
in 1994). See generally Waters, 251 N.W.2d at 548 (stating a curative act
“ ‘is necessarily retrospective in character’ ” (quoting McSurely v. McGrew,
140 Iowa 163, 172, 118 N.W. 415, 419 (1908))). Therefore, the plaintiff
has not carried his burden to establish the unconstitutionality of the
legislature’s action.
X. Summary and Disposition.
We recognize the result in this case makes litigation challenging
municipal taxes that have not been authorized by the state less attractive
as recovery of potential refunds may be cut off by the legislature. Yet,
any municipality that imposes unauthorized taxes runs the risk of fiscal
disruption in the event the legislature declines to ratify its actions. 13 If
the legislature wishes to provide taxpayers with a mandatory recovery
when unauthorized taxes are levied by local governments, it may do so
through appropriate legislation. As even the Carlton Court stated with
respect to the retroactive imposition of a new tax:
“Provided that the retroactive application of a statute is
supported by a legitimate legislative purpose furthered by a
rational means, judgments about the wisdom of such
legislation remain within the exclusive province of the
legislative and executive branches. . . .”
Carlton, 512 U.S. at 30–31, 114 S. Ct. at 2022, 129 L. Ed. 2d at 28(quoting Pension Benefit Guar. Corp., 467 U.S. at 729, 104 S. Ct. at 2718,
81 L. Ed. 2d at 611); accord Usery v. Turner Elkhorn Mining Co., 428 U.S.
1, 19, 96 S. Ct. 2882, 2894, 49 L. Ed. 2d 752, 768–69 (1976) (noting
wisdom of retroactive application of statute imposing liability on coal
mine operators for disabilities of former employees was “not a question of
13We note the fees determined to constitute illegal taxes in Kragnes were
imposed on gas and utility services. The legislation at issue here does not ratify such
fees, and in fact, the plaintiff in this case has a pending claim for refund of gas and
utility fees.
38
constitutional dimension,” and holding retroactivity was not a due
process violation). This court made a similar observation in State v.
Miner, 331 N.W.2d 683 (Iowa 1983), in considering a substantive due
process challenge to economic regulation: “Our function is not that of a
super-legislature which weighs the wisdom of legislation; we look only to
whether the means chosen by the State are rational and reasonably
necessary to the accomplishment of the State’s purpose.” 331 N.W.2d at
689 (citation omitted). For the present, our legislature has reserved to
itself the power to determine whether to ratify unauthorized local taxes
on a case-by-case basis. We must defer to a constitutional exercise of
that judgment.
In summary, the legislature’s ratification of the city’s unauthorized
tax is a curative statute whose purpose––to safeguard the public fisc and
the financial stability of local municipalities––is rationally related to its
retroactivity. Therefore, this statute does not violate the plaintiff’s
substantive due process rights. We affirm the district court’s summary
judgment for the city on the plaintiff’s claim for a refund of fees paid on
cable television services. We remand this case for further proceedings on
the plaintiff’s claim for a refund of gas and utility fees.
AFFIRMED AND CASE REMANDED.
All justices concur except Wiggins and Hecht, JJ., who dissent.
39
#07–1819, Zaber v. City of Dubuque
WIGGINS, Justice (dissenting).
The facts of this case illustrate why many ordinary citizens distrust
their elected officials. In 2002 this court’s decision in Home Builders
Ass’n of Greater Des Moines, established the proposition that any fees a
city collects is an illegal tax when it charges franchise fees not
reasonably related to the reasonable costs of inspecting, licensing,
supervising, or otherwise regulating a franchised activity. Home Builders
Ass’n of Greater Des Moines v. City of W. Des Moines, 644 N.W.2d 339,
347–48 (Iowa 2002).
On May 2, 2005, the elected officials of the City of Dubuque
enacted a cable franchise fee. Dubuque Mun. Code ch. 11, § 3A-7(1).
Under existing Iowa law, the city should have known that such a fee is
an illegal tax to the extent it exceeds the reasonable administrative costs
of regulating the cable provider. The fee as enacted was due not to the
city, but to cable providers who would disconnect a subscriber’s cable
service if he or she refused to pay the illegal tax. Once the citizens of
Dubuque realized the franchise fee was nothing more than an illegal tax,
they brought this action to seek a refund.
On May 26, 2006, this court issued the Kragnes decision. Kragnes
v. City of Des Moines, 714 N.W.2d 632 (Iowa 2006). In Kragnes, this
court held the citizens of a municipality could bring an action against the
municipality for a refund of that part of a franchise fee paid by the
citizens that exceeded the reasonable administrative costs related to gas
and electric utility franchises. Id. at 643–44. In response to Kragnes,
the 82nd General Assembly passed a law authorizing franchise fees in
excess of a city’s administrative costs and giving municipalities the right
to retain the revenues it collected from the illegal tax. Iowa Code
40
§ 477A.7(5) (Supp. 2007). This law became effective May 29, 2007. 2007
Iowa Acts ch. 201, § 15.
I assume that in 2005, when the Dubuque City Council passed its
franchise fee, the 81st General Assembly had neither the votes nor the
political will to authorize the city to collect franchise fees on cable
services in excess of the reasonable costs of inspecting, licensing,
supervising, or otherwise regulating such services. Subsequently, the
82nd General Assembly, a legislative body not elected by the people at
the time the Dubuque City Council levied and collected the illegal tax,
decided the city could retain the revenues generated by the tax. The
actions of the 82nd General Assembly, authorizing the collection of the
illegal tax retrospectively, compounded the unfairness of the actions of
the Dubuque City Council when it enacted the tax without legislative
authority. Such conduct by these elected officials completely disregarded
the political will of the general assembly at the time the Dubuque City
Council imposed the franchise fee on cable services. These actions are
as repugnant to the American system of taxation as the concept of
taxation without representation.
The majority decision holds, a curative statute may, consistent
with due process principles, authorize the unfettered retroactive
application of an illegal tax so long as the purpose of the curative statute
is to protect the public fisc. Of course, any time a city must pay out
funds the public fisc is at risk. Thus, under the majority’s decision, a
curative statute authorizing the imposition and retention of an illegal tax
can never be subject to a due process challenge.
Taking the holding of the majority to its logical conclusion leads to
the result that any act a legislative body had the power to enact, but did
not authorize by formal legislative enactment, could be the subject of a
41
curative act and evade the requirements of the Due Process Clauses of
the United States and Iowa Constitutions. This reasoning is illogical,
and its flaw is illustrated by the following example.
The general assembly has the power to enact a fee on hunters.
However, such a fee is nothing more than an illegal tax until a bill
enacting such a fee is introduced in the general assembly, passed by a
constitutional majority of the house and senate, and signed by the
governor. Suppose the department of natural resources decides the
state’s financial situation requires more revenues and on its own, enacts
a rule to collect an additional ten percent fee on hunting licenses without
the authorization of a law enacting such an increase. Because the
legislature has not authorized this fee, it is an illegal tax. Under the logic
of the majority, the department may collect and retain this tax without
legislative authority so long as a subsequent general assembly enacts a
curative act allowing the state to retain the illegal tax it previously
collected.
Moreover, a retroactive tax is a new tax whether the legislature
enacts it as a curative statute or by other legislation. The effect is the
same, the legislature is authorizing a governmental entity to collect and
retain the revenues of a tax that the entity previously was not authorized
to collect. The manner in which the legislature enacts a retroactive tax is
a distinction without a difference.
This does not mean, however, retroactive taxes necessarily violate
the Due Process Clauses of the Federal or State Constitutions. See, e.g.,
United States v. Carlton, 512 U.S. 26, 35, 114 S. Ct. 2018, 2024, 129 L.
Ed. 2d 22, 31 (1994) (applying federal due process); United States v.
Hemme, 476 U.S. 558, 571, 106 S. Ct. 2071, 2079, 90 L. Ed. 2d 538,
550 (1986) (same); United States v. Darusmont, 449 U.S. 292, 297–99,
42
101 S. Ct. 549, 552–53, 66 L. Ed. 2d 513, 517–19 (1981) (same); Welch v.
Henry, 305 U.S. 134, 149–51, 59 S. Ct. 121, 126–27, 83 L. Ed. 87, 94–95
(1938) (same); United States v. Hudson, 299 U.S. 498, 500–01, 57 S. Ct.
309, 310, 81 L. Ed. 370, 372 (1937) (same); Shell Oil Co. v. Bair, 417
N.W.2d 425, 431–32 (Iowa 1987) (same); City Nat’l Bank of Clinton v.
Iowa State Tax Comm’n, 251 Iowa 603, 608–09, 102 N.W.2d 381, 384
(1960) (applying state and federal due process principles).
The most recent Supreme Court decision to address the
retroactivity of a tax is Carlton. In Carlton, a taxpayer relied on the Tax
Reform Act of 1986 to exclude from federal estate taxation one-half of the
proceeds from the sale of securities to an Employee Stock Ownership
Plan. Carlton, 512 U.S. at 28, 114 S. Ct. at 2020–21, 129 L. Ed. 2d at26–27. In January 1987, after the taxpayer made the sale, the Internal
Revenue Service (IRS) issued a notice stating it would not recognize such
a deduction unless the decedent directly owned the stock immediately
prior to his or her death. Id. at 29, 114 S. Ct. at 2021, 129 L. Ed. 2d at
27. In December 1987 Congress enacted a statute codifying the
substance of the IRS notice. Id. The IRS then disallowed the deduction
because the decedent did not own the stock immediately before her
death. Id. The taxpayer paid the deficiency, filed a claim for a refund,
and instituted a suit for refund arguing the government’s retroactive use
of the December 1987 law to deny a deduction available to the taxpayer
when the taxpayer made the sale violated the Due Process Clause of the
Fifth Amendment to the United States Constitution. Id.Prior to Carlton, the Supreme Court determined the validity of a
retroactive tax statute under the Due Process Clause by determining
whether its “ ‘retroactive application is so harsh and oppressive as to
transgress the constitutional limitation.’ ” Id. at 30, 114 S. Ct. at 2022,
43
129 L. Ed. 2d at 28 (quoting Welch, 305 U.S. at 147, 59 S. Ct. at 126, 83
L. Ed. at 93). In applying the harsh and oppressive test, the Ninth
Circuit in Carlton, considered two factors. Carlton v. United States, 972
F.2d 1051, 1059 (9th Cir. 1992), rev’d, 512 U.S. 26 (1994). These factors
are “[f]irst, did the taxpayer have actual or constructive notice that the
tax statute would be retroactively amended? Second, did the taxpayer
rely to his detriment on the pre-amendment tax statute, and was such
reliance reasonable?” Id. A third factor used by courts prior to the
Supreme Court’s decision in Carlton in determining whether a retroactive
application of a tax meets due process requirements was whether
Congress acted promptly and established a modest period of
retroactivity. Darusmont, 449 U.S. at 296–97, 101 S. Ct. at 551–52, 66
L. Ed. 2d at 517.
After applying the factors of the harsh and oppressive test, the
Ninth Circuit found the retroactive application of the tax
unconstitutional. Carlton, 972 F.2d at 1062. In reversing the Ninth
Circuit, the Supreme Court abandoned the factors of reliance and notice
previously used by the Court in applying the harsh and oppressive test.
Carlton, 512 U.S. at 30–34, 114 S. Ct. at 2022–24, 129 L. Ed. 2d at 28–
31. In place of the factors the Supreme Court previously applied under
the harsh and oppressive test, the Court held, when dealing with
economic policy, the harsh and oppressive test should not differ from the
prohibition against arbitrary and irrational legislation. Id. at 30, 114
S. Ct. at 2022, 129 L. Ed. 2d at 28. Thus, the Court held as long as a
retroactive tax is supported by a legitimate legislative purpose furthered
by rational means, the retroactive application will not violate the Federal
Due Process Clause. Id. at 30–31, 114 S. Ct. at 2022, 129 L. Ed. 2d at
28.
44
In Carlton, when deciding whether the retroactive application of a
tax is supported by a legitimate legislative purpose furthered by rational
means, the Supreme Court considered two factors. First, the Supreme
Court determined whether the legislative body’s purpose in enacting the
retroactive application of the statute was illegitimate or arbitrary. Id. at
32, 114 S. Ct. at 2023, 129 L. Ed. 2d at 29. It is sufficient “if there exists
some legitimate purpose underlying the retroactivity provision.” Id. at
37, 114 S. Ct. at 2025, 129 L. Ed. 2d at 32 (O’Connor, J., concurring).
The Supreme Court concluded the retroactive application of the tax was
neither illegitimate nor arbitrary. Id. at 32, 114 S. Ct. at 2023, 129 L.
Ed. 2d at 29. The Court determined Congress had a legitimate purpose
in correcting a mistake it made when it enacted the Tax Reform Act of
1986. Id. A failure to rectify the mistake would lead to billions of dollars
in lost revenue for the government, and innocent taxpayers would have
to help replenish the federal coffers if the mistake was not rectified
retroactively. Id. at 31–32, 114 S. Ct. at 2022–23, 129 L. Ed. 2d at 29.
Second, the Supreme Court determined whether the legislature
“acted promptly and established only a modest period of retroactivity.”
Id. at 32, 114 S. Ct. at 2023, 129 L. Ed. 2d at 29. If the legislature acted
promptly and established only a modest period of retroactivity, the
statute would comport with due process. Id. The Supreme Court
determined the retroactivity of the tax in question extended for a modest
period of slightly greater than one year. Id. at 33, 114 S. Ct. at 2023,
129 L. Ed. 2d at 30. Therefore, the Supreme Court upheld the
retroactive application of the tax against a due process challenge. Id. at
35, 114 S. Ct. at 2024, 129 L. Ed. 2d at 31.
Following the Carlton decision, legal scholars agreed that, in order
for the retroactive application of a tax to pass constitutional muster
45
under the Due Process Clause, a legislative body’s purpose in enacting
the retroactive application of a tax statute can be neither illegitimate nor
arbitrary, and the statute must possess a modest period of retroactivity.
See, e.g., Charles H. Koch, Jr., 3 Administrative Law & Practice
§ 12.34[11] (2d ed. 1997); Pat Castellano, Retroactively Taxing Done
Deals: Are There Limits?, 43 U. Kan. L. Rev. 417, 438 (1995); Lynn A.
Gandhi, Taxation, 53 Wayne L. Rev. 599, 607 n.70 (2007); Robert R.
Gunning, Back From the Dead: The Resurgence of Due Process Challenges
to Retroactive Tax Legislation, 47 Duq. L. Rev. 291, 293–94 (2009); Leo P.
Martinez, Of Fairness and Might: The Limits of Sovereign Power to Tax
After Winstar, 28 Ariz. St. L.J. 1193, 1208–09 (1996); Kaiponanea T.
Matsumura, Reaching Backward While Looking Forward: The Retroactive
Effect of California’s Domestic Partner Rights and Responsibilities Act, 54
UCLA L. Rev. 185, 203 (2006); Michael J. Phillips, The Slow Return of
Economic Substantive Due Process, 49 Syracuse L. Rev. 917, 964 n.306
(1999); Monica Risam, Retroactive Reinstatement of Top Federal Estate
Tax Rates Is Constitutional: Kane v. United States, 51 Tax Law. 481, 485
(1998).
Other courts have passed on the constitutionality of a retroactive
tax statute since the Supreme Court’s decision in Carlton. These courts
have applied the two-part Carlton test. See, e.g., Quarty v. United States,
170 F.3d 961, 965–68 (9th Cir. 1999) (upholding a retroactive tax by
finding an eight-month period of retroactivity to be a modest period of
retroactivity); Kitt v. United States, 277 F.3d 1330, 1334–35 (Fed. Cir.
2002) (upholding a retroactive tax by finding a seven-month period of
retroactivity to be a modest period of retroactivity); Kane v. United States,
942 F. Supp. 233, 234 (E.D. Pa. 1996) (upholding a retroactive tax by
finding an eight-month period of retroactivity to be a modest period of
46
retroactivity); Enter. Leasing Co. of Phoenix v. Ariz. Dep’t of Revenue, 211
P.3d 1, 5–7 (Ariz. Ct. App. 2008) (upholding a retroactive tax by finding a
one-month period of retroactivity to be a modest period of retroactivity);
Gardens at W. Maui Vacation Club v. County of Maui, 978 P.2d 772, 782–
83 (Haw. 1999) (upholding a retroactive tax by finding a six-month period
of retroactivity to be a modest period of retroactivity); Rivers v. State, 490
S.E.2d 261, 264–65 (S.C. 1997) (holding a retroactive tax of at least two
to three years is not a modest period of retroactivity; therefore, the
statute’s retroactivity violates state and federal due process).
Prior to the Supreme Court’s decision in Carlton, this court had
two occasions to look at the retroactivity of a tax statute. The first was
City National Bank of Clinton. There, a taxpayer asked this court to
determine the constitutionality of the retroactive application of a tax law
regarding capital gains. City Nat’l Bank of Clinton, 251 Iowa at 605, 102
N.W.2d at 382. The taxpayer claimed the retroactive application of the
statute violated the Due Process Clauses of both the United States and
Iowa Constitutions. Id. at 607, 102 N.W.2d at 383. In deciding
otherwise, this court applied a two-factor test under both Constitutions.
Id. at 608–09, 102 N.W.2d at 383–84. The first factor considered by this
court in determining if the retroactive application of the statute violated
due process was whether its retroactivity would be “harsh and
oppressive.” Id. at 608, 102 N.W.2d at 384. In using this factor, this
court applied the federal due process standard used by the Supreme
Court at the time. See, e.g., Welch, 305 U.S. at 147, 59 S. Ct. at 125–26,
83 L. Ed. at 93.
The second factor this court considered in City National Bank of
Clinton, when determining if the retroactive application of the statute
violated due process, was the period of retroactivity. City Nat’l Bank of
47
Clinton, 251 Iowa at 608–09, 102 N.W.2d at 384. Consideration of the
period of retroactivity is the same as the second factor used by the
Supreme Court in Carlton. Carlton, 512 U.S. at 32–33, 114 S. Ct. at
2023, 129 L. Ed. 2d at 29–30. In applying this factor under the Iowa
Constitution, this court stated the period of retroactivity should extend
“no further than two years, or up to the adjournment of the last previous
legislative session.” City Nat’l Bank of Clinton, 251 Iowa at 608–09, 102
N.W.2d at 384. This limitation on retroactivity prevents the legislature
from enacting a tax that a prior legislature did not have the political will
to enact. See Iowa Code § 2.2 (2007) (stating a regular session of the
general assembly lasts for two years with the session beginning in the
odd-numbered year).
The other case decided by this court dealing with the retroactivity
of a tax statute was Shell Oil Co. There, a taxpayer claimed the
retroactive application of a tax law dealing with the deductibility of a
windfall profit tax violated the Federal Constitution’s Due Process
Clause. Shell Oil Co., 417 N.W.2d at 430. In Shell Oil Co., this court
reaffirmed the two-factor test it applied in City National Bank of Clinton
and held the retroactive application of the tax did not violate due
process. Id. at 431–32.
I believe the proper test to determine if a retroactive tax meets the
due process requirements of the Federal and State Constitutions is
whether the retroactive application of the tax statute is supported by a
legitimate legislative purpose furthered by rational means. I also believe
the two factors used by the Supreme Court in Carlton is the proper
analysis to determine if the retroactive application of the statute is
supported by a legitimate legislative purpose furthered by rational
means. The first factor requires the court to determine whether the
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legislative body’s purpose in enacting the retroactive application of the
statute was illegitimate or arbitrary. The second factor requires the court
to determine whether the legislature enacted only a modest period of
retroactivity. Labeling the tax as a tax enacted by a curative statute does
not change this analysis.
I agree with the majority’s analysis that the enactment of Iowa
Code section 477A.7(5) is supported by a legitimate legislative purpose
furthered by rational means. The majority, however, stops its analysis of
the constitutionality of the statute at this point by labeling the tax as a
tax authorized by a curative statute. Here, the majority and I part ways.
In determining the constitutionality of section 477A.7(5), the court must
also examine the period of retroactivity to determine if the tax violates
substantive due process under the Federal and State Constitutions.
Under a federal constitutional analysis, the modest period of
retroactivity does not have a bright-line rule. Justice O’Connor
suggested in her concurring opinion that “[a] period of retroactivity longer
than the year preceding the legislative session in which the law was
enacted would raise, in [her] view, serious constitutional questions.”
Carlton, 512 U.S. at 38, 114 S. Ct. at 2026, 129 L. Ed. 2d at 33(O’Connor, J., concurring). Justice Scalia, in his concurring opinion with
Justice Thomas joining, urged abandonment of the modest-period-of-
retroactivity factor and proposed the Court should consider the
taxpayer’s reliance on the existing law as the second factor. Id. at 40,
114 S. Ct. at 2026–27, 129 L. Ed. 2d at 34 (Scalia, J., concurring).
However, the majority of the Court applied the modest-period-of-
retroactivity factor, but did not specify a certain period of retroactivity
that would comport with due process under the Federal Constitution. Id.at 32–33, 114 S. Ct. at 2023, 129 L. Ed. 2d at 29–30. Rather than
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specifying a specific period of retroactivity, the majority cited its prior
decisions holding that a modest retroactivity period is “ ‘customary
congressional practice’ ” and that a retroactive application of slightly
greater than one year will not violate the Federal Due Process Clause. Id.(quoting Darusmont, 449 U.S. at 296–97, 101 S. Ct. at 552, 66 L. Ed. 2d
at 517).
The Supreme Court has upheld retroactive federal tax laws against
federal due process challenges when the period of retroactivity was less
than fourteen months. See id. at 28–29, 114 S. Ct. at 2021, 129
L. Ed. 2d at 26–27 (upholding a fourteen-month retroactive federal tax
law against a due process challenge); Hemme, 476 U.S. at 562, 106 S. Ct.
at 2074–75, 90 L. Ed. 2d at 544–45 (upholding a four-month retroactive
federal tax law against a due process challenge); Darusmont, 449 U.S. at294–95, 101 S. Ct. at 550–51, 66 L. Ed. 2d at 516 (upholding a ten-
month retroactive federal tax law against a due process challenge);
Hudson, 299 U.S. at 501, 57 S. Ct. at 310, 81 L. Ed. at 372 (upholding a
one-month retroactive federal tax law against a due process challenge).
The Supreme Court has also upheld a retroactive state tax law against a
due process challenge that reached back two years. Welch, 305 U.S. at141–42, 59 S. Ct. at 123, 83 L. Ed. at 90. There, the Supreme Court
emphasized that the Wisconsin legislature met biannually and passed its
curative act “at the first opportunity after the tax year in which the
income was received.” Id. at 150–51, 59 S. Ct. at 127, 83 L. Ed. at 95.
Under the Iowa Constitution, this court has developed a bright-line
rule, consistent with Justice O’Connor’s concurring opinion in Carlton,
for the modest period a legislature can apply a retroactive tax. In City
National Bank of Clinton, this court applied a state due process analysis
and held that for a retroactive tax to be valid, the period of retroactivity
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should extend “no further than two years, or up to the adjournment of
the last previous legislative session.” City Nat’l Bank of Clinton, 251 Iowa
at 608, 102 N.W.2d at 384. I believe under an Iowa constitutional due
process analysis, this court should continue to apply this bright-line rule
because this limitation on retroactivity prevents the legislature from
enacting a tax that a prior legislature did not have the political will to
enact.
Because this court has held the Iowa Constitution’s due process
clause has a bright-line rule as to what constitutes a modest period of
retroactivity, I would analyze the constitutionality of section 477A.7(5)
under the due process clause of the Iowa Constitution. Although the
legislature acted promptly in enacting section 477A.7(5) after this court
announced its decision in Kragnes, the legislature did not include a
period of retroactivity within the bright-line rule established in City
National Bank of Clinton. In fact, the legislature chose to give section
477A.7(5) an unfettered period of retroactivity. See Iowa Code
§ 477A.7(5). This unlimited period of retroactivity far exceeds the bright-
line rule that the period of retroactivity should extend “no further than
two years, or up to the adjournment of the last previous legislative
session.” City Nat’l Bank of Clinton, 251 Iowa at 608, 102 N.W.2d at 384.
Therefore, I would hold, separately and independently from a federal due
process analysis and in the exercise of this court’s exclusive prerogative
to determine the constitutionality of an Iowa statute under the Iowa
Constitution, that section 477A.7(5)’s unlimited period of retroactivity
violates the due process clause contained in article I, section 9, of the
Iowa Constitution.
However, I would not end the inquiry here. In construing a statute
the court’s ultimate goal is to ascertain and, if possible, give effect to the
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intention of the legislature. Janson v. Fulton, 162 N.W.2d 438, 442 (Iowa
1968). Additionally, it is the court’s duty in construing a statute to
preserve it and render it consistent with the state constitution, if
possible. Hines v. Ill. Cent. Gulf R.R., 330 N.W.2d 284, 290 (Iowa 1983).
It is clear that when the legislature enacted section 477A.7(5), it
intended to retroactively authorize the collection and retention of a cable
franchise tax, including the fees collected in excess of the municipality’s
reasonable costs of inspecting, supervising, or otherwise regulating the
franchise. Accordingly, if I were to hold section 477A.7(5)
unconstitutional because of its unlimited period of retroactivity, I would
be defeating the legislature’s clear intent. Therefore, rather than holding
the statute entirely unconstitutional, I believe the proper remedy would
be to hold unconstitutional only that part of the retroactive period that is
inconsistent with the due process principles contained in this dissent.
See Peterson v. Comm’r of Revenue, 825 N.E.2d 1029, 1037–41 (Mass.
2005) (giving a statute limited retroactivity after the court held it could
not allow the period of retroactivity as enacted by the legislature).
Consequently, I would hold section 477A.7(5) can be applied
retroactively, but its period of retroactivity shall not extend further than
two years, or up to the adjournment of the last legislative session.
The last legislative session prior to the enactment of section
477A.7(5), ended May 3, 2006. See Iowa Sen. J., 81st G.A., Reg. Sess.,
at 1090 (2006); Iowa H.J., 81st G.A., Reg. Sess., at 1755 (2006). Thus,
under my analysis, the city could collect cable franchise taxes beginning
on May 3, 2006. However, I believe any retention of cable franchise taxes
prior to that date violates the due process clause contained in article I,
section 9 of the Iowa Constitution.
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The substantive component of the Due Process Clause “bars
certain arbitrary, wrongful government actions ‘regardless of the fairness
of the procedures used to implement them.’ ” Zinermon v. Burch, 494
U.S. 113, 125, 110 S. Ct. 975, 983, 108 L. Ed. 2d 100, 113 (1990)
(quoting Daniels v. Williams, 474 U.S. 327, 331, 106 S. Ct. 662, 665, 88
L. Ed. 2d 662, 668 (1986)). By not applying the proper due process
analysis, the majority permits municipalities to collect unauthorized
taxes and legitimize them later, without temporal limitation. The
majority’s holding under this factual situation gives credence to Justice
Scalia’s notion that substantive due process is an oxymoron. Carlton,
512 U.S. at 39, 114 S. Ct. at 2026, 129 L. Ed. 2d at 33 (Scalia, J.,
concurring).
Hecht, J., joins this dissent.