Gruen v. State Tax Commission , 35 Wash. 2d 1 ( 1949 )

I concur in the dissenting opinion of Judge Hill in holding that this eighty-million-dollar bond issue creates a debt in violation of the provisions of Art. VIII of the state constitution.

I am also of the opinion that chapter 180 of the Laws of 1949 violates the clause of the fourteenth amendment (adopted in 1930) providing that "The power of taxation shall never be suspended, surrendered or contracted away." Owing to the far-reaching effect of the majority's interpretation of these two articles of our constitution relating to taxation, I deem it proper to state rather fully the reasons for my dissent, particularly with reference to the fourteenth amendment.

Having in mind the above-quoted clause of the fourteenth amendment, the following provisions of chapter 180 are pertinent: Section 9 of the act provides that, for the purpose of creating the fund to pay the principal and interest of these bonds, all proceeds of the present excise tax on cigarettes shall be paid into the bond retirement fund until the bonds are all paid in full with interest. This period may be as long as thirty years. The proceeds of this tax now amount to approximately five million dollars annually, which is currently being paid into the general fund and which is now proposed to be diverted for possibly thirty years to the payment of these bonds.

This same section further provides that, in addition to the present excise tax, "there is hereby levied" a new excise tax on cigarettes the proceeds of which are to be used to pay these bonds in the same manner as stated above with respect to the proceeds of the existing excise tax on cigarettes. Appellants state in their brief that it may be assumed that this additional excise tax will produce a like amount of money, that is, another five million dollars annually. This money is also to be paid into the bond retirement fund and is to be available solely for the payment of principal and interest thereof. By § 7 of the act, it is expressly declared that these bonds and the interest thereon shall constitute a prior and exclusive claim against the proceeds of both cigarette taxes and the bond retirement fund so long as any portion thereof remains unpaid.

During the period that these bonds are outstanding (which may be thirty years), there are two possible events which may cause a part of the proceeds of these two excise taxes to be transferred from the bond retirement fund to the general fund:

(a) if during any year the receipts in the bond retirement fund exceed $4,500,000 or

(b) whenever the receipts in the bond retirement fund shall exceed by $4,100,000 the amount needed to pay principal and interest during any year (as determined by the state finance committee).

In either of these events, the excess in the bond retirement fund shall be transferred to the general fund.

The last sentence of § 9 reads:

"As a part of the contract of sale of the bonds herein authorized, the state undertakes to continue to levy the taxesupon cigarettes referred to in this section and to place theproceeds thereof in the War Veterans' Compensation Bond Retirement Fund and to make said Fund available to meet saidpayments when due until all of said bonds and the interest thereon shall have been paid." (Italics mine.)

This is an express contract on the part of the state of Washington whereby it covenants with the holders of these bonds that it will not use the proceeds of these two cigarette taxes for general fund or other purposes connected with the operation of the state government for possibly thirty years (except to the extent and in either of the events mentioned above).

Thus several million dollars of tax proceeds now being paid into the state's general fund and available to pay the expenses of operation of the state government are to be siphoned off and diverted to the payment of these bonds pursuant to this contract between the state and the bondholders. In addition, the same covenant is made with respect to the proceeds of the new cigarette tax levied by the provisions of § 9. Thus, in my opinion, the state's power to levy an excise tax on cigarettes up to twenty per cent of their retail sale price is to be suspended and surrendered and contracted away for possibly thirty years. This is in direct violation of the first sentence of the fourteenth amendment to the state constitution.

If such a contract pledging the proceeds of certain excise taxes to the payment of certain bonds is valid, then all of the state's revenues from excise taxes can be so pledged from time to time, with the result that the legislature at some future time may find all available sources of revenue thus contracted away, and the operation of the state government would either be seriously curtailed or halted altogether for lack of funds. This is the logical result arrived at, if the position adopted by the majority decision is sound.

The majority says that such a situation will never come to pass because (among other reasons) there have been thirty-one regular sessions of the legislature since 1889 and the general fund has not been depleted in this manner, and because we should have faith in the integrity of future legislatures. If these reasons were sound, we would not need any provisions in our constitution limiting the power of the legislature in regard to taxation. The answer is that the people saw fit in 1930 to place the fourteenth amendment in their state constitution, and, until it is repealed or amended by them, it is the duty of the courts to enforce this provision and to declare invalid any legislation which violates its plain meaning.

The United States supreme court has held an act of Congress invalid as being in contravention of a tax limitation provision of the Federal constitution (Art. I, § 9). The legislative enactment attempted to levy a stamp tax on foreign bills of lading in the face of the constitutional provision that no tax or duty shall be laid on articles exported from any state. Speaking for the court, Mr. Justice Brewer in Fairbank v. UnitedStates, 181 U.S. 283, 45 L. Ed. 862, 21 S. Ct. 648, said:

"The constitutionality of an act of Congress is a matter always requiring the most careful consideration. The presumptions are in favor of constitutionality, and before a court is justified in holding that the legislative power has been exercised beyond the limits granted, or in conflict with restrictions imposed by the fundamental law, the excess or conflict should be clear. Andyet, when clear, if written constitutions are to be regarded asof value, the duty of the court is plain to uphold theConstitution, although in so doing the legislative enactmentfalls. The reasoning in support of this was in the early history of this court forcibly declared by Chief Justice Marshall inMarbury v. Madison, 1 Cranch, 137, 177, and nothing can be said to add to the strength of his reasoning. His language is worthy of quotation:

"`The Constitution is either a superior paramount law, unchangeable by ordinary means, or it is on a level with ordinary legislative acts, and, like other acts, is alterable when the legislature shall please to alter it.

"`If the former part of the alternative be true, then a legislative act contrary to the Constitution is not law; if the latter part be true, then written constitutions are absurd attempts, on the part of the people, to limit a power in its own nature illimitable.

"`Certainly all those who have framed written constitutions contemplate them as forming the fundamental and paramount law of the nation, and, consequently, the theory of every such government must be that an act of the legislature repugnant to the Constitution is void.

"`This theory is essentially attached to a written constitution and is consequently to be considered, by this court, as one of the fundamental principles of our society.

"`It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to particular cases must of necessity expound and interpret that rule. If two laws conflict with each other, the courts must decide on the operation of each.

"`So if a law be in opposition to the Constitution; if both the law and the Constitution apply to a particular case, so that the court must either decide that case conformably to the law, disregarding the Constitution, or conformably to the Constitution, disregarding the law, the court must determine which of these conflicting rules governs the case. This is of the very essence of judicial duty.

"`If, then, the courts are to regard the Constitution, and the Constitution is superior to any ordinary act of the legislature, the Constitution, and not such ordinary act, must govern the case to which they both apply.'" (Italics mine.)

The basis of the majority decision in upholding this contract is substantially that none of the provisions of our state constitution relating to taxation limit the power of the legislature to levy excise taxes, and that, therefore, the provisions of Art. VIII and of the fourteenth amendment have no bearing on this case. In view of the fact that practically all of the state's revenue derived from taxation which is available to pay the expense of operating the state government is produced by the levy of excise taxes, the decision adopts an interpretation of these two constitutional provisions which, to my mind, renders them entirely inoperative.

In support of their position, the majority cite State v.Sheppard, 79 Wash. 328, 140 P. 332, in which a peddlers' licensing act was sustained as being an exercise of the taxing power on the authority of McKnight v. Hodge, 55 Wash. 289,104 P. 504, 40 L.R.A. (N.S.) 1207. The annual license fees prescribed by the act were:

"(1) Peddler on foot $100.

"(2) Peddler with one horse and wagon, $150.

"(3) Peddler with two horses and wagon, $250.

"(4) Peddler with any other conveyance, $300."

These license fees were payable to the respective county treasurers who issued the licenses. The defendant in that case, a peddler who had failed to take out a license, contended that the law was unconstitutional in that it did not state the purpose to which such license fees were to be applied. This failure, it was asserted, violated § 5 of Article VII of the state constitution, which reads:

"No tax shall be levied except in pursuance of law; and every law imposing a tax shall state distinctly the object of the same, to which only it shall be applied."

This court in that case held that the provisions of Art. VII applied only to the taxation of property and that § 5 of that article did not apply to peddlers' license fees. It is to be noted that neither the interpretation of Art. VIII nor of the fourteenth amendment (which was later adopted) was involved in the Sheppard case, supra, and hence the sweeping language in the decision to the effect that the only taxes mentioned anywhere in the constitution were property taxes was not necessary to the decision. Furthermore, this case was decided in 1914 which was long prior to the adoption of the fourteenth amendment.

In the recent case of State ex rel. Collier v. Yelle, 9 Wash. 2d 317,328, 115 P.2d 373 (decided in 1941), this court in discussing the scope of the fourteenth amendment said:

"In the case of State ex rel. Hart v. Clausen, supra [113 Wash. 570, 194 P. 793, 13 A.L.R. 580], this court held valid an act of the legislature known as the veterans' equalized compensation act, enacted at the extraordinary session of the legislature in 1920, and approved by the voters of the state November 2, 1920, found in Laws of 1920, Ex. Ses., chapter 1, p. 7. Upon application for a writ of mandamus filed in this court, a writ was issued directing the state auditor to issue a warrant pursuant to the act, this court being of the opinion that a moral obligation on the part of the state to recognize the services of its citizens in the armed forces of the United States during the World War was sufficient to sustain the taxing power of the state. This latter case falls within a well-recognized class in which acts for the relief of veterans, enacted after the service was rendered, have been held valid.

"If it be suggested that the fourteenth amendment to the state constitution applies only to taxes levied against property, as that word is defined in the amendment, and that such taxes as support the motor vehicle fund are neither property taxes nor are they levied, such an argument would be untenable. The first sentence of the amendment reads as follows: `The power of taxation shall never be suspended, surrendered or contracted away.' This, of course, refers to all taxes collected by thestate, including property, excise, and all other taxes. The amendment, then, in scopecovers all the state's power to levy taxes.

"In the second sentence of the amendment, above quoted, the opening words `all taxes' apply to the first clause of the sentence, and also to the last clause, `shall be levied and collected for public purposes only.'

"In referring to privilege taxes, the state sales tax, and similar exactions, this court has repeatedly referred to such taxes as `levied.' Shell Co. v. State, 113 Wash. 632,194 P. 835; Morrow v. Henneford, 182 Wash. 625, 47 P.2d 1016;Spokane v. State, 198 Wash. 682, 89 P.2d 826. The legislature, in Laws of 1935, chapter 180, p. 726, § 31, relating to the compensating tax, used the word `levied,' and the same word is found in Rem. Rev. Stat. (Sup.), § 8327-23 [P.C. § 7068-93] (Laws of 1933, chapter 58, p. 326, § 23), referring to the gasoline tax.

"In the case of State ex rel. Hamilton v. Martin, 173 Wash. 249,23 P.2d 1, this court, in considering chapter 65, Laws of 1933, p. 336, and chapter 8, Laws of 1933, p. 103, known, respectively, as the `bond act' and the `relief act,' held the last act constitutional, after considering the fourteenth amendment in connection with the problems presented. A portion of the revenues accruing to the motor vehicle fund were appropriated to the retirement of bonds issued pursuant to the relief act. From the opinion in the latter case, it is evident that this court considered the fourteenth amendment as applying to revenues accruing to the motor vehicle fund with which we are here concerned." (Italics mine.)

The majority opinion states that the quoted language wasdicta. It is to be noted, however, that this case was heard EnBanc and that eight of the nine members of the court concurred in the opinion. Whether or not the quoted language was necessary to the decision, the interpretation there placed upon the first sentence of the fourteenth amendment, to-wit, that it applies to all taxes collected by the state, including property, excise, and all other taxes, seems to me to be the only possible interpretation of it.

The holding of the majority is based upon the untenable premise that when the people of this state in 1930 amended § 4 of Art. VII of the constitution, which formerly read:

"The power to tax corporations and corporate property shall not be surrendered or suspended by any contract or grant to which the state shall be a party," (italics mine.) to read:

"The power of taxation shall never be suspended, surrendered or contracted away, . . ." (italics mine.)

they did not mean all power of taxation but only the power to tax real and personal property.

From a practical standpoint, if the majority decision is sound, the new limitation placed upon the legislature's power of taxation by this amendment would amount to virtually nothing. Under the seventeenth amendment (adopted in 1944), the taxation of real and personal property is limited to forty mills, with certain exceptions. The only portion of the real and personal property taxes which the state receives is the proceeds of the two-mill levy which is allocated exclusively to the support of institutions of higher learning as provided in chapter 253 of the Laws of 1945. There are, therefore, no taxes to which the amendment could apply, if excise taxes are excluded from its operation.

Thus, if the people did not intend by adopting the fourteenth amendment to prevent the legislature from suspending, surrendering, and contracting away the power to levy excise taxes, they accomplished nothing in their attempt to protect the power of taxation.

In the majority opinion, the rule is stated that words used in a constitution are to be understood in their usual and ordinary sense. Applying this rule of construction to the first sentence of the fourteenth amendment, I arrive at the very opposite interpretation to that adopted by the majority.

The power of taxation has been judicially defined as "a power to enforce contributions from persons and property for the maintenance of the government." Shurtleff v. Chicago, 190 Ill. 473,60 N.E. 870.

It has also been defined as "the power to take from the citizen a sum for the support of the government, whether that be national, State or municipal." Hoefling v. San Antonio, 85 Tex. 228,20 S.W. 85, 16 L.R.A. 608.

This court very recently said:

"We repeat, a tax is an enforced contribution of money, assessed or charged by authority of sovereign government for the benefit of the state or the legal taxing authorities." State exrel. Seattle v. Department of Public Utilities, 33 Wash. 2d 896,207 P.2d 712.

In 51 Am. Jur. 35, Taxation, § 2, taxation is defined as follows:

"Taxation, in its broadest and most general sense, includes every charge or burden imposed by the sovereign power upon persons, property, or property rights for the use and support of the government and to enable it to discharge its appropriate functions, and in that broad definition there is included a proportionate levy upon persons or property and all the various other methods and devices by which revenue is exacted from persons and property for public purposes."

From these definitions of the terms "power of taxation," "tax," and "taxation," it would seem very clear that the people meant when they adopted the fourteenth amendment that the first sentence should apply to all power of taxation which the state possessed. They must be held to have intended to include the power to levy excise taxes as well as property taxes. At the present time, as pointed out above, the state is dependent upon excise taxes for practically all of its operating revenue, and to construe the first sentence of the amendment as applicable only to property taxes is to hold that this important constitutional limitation has no meaning and could have been omitted entirely.

What has been said herein does not mean that such legislation as is here under consideration cannot be validly enacted. The object sought to be accomplished by chapter 180 of the Laws of 1949 may be accomplished in compliance with the state constitution in the same manner as was done with respect to the veterans' equalized compensation act of 1920, which was upheld by this court in State ex rel. Hart v. Clausen, 113 Wash. 570,194 P. 793, and in State ex rel. Hart v. Clausen, 117 Wash. 260,201 P. 30.

The people of this state have placed in their constitution certain limitations on the power of the legislature to incur indebtedness and to levy taxes, and it is the function of the courts to interpret and enforce those provisions. The applicable principles are well stated in 11 Am. Jur. 651, in § 44, where, referring to state constitutions, the author says:

"A written Constitution is not only the direct and basic expression of the sovereign will, but is the absolute rule of action and decision for all departments and offices of government with respect to all matters covered by it and must control as it is written until it shall be changed by the authority that established it. No function of government can be discharged indisregard of, or in opposition to, the fundamental law. The stateConstitution is the mandate of a sovereign people to its servantsand representatives. No one of them has a right to ignore or disregard its mandates; and the legislature, the executive officers, and the judiciary cannot lawfully act beyond the limitations of such Constitution." (Italics mine.)

Having due regard to the presumption of validity to which all acts of the legislature are entitled, I am, for the reasons herein stated, constrained to dissent from the majority decision in this case.

The judgment of the trial court should be affirmed.

HILL, ROBINSON, and MALLERY, JJ., concur with DONWORTH, J.