June 11, 2012

Intellectual Laziness on the Supreme Court

It’s time to scrap the irrational “rational basis test.”

In the run up to the Supreme Court’s decision on health care, few people will pay any attention to the Court’s most recent constitutional failure of intellectual nerve in Amour v. Indianapolis. But they should. This instructive case encapsulates what goes wrong when the Supreme Court abandons its constitutional obligation to prevent the nonstop shenanigans of local governments.

Armour deals with the special real estate assessments that have long been used to fund real estate improvements. In 2001, Indianapolis elected to fund its Sanitary Sewers Project for a subdivision with 180 homes by levying a $9,000 per unit assessment. Homeowners could pay that figure in a lump sum or in installments over a period of 10, 20, or 30 years, with a 3.5 percent interest rate on the unpaid balances. Most homeowners chose an installment option, but 38 of these homeowners made the front-end lump sum payment.

 Epstein  
 Illustration by Barbara Kelley

Several years later, Indianapolis introduced its new and better Septic Tank Elimination Program that it chose to fund by annual charges of $2,500 per home. That welcome technological improvement was paired with a novel financial plan. Indianapolis forgave all unpaid assessments against the homeowners who participated in the installment plan. But the city refused to refund any money to the homeowners who had paid the full amount in one lump sum payment. These 38 lump sum payers promptly sued to recover an amount equal to the smallest amount of debt that the city gave to any homeowner (roughly $8,000 each). Their basic claim was that Indianapolis violated their Fourteenth Amendment guarantee of “the equal protection of the laws.”

The Court thus faced a public finance question with constitutional implications. But instead of starting with the former, Justice Stephen Breyer, writing for a six-member majority (himself, Kennedy, Thomas, Ginsburg, Sotomayor, and Kagan), started by setting the constitutional standard of review. Since the claim against Indianapolis involved neither a preferred constitutional right, like speech or religion, nor a suspect classification, like race, or out-of-state or new residents, Justice Breyer adopted the well-established, though misnamed, “rational basis” review under which

a legislature need not "actually articulate at any time the purpose or rationale supporting its classification." Rather, the "burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it." (internal citations omitted).

Justice Breyer then held that this standard allowed the state to invoke the administrative costs of running the refund program as a reason not to start it. The motivation for this test was made clear in oral argument when Justice Sotomayor wondered out loud whether accepting Armour’s claim would commit the Court to examining ”amnesty programs” covering everything from parking tickets to illegal immigration.

These weird comparisons are all off point. Full relief in Armour requires at most a set of easy financial calculations of the sort routinely used by banks and public utilities everywhere. It doesn’t raise tricky enforcement issues in the face of widespread public noncompliance. Put otherwise, the claimants in Armour objected to an illicit form of favoritism from one set of landowners to another that was implemented by a city government with its own financial interest in keeping the moneys that it had already collected.

Armour takes on a very different complexion when the choice of the judicial standard of review is informed by looking first to see how private parties behave when faced with similar questions. Thus, suppose that the Acme Theater Company advertises a set of tickets for ten plays that can be purchased in one installment or in two. Group A pays the full sum up front. Group B chooses the installment plan. Acme then cancels the series after five plays have been performed. It announces that it will not sue to collect the second installment from the members of group B, but it will not make refunds to the members of group A, because of the administrative hassle involved.

Thanks to the Court, local governments are allowed to flout common commercial rules.

The case is a no-brainer. Acme would quickly learn that it did not have a leg to stand on. The uniform rule everywhere in the world is that this failure of consideration (i.e., nonperformance of the last plays) requires restitution for the overpaid sum—period. Every consumer protection group in the land would denounce Acme’s coldly calculated decision to keep its customers’ money. Acme would probably be forced out of business. The administrative costs of cutting a check would be a complete nonstarter. It would be unlikely that Acme could apply the unused funds to a different series of plays, unless it first secured the consent of each subscriber.

So why doesn’t this simple and undisputed standard of right conduct also apply to local governments? The nation does not face some major social dislocation by forcing a local government to abide by the most elementary standards of decent commercial behavior. But dangerous consequences do follow when local governments are allowed to flout these common commercial rules to their own advantage. The original decision to offer homeowners payment options is an unalloyed good so long as the city sets the interest rates correctly. The city is rightly indifferent among the various alternatives in present value terms. Individual homeowners get to choose the alternative that best fits their own plans, so that they become better off, without making anyone worse off.

The moment local governments can renege on promises with impunity, no one in his right mind would choose the lump sum payment. At this point, two bad consequences follow. First, a deep sense of social unfairness leads to a net loss in public confidence in government. Second, wealth transfers wholly gratuitously from one group of citizens to another. At this point, wasteful lobbying could set in to make those transfers happen. The best way to think about Armour is not as some sterile equal protection case, but as a taking of property, through the conscious maladministration of the city, from the members of group A to those of group B. That level of misconduct deserves more scrutiny than the rational basis test supplies.

The worthy dissent of Chief Justice John Roberts was sensitive to these issues. Unfortunately, however, the dissent did not approach the case as a matter of first principle, but nibbled at the edges of existing law. The critical challenge to the case had to be this: Why read the word “conceivable” into a Constitution where it is nowhere to be found in any of its basic guarantees of individual rights? For his initial foray, Roberts compared Armour to the Court’s 1989 decision in Allegheny Pittsburgh Coal Co. v. Commission of Webster City, in which the local government based its real estate taxes on initial cost rather than on current value. In that case, Chief Justice Rehnquist rightly found that practice wholly irrational, in part because Webster City had violated its own general statutory mandate for uniform taxes.

The key task in Armour is not to parse one case against another, but to articulate a general administrable principle that promotes good government. The correct rule requires persons who receive like benefits to pay like costs in present value terms. That outcome could easily be achieved in Allegheny by basing real estate taxation on current values, and in Armour by allowing either a refund, or even a credit against future tax obligations, to those who have overpaid in taxes.

What if we applied the rational basis test to Brown v. Board of Education?

Indeed, the correct analysis of Armour does not limit the financial adjustments to the lump sum payers, but should also allow smaller refunds to the parties who paid on the 10- or 20-year installment plans as well. Spend a few dollars on a computer expert who can indicate the present value of all payments made by all parties, and then make whatever refunds, credits, or other adjustments that are needed to equalize the burdens across all groups. A few hundred dollars can buy a lot of good government.

Some skeptics might ask why anyone would get bent out of shape in a case where the claims of all class members total less than $300,000. The answer is because bad rules in small cases lead to horrific consequences in bigger ones. As a matter of first principle, the rational basis test lets all courts turn a blind eye to various programs of business and fiscal madness.

One illustration of this unwise passive approach is Nordlinger v. Hahn, a 1992 Supreme Court decision that used the rational basis test to sustain California’s Proposition 13. The Jarvis-Gann Amendment uses an “acquisition value” method of taxation that only reappraises property for real estate taxes at the time of resale or new construction. This bizarre system results in huge inequities in current tax burdens and it retards the sale of property to new owners by the looming threat of a huge increase in real estate taxes.

Nor does the rational basis test work any better outside the narrow area of real estate taxation. The 2005 decision in Kelo v. City of New London came out the way it did only because Justice Stevens used the rational basis test to let New London condemn Ms. Kelo’s property for no reason at all. That test got its start in Justice Sandra Day O’Connor’s misconceived 1984 opinion in Hawaiian Housing Authority v. Midkiff, which contained this one fatal sentence: “Where the exercise of the eminent domain power is rationally related to a conceivable public purpose, the Court has never held a compensated taking to be proscribed by the Public Use Clause.”

The bottom line is this: The Supreme Court should never accept the open invitation to intellectual laziness and antisocial results that comes from adopting the rational basis test in any case that involves government regulation or taxation. There are all sorts of powerful and instructive private analogies that give clear guidance on how constitutional law cases should be decided, and these rules never give pride of place to some exaggerated concern with administrative costs.

Brown v. Board of Education was also an equal protection case: What might have happened if the Supreme Court had held that the high administrative costs of ending segregation meant that the Court should not intervene? The point here is not to pretend that Armour is as important as Brown. It isn’t. Rather the point is this: Just because the Court rightly exercises close scrutiny in cases that involve both fundamental rights and suspect classifications does not mean that it should throw in the towel whenever it is confronted by the blatant misuse of taxation powers by local governments. The Court should restore some semblance of true rationality to American constitutional law by junking the rational basis test that leads it to disregard every known principle of justice and efficiency. 


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


Letters to the editor

Justice Sotomayer's Next Move

Prof. Epstein,

You write that "Justice Sotomayor wondered out loud whether accepting Armour’s claim would commit the Court to examining ”amnesty programs” covering everything from parking tickets to illegal immigration" as a rationale for denying the claim.

It will be interesting to see if Justice Sotomayor applies a parallel rationale to the upcoming decision on the Affordable Care Act. To wit: Accepting the ACA's claim under the commerce clause would permit the Congress to regulate everything from parking tickets to illegal immigration" and, likewise, should be denied.

---Anthony Benvin


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