AGO 91-4.

Case Date:June 03, 1991
Colorado Attorney General Opinions 1991. AGO 91-4. June 3, 1991Department of Law Attorney General Opinion FORMAL OPINION of GALE A. NORTON Attorney General Opinion No. 91-4 AG Alpha No. LE SE AGASK The Honorable Ted Strickland President of the Senate State Capitol Building Denver, Colorado 80203 RE: Proposed Tax Incentive Legislation Concerning Construction of a New United Airlines Aircraft Maintenance FacilityDear Senator Strickland: By your letter of May 15, 1991, you have requested a formal opinion concerning whether various requirements of the Colorado Constitution would be violated by proposed legislation which would provide tax incentives for United Airlines, Inc. ("United") to construct and operate a major aircraft maintenance facility in Colorado. Recent estimates are that the proposal submitted would grant United as much as $609 million in tax credits extending over a period of 30 years. Furthermore, local economic impact estimates have ranged from a projected net loss to the state of $117 million to a net positive impact of $173 million. Although intriguing, these loss/gain forecasts have played no part in my legal analysis. As Attorney General I have spent considerable time scrutinizing the relevant constitutional provisions, and the cases interpreting those sections. What follows is, therefore, my best analysis of the legal issues presented and the approach Colorado courts will take in construing such issues. Several significant issues are presented in your letter and by the draft legislation. QUESTIONS PRESENTED AND CONCLUSIONS Under the proposed legislation, would the state make a donation or grant to United contrary to the Anti-Donation Clause, art. XI, Section 2 of the Colorado Constitution? As this clause has been interpreted, no. Does this legislative proposal make a private appropriation to United in violation of the Private Appropriation Clause, art. V, Section 34 of the Colorado Constitution? As this clause has been interpreted, no. Under the proposal, does the General Assembly relinquish its power to tax corporations in violation of art. X, Sections 9 and 10 of the Colorado Constitution? No. Does the proposed tax incentive legislation deny equal protection of the laws, or amount to special legislation granting United a special or exclusive privilege in violation of the Special Legislation Clause, art. V, Section 25 of the Colorado Constitution? Although the proposal raises serious constitutional concerns, it is probable that a court would uphold it. Does the proposed legislation create an irrevocable grant of special privileges, franchises or immunities, in violation of art. II, Section 11 of the Colorado Constitution? Yes, although the case law is not conclusive. Does the delegation of power to the Governor to negotiate an agreement that "may" provide for an income tax refund and to set the amount of that refund, not to exceed $2,000, constitute an unlawful delegation? Yes, although this deficiency can be remedied. If United is entitled by this legislation to receive annual cash payments for 30 years from future revenues otherwise available for general purposes, would that obligation be an unconstitutional debt prohibited by art. XI, Section 3? Yes. ANALYSIS INTRODUCTION The Colorado General Assembly will meet in special session beginning June 4, 1991, to consider the Governor's call for legislation to provide incentives for United to construct and operate a massive aircraft maintenance facility at the new Denver international airport. It is in the best interests of the state, as well as of United, that the proposed legislation be drawn in a fashion most likely to survive a constitutional challenge. The possibility that a court may strike down this legislation as unconstitutional would cloud the future of the proposed maintenance facility and endanger the potential benefit to Colorado's economy. Many of the constitutional provisions at issue in this matter arose at a time when citizens were greatly concerned about the undue influence of private corporations, most notably railroads, upon government. The Colorado Constitution's framers attempted to halt the abuse of public debt to further speculative business ventures. Accordingly, our state constitution contains express language banning donations (art. XI, Section 2) and appropriations to private corporations (art. V, Section 34). Undoubtedly, the original intent of the drafters of the constitution was to preclude the state from using public funds to become a partner in private business ventures. However, the Colorado Supreme Court has not applied the constitutional language literally for decades. Over the state's history, the court has construed these constitutional provisions to allow the General Assembly considerable flexibility to craft solutions for economic problems so long as any indirect benefits to private business are outweighed by the legislation's public purpose. The legislation must contain findings of a significant public purpose that is served by the proposed tax incentives, because the court will scrutinize that legislative determination and measure it against the considerable benefits accruing to United. It is very unlikely that a court would strike down the current proposal as either an unconstitutional donation or a special appropriation. The proposed legislation would not violate the constitutional provisions relating to corporate taxation. However, serious constitutional questions would arise if the legislation purported to be irrepealable, or impaired the financial base of government. The proposal would not deny equal protection nor be prohibited special legislation merely because it provides special tax incentives for United, so long as other corporations would also be eligible if they were to undertake a project of similar magnitude and benefits. The General Assembly has great latitude to set appropriate restrictions on the type of project or business that will qualify, such as minimum size limits, minimum numbers of new jobs created, and the nature of the industry eligible for these tax benefits. Although the courts have sometimes ruled that narrowly drawn statutes are unconstitutional special legislation, it appears that in this case the proposed incentives will be neither special legislation nor a denial of the equal protection of the laws, even if only United chooses to undertake a project to which those incentives apply. The proposed legislation does raise some significant concerns with respect to the constitution's prohibition of irrevocable grants. Even if the proposed legislation does not constitute special legislation, it is constitutionally suspect to the extent it purports to grant irrevocable benefits to United or any class of taxpayer. The proposed legislation also would grant the Governor undefined discretion to determine whether tax refunds will be granted to an otherwise eligible taxpayer, and in what amount. An open-ended delegation of an income tax power is unconstitutional, but it appears that this difficulty may be remedied through careful legislative drafting. The most troubling aspect of this proposal from a constitutional perspective is the commitment by the General Assembly to make cash payments to United for the next 30 years. Art. XI, Section 3 of the Colorado Constitution forbids the state from incurring a general obligation debt. The Colorado Supreme Court consistently has interpreted that provision to prohibit the General Assembly from pledging the revenues of future years to pay for today's legislative commitments, thereby tying the hands of future legislatures. Unlike the constitutional provisions relating to private appropriations and donations, the courts have never implied a public purpose exception to the prohibition against general obligation debt. In my opinion, a legislative promise to make cash payments to United for a period of 30 years from any revenues available to the state is precisely the type of future obligation prohibited by art. XI, Section 3. A distinction must be made between the cash payments contemplated by this legislative proposal and a credit against taxes which does not exceed the taxpayer's liability. In the latter case, a tax credit is simply a reduction in a tax liability that would otherwise be due the state and does not require a future legislature to make payments from revenues otherwise available for general purposes. To the extent that a tax credit does not exceed the tax liability, it does not amount to a debt of the state. Ordinarily, a future legislature cannot be barred from repealing such a tax credit. The proposal under consideration is significantly more burdensome because it would entitle United to a cash payment even if United has no tax liability. If the only source of such payments is future revenues otherwise available for the state's expenditures, then that proposal would violate the Colorado Constitution. It may be possible to structure an arrangement where the payment of incentives to United in the future would not be considered a general obligation debt. For example, any obligation could be made subject to annual legislative appropriation or restricted to payment from an earmarked special fund. However, the key element of any such constitutional arrangement is that the General Assembly must remain free to change its mind and repeal future subsidies. So long as there is no legally enforceable commitment requiring future legislatures...

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