The Honorable Bill Walker
AGO 16-2
No. 16-002
Alaska Attorney General Opinion
June 23, 2016
The
Honorable Bill Walker
Governor
of the State of Alaska
Office
of the Governor
P.O.
Box 110001
Juneau,
AK 99811-0001
Re:
Ability to surrender the State's taxing power
Dear
Governor Walker:
You
asked whether the State of Alaska, by legislation or
contract, can bind the State to a tax structure for a
proposed Alaska North Slope liquefied natural gas project and
thereby prevent future legislatures from amending that tax
structure. The short answer is that it cannot. Under article
IX, section 1 of the Alaska Constitution, the sovereign power
of taxation cannot be completely surrendered by an
irrevocable legislative tax structure or contract.
ANALYSIS
Whether
the State may bind future legislatures to a tax structure and
prevent any future changes to that tax structure turns on the
interpretation of article IX of the Alaska Constitution.
Article IX's provisions must be understood as a response
to U.S. Supreme Court decisions holding that a state's
surrender of its taxation power is binding and enforceable
against future legislatures. Under these decisions, once a
state's legislature had granted a tax exemption to a
favored industry, the exemption was held contractually
binding, severely hampering future legislatures' power to
meet their states' changing financial needs. With this
danger in mind, the drafters of Alaska's constitution
wrote article IX to expressly prohibit the surrender of the
State's taxing power and to allow the suspension or
contracting away of the power of taxation through tax
exemptions granted only by "general law." The text
and history of article IX make clear that no legislature or
administration can create a permanent tax exemption. Rather,
any tax exemption that is granted can always be amended or
repealed by a future legislature at any time.
I. State constitutional provisions that prohibit
surrender of the taxing power, like Alaska's, were
drafted to ensure that states retain the power to change
their tax policies without running afoul of the federal
constitution's contract clause.
The
contract clause of the federal constitution provides that
"[n]o state shall . . . pass any . . . law impairing the
obligation of contracts."
1 This clause was intended to
"remedy a particular social evil—the state
legislative practice of enacting laws to relieve individuals
of their obligations under certain
contracts."
2 Under this clause, states are prohibited
from eliminating vested rights arising out of their contracts
with private parties.
3 For purposes of the contract clause,
"contracts" include statutes "when the
language and circumstances evince a legislative intent to
create private rights of a contractual nature enforceable
against the State."
4 One of the powers a state may
contractually limit, if it does so in clear and unequivocal
terms, is the power to tax.
5
The
federal constitution's protection of contractually
granted tax exemptions—and its resulting limitation on
a state's ability to change tax policies—led many
states, including Alaska, to adopt constitutional provisions
designed to prevent surrender of the state taxing
power.
6 These provisions ensure that while states
can create tax exemptions, the exemptions can be repealed or
amended by future legislatures, thereby protecting maximum
flexibility and authority to revise tax policies to meet
changing economic conditions. Courts have routinely held that
these constitutional provisions prevent the creation of
irrevocable, permanent tax exemptions.
[7] As a result, when
a state enacts a constitutional prohibition against
surrendering the power to tax, it allows successive
legislatures to change tax policy without running the risk of
violating the federal contract clause.
II.
The Alaska Constitution prohibits surrender of the power
of taxation but allows tax incentives that
are subject to change by future legislatures.
Article
IX of the Alaska Constitution must be interpreted against
this backdrop and consistently with similar provisions in
other states' constitutions that preclude a legislature
from binding the hands of its successors.
[8] The Alaska
Constitution—in article IX, section
1—specifically provides that "[t]he power of
taxation shall never be surrendered," and only allows it
to be "suspended or contracted away" as provided in
that article.
9 Article IX, section 4 allows tax
exemptions to the State and its political subdivisions, and
for non-profit religious, charitable, cemetery, and
educational purposes as provided by the legislature in state
law. In addition, the legislature can grant "[o]ther
exemptions of like or different kind . . . by general
law."
10 Read together, sections 1 and 4 allow
the legislature to suspend or contract away the power of
taxation by general law but not to surrender the power to
tax. The legislature's suspension or contracting away of
the taxing power through tax exemption by general law cannot
be permanent or irrevocable by a future legislature. The
power to taxis specifically preserved by the state
constitution for future legislatures.
[11]
III.
The framers of the Alaska Constitution intended to authorize
the legislature to grant tax incentives for economic
development, while leaving as much leeway as possible to
future legislatures.
The
drafters of the State constitution began with the National
Municipal League Model State Constitution language for
article IX, section 1: "The power of taxation shall
never be surrendered, suspended or contracted
away."
12 A report provided to the delegates
explained that the "important constitutional aspect of
state taxation is the question of limiting the
legislature's power in this field."
[13] The wording
of this particular provision in the Model was intended
"to prevent the state from exempting, particularly by
contract, individuals and corporations from
taxation."
14 The report expressed the concern that,
without providing some limitations,
[i]n granting exemptions, one legislature may bind another
and thereby lose for the state its power to tax. The
exemption may, under certain conditions, result in a contract
relationship that legislatures may not abrogate without
violating the federal [contract clause]. To avoid such
difficulties, a considerable number of states have
constitutionally prohibited the surrendering or contracting
away of the taxing power.15
The
Alaska delegates heeded the advice to prohibit surrendering
the taxing power, but wanted to retain the authority of the
legislature to offer tax exemptions to induce economic
development.
16 Initially, the Constitutional Convention
Finance and Taxation Committee tentatively adopted the
phrase, "the power of taxation shall never be
surrendered."
17 At subsequent meetings the Committee
discussed whether tax exemptions should be permitted and, if
so, whether the specific exemptions should be included in
article IX.
18 On December 16, 1955, the Committee had
agreed on language similar to what we have now:
Section 1. The power of taxation
shall never be surrendered; and shall never be suspended or
contracted away, except as provided herein. . . .
Section 4. The real and personal property of
the State and of its political subdivisions shall be exempt
from taxation under such conditions and with such exceptions
as the legislature may direct. All or any portion of property
used exclusively for non-profit, charitable, cemetery, or
educational purposes as defined by law, is exempt from
taxation. Other exemptions of like or different kind
may be granted by general law; and until otherwise
provided by law, all exemptions from taxation validly granted
are retained.19
The
only exceptions to the prohibition against suspending or
contracting away the taxing authority referenced in section 1
("except as provided in this article") are
contained in section 4. No other section of article IX speaks
to exemptions or other ways in which the State's taxing
authority could be suspended or contracted away. Reading
section 1 and section 4 together, it is clear that the
suspension or contracting away of the taxing power could only
be by general law.
A
report accompanying the Committee's proposal explained:
"The power to tax is never to be surrendered, but under
terms that may be established by the legislature, it may be
suspended or temporarily contracted away. This could include
industrial incentives, for example."
[20]
The
Committee explained to the Convention that the...
