Tax Injunction Act Did Not Divest Court Of Jurisdiction To Hear "Demolition Tax" Challenge
KATHREIN v. EVANSTON (March 11, 2011)
Evanston, Illinois adopted a Demolition Tax as part of its policy to maintain affordable housing. Under the ordinance, every residential demolition carries with it a tax. There are exemptions if the owner replaces the building with an affordable housing, if the owner otherwise provides a affordable housing, or if the owner has lived in the building for three years and will continue to live in it for three years. Shortly after Michael and Victoria Kathrein agreed to sell their home in Evanston, the purchaser learned of the tax and demanded a reduction in the purchase price. The Kathreins refused and the sale was not consummated. The Kathreins brought suit pursuant to § 1983, alleging that the tax violated the United States and the Illinois Constitutions, as well as Illinois law. The Kathreins also challenged the constitutionality of the Tax Injunction Act (TIA). Judge Guzman (N.D. Ill.) granted Evanston's motion to dismiss. He concluded that he had no jurisdiction because of the TIA and that the Kathreins lacked standing to challenge either the TIA or the tax. The Kathreins appeal.
In their opinion, Judges Ripple, Kanne, and Sykes affirmed with respect to the TIA challenge but reversed and remanded in all other respects. The Court began with a discussion of the TIA. The TIA prevents a federal court from enjoining or restraining the collection of a state tax if a state court provides a speedy and efficient remedy. But it applies only to taxes, not to every payment to the state. The Court identified four kinds of payments that are not taxes, including what it called "regulatory devices." A regulatory device uses monetary incentives to regulate behavior -- behavior that the state wants to deter. The Court concluded that the Demolition Tax was a regulatory device, not a tax, after considering several factors: a) it was part of a complex scheme aimed at deterring only those demolitions considered harmful, b) the substantial amount of the tax ($10,000), given the price elasticity of the market, deters developers from demolishing less expensive homes, c) the tax raises an insubstantial amount of revenue relative to Evanston's total revenue, and d) the revenue does not go to the general fund but instead is used to promote affordable housing in the city in other ways. Because the Court noted that the TIA did not divest the court of jurisdiction, it also concluded that it caused no injury to the Kathreins. They therefore had no standing to challenge its constitutionality. The Court concluded, however, that the Kathreins did have standing to challenge the tax ordinance. After identifying several bases for standing set forth by the Kathreins and amicus that did not confer standing (e.g., their status as tax payers, the increased cost of demolishing their house, the failed real estate transaction), the Court identified one that did. The uncontradicted testimony of the Kathreins and the developer who wanted to purchase the property established that the tax decreased the market value of the property. This reduction in value is an "injury in fact" and confers standing, even if the Kathreins have no present intent to sell their home. The Court remanded for consideration of their challenge on the merits.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select