When is a Tax Not a Tax?: When it is a Regulatory Fee Imposed on One Business

Generally, local decisions are best guided by local wisdom. That is not the case, however, when a local county council enacts a punitive “tax” against one business in an unconstitutional manner.

Maryland’s Montgomery County did exactly that. In May 2010, the council passed a bill that imposed a levy on large stationary emitters of carbon dioxide within the county. It imposes an “excise tax” of $5 per ton of carbon dioxide emitted but only on those that emit in excess of 1 million tons per year.

There is only one business in the county that does that – GenOn, which maintains an electricity plant in the county. After the new law was passed, GenOn challenged the levy in federal court, alleging that it violated the Maryland and United States Constitutions. Unfortunately for GenOn, the county successfully argued in the district court that their lawsuit was barred by the Tax Injunction Act, a federal law that prevented taxpayers from challenging local or state taxes in federal court when there is an adequate forum in the state courts to do so.

GenOn appealed to the U.S. Court of Appeals for the Fourth Circuit and won. In a unanimous opinion (GenOn Mid-Atlantic, LLC v. Montgomery County, Maryland) issued on June 20, the appellate court held that such a “tax” is really no tax at all: it is a punitive regulatory fee, especially when aimed at a single business. Citing comments made by county council members and stressing the regulatory nature, rather than revenue-raising purpose a tax is for, the court found that because the burden fell on one rather than many, it could not be a tax as the county contended.

With future efforts to regulate greenhouse gas emissions looming in many cities and states across the country, businesses must have access to federal courts for relief. Foreclosing that option would “turn what are truly interstate issues over to local authorities,” the court wrote. It added:

The implications of allowing localities to impose financial exactions exclusively upon single entities of national reach with no accountability in federal court are profound, and we decline to foreclose these federal claims with a jurisdictional bar.

After the decision in AEP v. Connecticut, in which the Supreme Court prevented lawsuits based on federal common law nuisance claims against emitters of greenhouse gasses, it appears that federal courts will not hesitate to step in where they need to when a legal resolution is necessary at a federal, rather than local, level. After all, you never know what the next regulation around the corner will be.