New Energy Company of Indiana v. Limbach – Oral Argument – March 29, 1988

Media for New Energy Company of Indiana v. Limbach

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William H. Rehnquist:

We’ll hear argument next in No. 87-654, New Energy Company of Indiana versus Joanne Limbach.

Mr. Schwartz, you may proceed whenever you’re ready.

Herman Schwartz:

Mr. Chief Justice, and may it please the Court.

This is an appeal by the New Energy Company of Indiana, an Indiana ethanol producer, from the fourth redecision of the Ohio Supreme Court on rehearing that rejected New Energy’s Commerce Clause challenge to a 1984 amendment to Ohio’s sales tax credit for the gasoline ethanol blend or 90/10 blend known as gasohol.

Prior to 1985, Ohio had granted a credit to the motor vehicle fuel tax for gasoline for gasohol.

On December 20, 1984, it amended the statute by denying the credit to gasohol containing ethanol produced in another state unless that foreign producer state grants a credit to ethanol sold there containing Ohio produced ethanol.

The credit that Ohio grants is limited the amount of credit granted Ohio ethanol in that other state.

Now, although the Ohio courts agreed that the reciprocity provision effectively excluded New Energy from the Ohio ethanol market, they nevertheless upheld it.

Our position is that this 1984 amendment which was conceded by the Supreme Court of Ohio to be a forced reciprocity statute discriminating against out-of-state products by denying the tax credit unless the out-of-state product’s home state provides a similar tax credit, must pass a strict scrutiny test, and that this clearly does not.

Sandra Day O’Connor:

Mr. Schwartz, what if all we had in front of us was an Ohio statute that granted a tax credit to producers of ethanol in Ohio, no reciprocity provision.

Would you be here, and would you think that posed a commerce clause problem?

Herman Schwartz:

Yes, Your Honor, if it grants a tax credit only to Ohio ethanol, yes, Your Honor.

Sandra Day O’Connor:

Do you think that would be true if Ohio had a serious concern about its citizens’ health problems?

Herman Schwartz:

Yes.

Sandra Day O’Connor:

Do you think it couldn’t provide a tax credit to encourage the production and use of ethanol in Ohio?

Herman Schwartz:

Yes.

But that is the kind of protection that must meet the strictest of all scrutiny.

It’s almost per se illegal, that kind of tax credit, as this Court has found.

A tax credit that’s limited solely to the in state product.

Sandra Day O’Connor:

Well, let me ask you this.

Do you think that Ohio could, instead of a tax credit, give some kind of bonus payment to producers of ethanol in Ohio?

Herman Schwartz:

Yes.

And States have done that.

Sandra Day O’Connor:

It could do that?

Herman Schwartz:

Yes.

And States have done that.

Sandra Day O’Connor:

You don’t think that a tax credit is essentially the same thing as a bonus?

Herman Schwartz:

No, it’s not, Your Honor.

A tax credit is aimed in the form in which you’ve raised it, it is aimed almost explicitly at out of state producers.

It says, our people will get this.

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Herman Schwartz:

It’s a discriminatory tax on its face.

It is the kind of tax that I think it’s fair to say the framers were concerned about right from the beginning.

Sandra Day O’Connor:

Well, I guess it’s a little hard though to distinguish between an outright grant of state money and an extension of a tax credit?

Herman Schwartz:

Right.

It is, Your Honor, but that kind of distinction is a distinction that this Court has always made, and frequently made, because ultimately almost everything that a State does when it spends money, whether it spends money on research, whether it spends money to facilitate matters in one way or another for its products, is an expenditure of money on behalf of its own.

For example, in the Hunt case, the Court pointed out… and I think that was unanimous… that the State of Washington had spent a great deal of money to develop a grading system for Washington apples.

And when North Carolina tried to match that by taking away that advantage that the State of Washington had created, this Court unanimously said, you can’t do that.

It’s okay to spend money.

But when you discriminate, when you set up a tax system and it is discriminatory taxes that the Commerce Clause is historically aimed at, when you set, and which this Court has again and again struck down–

Sandra Day O’Connor:

So you would just distinguish the Alexandria Scrap type situation based on the fact that this is within the tax structure?

Herman Schwartz:

–That’s right.

And the Court did so itself, Your Honor.

In Alexandria Scrap and in the cases subsequent to Alexandria Scrap, Reeves, the others, particularly in Justice Blackmun’s discussion in Reeves of the market participant doctrine, the Court said, the Commerce Clause is aimed at regulation and direct taxes.

It is not aimed at the situation where a state enters the market.

It is not aimed at the situation where perhaps the State even spends its own money.

Antonin Scalia:

Mr. Schwartz, I’m not sure you’d really hold to that line.

In the subsidy situation you were just addressing, it’s assumed that the subsidy goes to the producer, no matter where the producer sells it.

Suppose you had a state subsidy that applied to an in-state producer but only if he sells those products within the state, and he forgoes that subsidy to the extent he ships out of the state, would you say, well, that’s not a tax so it’s all right?

Herman Schwartz:

Yes, Your Honor, I would say that.

Antonin Scalia:

You would.

Herman Schwartz:

Because it is not a tax.

I think–

Antonin Scalia:

As long as it’s not a tax, you can do whatever you like to–

Herman Schwartz:

–Well, you can spend your money in any way you want so long as you’re not taxing.

You can spend money on anything you want in your own state.

Antonin Scalia:

–So I can subsidize an in-state produce but only if he ships nothing out of state and as soon as he ships out of state, he looses the subsidy and that doesn’t interfere with the Commerce Clause?

Herman Schwartz:

Well, I think that’s right because I think at that point, it comes close to the market participant doctrine although there is a danger that that doctrine could swallow up the entire situation.

In the tax area again and again, Your Honor, and I think you would referred to this yourself last year in the Scheiner case, things would seem the same which have the same effect will nevertheless produce different kinds of results.

We are dealing here, as I think the Court said in, I think Justice Holmes said it in Towne against Eisner where a page of history is worth a page of logic.

William H. Rehnquist:

A volume–

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William H. Rehnquist:

–A volume of logic.

Herman Schwartz:

Pardon?

William H. Rehnquist:

A volume of logic.

Herman Schwartz:

I stand corrected.

A volume of logic.

In fact, it’s much better.

The point is lost in my version and it’s reinforced in yours.

It seems to me that this is precisely what we’re dealing with here.

States can spend their own money.

They can do it in the manner they choose.

But the tax structure has so many possibilities of discrimination built into it, and it’s historically so dangerous because the alternative, Justice O’Connor, I think would be to have to repudiate a line of cases that goes back to Welton against Missouri in which states again and again have said, we are trying to help our local industry.

The Hawaiian case just a few years ago, they said here is this struggling little brandy, Okolehau brandy… to an easterner, that’s a little hard to pronounce, this little product which has almost no market, and then there’s this pineapple wine which has no market at all.

And we will give them a tax exemption from the twenty percent tax that we’ve established.

The Court said… and on this point, I think there was no dissent… I think there was a dissent on the implications of the 21st amendment, on this point the Court said, you just can’t do that.

You can’t help your own industry by a discriminatory tax.

Now, if I may take a minute to sort of recollect where I was in my argument.

Now, to go back, some ethanol was sold in Ohio in 1979 and 1980, but in 1981, the same year New Energy’s Ohio competitor, Southpoint Ethanol, which is an intervenor in this case, was formed, Ohio adopted a sales tax credit for all ethanol sold in Ohio.

It was about 3.5 cents a gallon of gasohol, which ultimately fell to 2.5 cents.

Indiana had a comparable fuel tax credit which it repealed in early ’84, effective July, ’85, and it authorized at that time a production subsidy which in fact was dropped a year later again on July ’86.

In the fall of 1984, New Energy went into production in Indiana.

And Southpoint’s sales in Indiana began to fall sharply.

On December 20th, the Ohio reciprocity provision was enacted.

As the Trial Court found, Southpoint had lobbied the Ohio legislature for this provision, in fact, stressing to the legislature… and the word stressing was used twice by the Southpoint witness… how important Southpoint was to the most depressed areas of the Ohio economy.

This reciprocity provision which also, by the way, excluded ethanol from almost all gas-fired plants and ethanol made from cane and beet sugar, this was done in order to pressure Indiana to restore the Indiana tax credit, and in fact it was aimed only at Indiana, for every other state that could be affected by this tax credit, the producers in other states like Tennessee, Illinois and elsewhere already had a credit which they were giving.

Now, loss of the Ohio tax credit, when all of the New Energy’s competitors continued to get this credit inevitably excluded New Energy from the Ohio market, as the Trial Court found.

When New Energy challenged this Statute, the Trial Court found two, and only two legislative purposes.

And I’d like to quote that, if I may.

“To promote domestic industry and to affect the policies of other states. “

The Court nevertheless upheld the statute because–

Sandra Day O’Connor:

May I stop you on that point just for a moment.

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Sandra Day O’Connor:

The Court did also adopt appellees’ additional finding of purpose.

Herman Schwartz:

–Right, Your Honor.

Sandra Day O’Connor:

And it isn’t altogether clear to me whether or not there was an additional purpose to provide a cleaner and safer environment for Ohio citizens.

Herman Schwartz:

Your Honor, that’s a-troubling point.

I had a lot of trouble understanding that finding.

The first sentence says, it is conceivable that there were other purposes.

One of these was… now if conceivable modifies everything which is actually all there is, then it seems to me there is no such finding.

And indeed when one looks at the intermediate appellate court’s opinion, which lists the purposes, it does not include that.

Sandra Day O’Connor:

If it was a purpose of the legislature, how does that affect the legal analysis?

Herman Schwartz:

Not at all, Your Honor, because if it were, there would still be a least drastic alternative test.

After all, in Dean Milk and many other cases, the Court said, and in Hunt, for example, the Court said we accept that this is a legitimate bona fide purpose.

However, you have to apply the least drastic alternative.

And in this case, I planned to get to it shortly, but I could get to it right now, there is just no question that this is not the least drastic alternative.

How in the world do you increase the amount of ethanol by excluding ethanol just because it comes from a state that uses a different incentive, because it comes from a coal-fired plant, because it is made of cane or beet sugar.

Indeed, it’s counterproductive to that because New Energy’s loss of the market may have gone to gasoline, not to gasohol, in which case the amount of pollution in the air would multiply rather than be reduced.

Now, despite these findings which, again with the ambiguity that you’ve pointed to, the Court nevertheless upheld the statute because New Energy was the only producer affected and would not have been affected had Indiana not repealed the tax credit.

Anthony M. Kennedy:

Do we have cases which say that it’s improper to try to influence the policies of other states’?

Herman Schwartz:

Yes, there are, but of course, it depends on the method of influence.

There is nothing wrong inherently in trying to influence the policies of other states.

It depends on how you do it.

Indeed, even under the equal protection clause where that is an even more acceptable purpose in the Metropolitan Life case, the Court said, you can try to influence other states, but you can’t do it by discriminating in taxes.

So that it seems to me the answer is in itself neutrally there’s no problem about trying to influence.

If for example, you try to influence by improving the economic climate say by I suppose a right to work law or some other kind of economic or friendly regulatory climate, other states obviously may try to respond in other ways.

Anthony M. Kennedy:

So the objective itself is legitimate to try to influence the policy of other states?

Herman Schwartz:

That objective, yes, Your Honor, yes.

To influence is correct, but it depends on how you do it.

William H. Rehnquist:

What if Ohio felt that coal-fired energy plants in Indiana to the west of it were producing a lot of acid rain in Indiana.

Could it instruct or regulate its utilities to tell them they couldn’t buy from any coal-fired plant in Indiana?

Herman Schwartz:

If that were the least drastic way of dealing with that very serious health problem, the answer would be, yes.

William H. Rehnquist:

What’s the leading case that you can think of that applies the least drastic alternative test in this situation?