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?
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Herman Schwartz:
Well, I’m not quite sure by, this situation, but the cases I rely on are Dean Milk.
William H. Rehnquist:
Did that use the term, least drastic?
Herman Schwartz:
Yes.
Yes, it did, Your Honor.
I’m quite sure that it did use the term.
And I think the A&P case did as well.
Anthony M. Kennedy:
I thought Dean used the reasonable alternative analysis, it said whether there’s a reasonable alternative.
Herman Schwartz:
I don’t think so, Your Honor, because I think as I recall Justice Black was unhappy because it was using First Amendment doctrine, and I think he commented on that.
I’m not sure.
I think the phrase in A&P there’s one reference here to less drastic alternative, and there are I think other ways in which the Court stressed that you’ve got to look at other alternatives that create less problems.
Indeed, the Pike v. Bruce Church test itself says that even when something regulates evenhandedly, which I think this does not, even when something regulates evenhandedly under those circumstances, and for a legitimate purpose, you still have to look to see where there are other ways that could accomplish the same thing.
William H. Rehnquist:
But, Mr. Schwartz, it’s one thing to say you have to look at other alternatives.
Herman Schwartz:
Right.
William H. Rehnquist:
It’s quite another thing to say you must employ the least drastic of these alternatives.
Herman Schwartz:
Well, Your Honor, even if it’s not least drastic, the Court certainly has insisted on less burdensome, and there are less burdensome.
Indeed, the initial statute, the initial tax credit in Ohio in 1981 which allowed the credit for ethanol, just like that, ethanol or methanol itself was quite an adequate alternative without the reciprocity.
We are not challenging the tax credit which was made available in ’81 to everyone.
We’re challenging the reciprocity and we’re saying that the tax credit without the reciprocity which now some eleven states have and which in 1985 approximately 23 states had, that that is a less burdensome alternative which accomplishes the same purpose.
After all, over the years, the rate of usage of ethanol, of gasohol, I think, has risen from something like 400 or 500 million gallons to 900 million gallons during this period without, with very few of these reciprocity statutes operating.
Now, if I may return, our argument, which is of course what we’ve been talking about here is that reciprocity statutes face strict scrutiny and for a very good reason.
They involve facial discrimination, they create most favored nation enclaves, precisely the kind of preferential trade areas that the Commerce Clause is supposed to prevent, and they threaten economic isolation in an effort to control the policies of other states.
All of those I think have been touched on by this Court.
Now, the Ohio courts recognized the applicability of strict scrutiny, but they ruled that because others from outside Ohio, besides New Energy, could come into Ohio, there was no violation.
Now, that logic this Court has never adopted.
In some cases for example that this Court has dealt with, only one out-of-state company was involved.
That’s true of the Pike case, it’s true of Lewis against Bete Investment.
In A&P, for example, many other states, I think it was something like eight states, had reciprocity agreements with Mississippi.
Louisiana did not.
And the Court still struck that down unanimously.
There is no requirement either that there be an absolute bar.
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Herman Schwartz:
I think this Court has recognized right from the beginning that taxes can have the same effect as an absolute bar, and in fact in this case as the Trial Court recognized, it had precisely that effect.
New Energy was excluded.
The fact is with the competitors getting the credit, there was no way New Energy could compete in the Ohio market.
Now, with respect to the health claim, I think I’ve already touched on that, unless there are some further questions on it.
And indeed, there’s some question as to whether any credit is necessary for health, because over the years, there has been a decline in the use of any tax credits and an enormous increase in the use of ethanol.
And as I pointed out before, it’s very possible that New Energy’s loss in Indiana may have been diverted not to another ethanol producer, but to gasoline, which in turn would produce increased pollution.
And I think the record quite beyond dispute shows that the purpose here was to pressure Indiana to restore that tax credit for the benefit of the Ohio competitor, an important employer in perhaps the most depressed area of the State that used a great deal of Ohio corn and coal.
And as I said, this was stressed at the legislative hearing.
Now, an argument has been made–
Antonin Scalia:
Mr. Schwartz, before you go on to the new argument, will you tell me why this is different from what we have clearly allowed that is facially discriminatory and that is the assessment by a state of a compensating use tax.
In that situation, the state is just equilibrating matters between itself and other states.
It’s worried that its sellers will be at a disadvantage because of its tax if other states don’t impose taxes so it imposes a use tax on any imports.
It seems to me the state here is doing the same thing.
It’s worried that its sellers will be at a disadvantage abroad, viz a viz, the sellers in the state that does not give the same credit that it does.
So it’s just making things even.
Herman Schwartz:
–Your Honor, I think the difference is, and the case you’re talking about is obviously Henneford v. Silas Mason, that line of case.
Antonin Scalia:
Right.
And they’re tax cases.
Herman Schwartz:
Right.
Oh, yes, they’re clearly tax cases.
The difference is that that’s a situation in which a state itself has imposed a tax burden on its own people, and it says that we don’t want to hurt our own people too much so therefore we will equalize matters by saying that if you buy something outside and use it here, our people will not be at a disadvantage.
But it’s a disadvantage that the state itself created.
In this case, there was no disadvantage when the tax credit went to everyone, and indeed there was no disadvantage had there been no tax credit at all.
Ohio created a disadvantage whereas in the Silas Henneford Mason (sic) case by the reference to other states, Ohio undid a disadvantage to its people, or the State of Washington, actually, that the State of Washington itself had created.
And it was a straight equalizer, penny for penny.
Whereas here, when there’s an attempt to equalize whatever advantages other states have, we have an attempt to mix apples and pears.
If for example another state provides research help, here we’re providing a discriminatory tax.
There’s no way of knowing whether they are in any way equal.
Henneford Silas Mason (sic) it was calibrated exactly to the penny and as I think it was Justice Cardozo who said it, equality is the hallmark.
Not true here.
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Herman Schwartz:
This statute does not create equality.
Now, I have just a couple of minutes more before the close of my argument, and I’d like to respond briefly if I may make a couple of points with respect to as I say Justice O’Connor’s raising before of this issue of bounties and subsidies and market participant.
The market participant is a narrow doctrine designed to deal with that situation whereas the Court has said, and I think the most detailed statement is in Reeves and I think other Justices have quoted that Reeves statement, where the State acts as the equivalent of a private business, where it is buying or it is selling or it is manufacturing.
Sandra Day O’Connor:
Well, that doesn’t explain Alexandria Scrap, I don’t think.
Herman Schwartz:
It doesn’t explain it fully except Justice Powell referred to the case as, I think the Reeves case as a situation in which the State was really acting as a purchaser.
What happened in Alexandria Scrap, of course,–
Sandra Day O’Connor:
Well, I don’t think so.
The situation appears at least to be one where the state wanted to encourage disposal of the old auto hulks, just like Ohio might want to encourage the use of ethanol.
Herman Schwartz:
–Yes.
But the Court, I think, has characterized it, and indeed in the subsequent cases certainly treated both Alexandria Scrap and the line of cases as a line of cases where the states act as a private trader.
Indeed, the justification I think that was given in Reeves v. Stake is that it acts as a private trader and may indeed even be subject to the constraints of a private trader, which a plurality of the Court then applied subsequently in the South Central Timber case, imposing restraints on an alienation and in effect preventing an effort to control a downstream operation, namely, processing of timber.
And unless I think the rule is cabined and limited that way, it could easily swallow up the entire Commerce Clause, because again almost any tax credit can be called a tax expenditure.
And indeed an expenditure.
And at that point, the Court would have to reexamine and in effect overrule this lengthy line of cases which go as recently as last year.
I think I will sit down now and reserve the rest of my time for rebuttal.
And simply conclude by saying that this Statute is clearly unconstitutional under the Commerce Clause and the decision of the Supreme Court of Ohio on rehearing the second Ohio Supreme Court decision should be overruled and reversed.
William H. Rehnquist:
Thank you, Mr. Schwartz.
Mr. Farrin, we’ll hear now from you.
Richard C. Farrin:
Mr. Chief Justice and may it please the Court.
The issues in this case are twofold.
The first issue to be decided is whether the Ohio tax credit scheme is the type of state action that is subject to the restraints of the Commerce Clause.
Within this one issue there are actually two questions to be considered by the Court.
Initially as this Court has heard during the initial argument in this case, whether or not the market participant principle applies to the ethanol tax credit scheme.
The second issue, which is also a matter that was touched upon by this Court in the Alexandria Scrap case but not decided, is whether the Commerce Clause prohibits state action effecting a flow of commerce that is dependent for its existence upon a state subsidy rather than on the private market.
The second issue is whether assuming this scheme is subject to the Commerce Clause restrictions, whether it is valid under the various tests established by this Court.
As New Energy’s counsel has pointed out, the Ohio General Assembly initially enacted its tax credit provision in 1981 to provide an encouragement for the use of ethanol as a substitute for lead in gasoline.
The result of this use would be to protect the environment of Ohio because as has been stipulated throughout these proceedings, ethanol is the most environmentally benign substitute for lead in gasoline.
Other benefits of the use of ethanol are the creation of an alternative market for corn and a reduction of the country’s dependency on foreign oil.
It’s undisputed that these purposes are legitimate purposes for the State to pursue.
The portion of the scheme that is the subject of the challenge before this Court is the enactment in 1984 which became effective in 1985 of the reciprocity provision that limited the credit given to motor vehicle fuel dealers to the use of ethanol that was produced either in Ohio or in any other state that granted similar credits for the use of ethanol to Ohio dealers to Ohio produced ethanol.
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Richard C. Farrin:
This scheme, including the reciprocity scheme, does not put any prohibition on the sale or distribution of ethanol in Ohio, nor does it regulate the conditions under which the flow of ethanol may occur in Ohio.
By this scheme, Ohio has simply entered the market by providing a subsidy to build up the price of ethanol.
This subsidy is necessary in order for ethanol to compete with gasoline in the marketplace.
John Paul Stevens:
When under your view of it did Ohio enter the market, in 1981 or 1984?
Richard C. Farrin:
Justice Stevens, I believe Ohio entered the market initially when it first enacted the credit provision 1981.
Its purpose at that point in time was the same, to bid up the price of ethanol so that it might compete with gasoline in the marketplace.
Because of the production costs involved with ethanol, absent both Federal and state subsidies, ethanol simply could not compete in the free private marketplace with gasoline.
And the evidence in the record affirms that fact.
Antonin Scalia:
Mr. Farrin, do you really think it solves matters to simply say it’s the application of a state subsidy?
I assume, for example, that a state could if it chooses subsidize all of its domestic industries in a lot of ways, by tax credits, or even by giving them money.
But do you think a state could subsidize domestic production by only charging a sales tax on out-of-state products and not charging a sales tax on in-state products.
And saying, well, that’s all fine because all we’re doing is subsidizing in-state industry which is certainly a laudable and valid goal?
Richard C. Farrin:
Justice Scalia, initially I think from an economic standpoint, that’s a very unlikely event.
Secondly, I don’t think this case requires the Court to so hold.
Antonin Scalia:
I didn’t ask either of those questions.
I asked whether you thought that would be constitutional simply because it’s the application of a state subsidy?
Richard C. Farrin:
I do not think it would be to simply use a tax exemption to favor local business with no other purpose, I do not believe would be constitutional, Justice Scalia.
Antonin Scalia:
So subsidy isn’t the answer.
I mean, it doesn’t necessarily prove that this is okay.
Richard C. Farrin:
Your Honor, I submit under Alexandria Scrap that a direct subsidy may in fact be unlimited.
I think that case leaves the future unclear as to how it will be applied as it goes along the spectrum to the point that’s suggested in your question.
I submit though that at the least, Alexandria Scrap would allow a state to subsidize a local industry if it was part of a scheme that was effected to carry out a legitimate state purpose other than simply protectionism.
In Alexandria Scrap, the purpose of the statute was to effect the removal of abandoned hulks in the state.
In this case, the primary purpose of the ethanol credit scheme is not solely to benefit Ohio business.
Its purpose is to encourage the use of ethanol which will have great environmental benefits in the State of Ohio, plus it will have other benefits including the increased market for corn and reduction on the dependency of foreign oil.
Anthony M. Kennedy:
Well, it’s purpose is to insist that other states do it Ohio’s way, isn’t it?
Richard C. Farrin:
Justice Kennedy, I was speaking of the scheme as a whole, and I think that’s what Alexandria Scrap looked at, the scheme as a whole was intended to further a legitimate state purpose.
One aspect of the scheme–
Anthony M. Kennedy:
But it did so in a way that penalized producers from one state and not others, and incidentally helped Ohio producers.
Richard C. Farrin:
–Justice Kennedy, I don’t think the record indicates whether or not it did help Ohio producers or whether it was intended to help Ohio producers viz a viz their foreign competitors.
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Anthony M. Kennedy:
Well, it didn’t hurt Ohio producers, did it?
Richard C. Farrin:
I would be amazed if it hurt Ohio producers, Justice Kennedy.
But I think if you look at Alexandria Scrap, the same exact situation was present there.
Maryland first enacted their scheme which provided subsidies to scrap processors.
There’s no difference in the–
Anthony M. Kennedy:
Well, there, the State was actually buying the hulks.
Are you saying the State enters the market any time it imposes a tax?
Richard C. Farrin:
–Justice Kennedy, I don’t believe that the State of Maryland was purchasing hulks in the Alexandria Scrap.
They were simply giving subsidies to processors who bought hulks.
In this case, Ohio is giving subsidies to motor vehicle fuel dealers who buy ethanol and use it in creating gasohol.
Sandra Day O’Connor:
Well, it’s giving a tax credit which has the same economic effect as a subsidy, isn’t that right?
Richard C. Farrin:
Justice O’Connor, that’s correct, it’s a tax credit, but I submit that it would be extremely formalistic to suggest that it is different in form.
Sandra Day O’Connor:
Well, have we ever applied the market participant theory to a tax scheme in a state?
Richard C. Farrin:
No, Justice O’Connor, this Court has not.
John Paul Stevens:
Yes, but isn’t there a difference in Alexandria Scrap the hulks that they wanted to get rid of were all located in Maryland, weren’t they?
The procedure generally was to get rid of these hulks that were in the State?
And it didn’t really matter whether it was an out-of-state wrecking company or an in-state wrecking company that bought them as long as the hulk was in Maryland.
But here your interest is in having the gasohol that is consumed in Ohio be less contaminated than regular gas, and it is immaterial where the gas comes from as long as you have an environmental interest.
You’d get the same benefit if Indiana gasohol were used in Ohio.
Richard C. Farrin:
Justice Stevens, the reason why Ohio is attempting to encourage other states to pass similar credits is so that ethanol will be used in those states.
John Paul Stevens:
But what does Ohio care about whether ethanol’s used in those states.
If the ethanol produced in those states is consumed on Ohio, that’s what Ohio cares about, isn’t it?
Richard C. Farrin:
Justice Stevens, I think Ohio is also legitimately concerned in the clean air of other states.
John Paul Stevens:
In Indiana?
They’re concerned about the clean air in Indiana?
Richard C. Farrin:
Justice Stevens, that air comes into Ohio.
I don’t think the environment can stop at the state lines.
When you’re interested in cleaning up polluted air, you can’t say if we just use it in Ohio, our air will be clean.
John Paul Stevens:
Is there anything in the legislative history to support this theory?
Richard C. Farrin:
There’s simply no legislative history in this matter.
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Anthony M. Kennedy:
Is there anything in our precedents which says that one state can take action to influence the conduct and the policies of other states?
I thought that’s what the Commerce Clause was all about.
Richard C. Farrin:
Justice Kennedy, I don’t believe there are any decisions of this Court that suggest a state cannot encourage other states to act.
We’re simply encouraging the other states to pass similar credits so that there’ll be a national market for ethanol.
Another point in response to Justice Stevens’ question is that the nature of the ethanol industry is such that it can’t exist if there are simply a few states which allow credits so that it can compete with gasoline.
In those states in which no credits are given, the ethanol industry will not exist because it can’t compete in the private marketplace with gasoline.
John Paul Stevens:
You seriously think the ’84 amendment actually would encourage industry as a whole rather than discourage it?
Richard C. Farrin:
Yes, I do, Justice Stevens.
John Paul Stevens:
It certainly wouldn’t help it any in Indiana.
Richard C. Farrin:
It would help the industry greatly if Indiana took the encouragement of Ohio and passed some type of a credit for ethanol.
John Paul Stevens:
Well, maybe Indiana has a better way of doing it.
What if every state were to adopt the Indiana program of subsidizing the industry?
Richard C. Farrin:
Justice Stevens, I–
John Paul Stevens:
Why is one better than the other?
Richard C. Farrin:
–I don’t submit that one might be better than the other, but I do submit that it would have no difference in effect.
I don’t think there’s any reason to distinguish a straight subsidy program, such as in Alexandria Scrap from doing the same thing through the granting of tax credits.
John Paul Stevens:
Well, what do you say to your opponent’s argument that maybe the Indiana gasohol that no longer comes into Ohio has been replaced by lead gas rather than gasohol?
Richard C. Farrin:
Justice Stevens,–
John Paul Stevens:
That’s possible.
Richard C. Farrin:
–I would first say that there’s nothing at all in the record to suggest that.
I would submit that the greater assumption, and the assumption that the Ohio Court of Appeals made on what evidence there was in the record was that it would be replaced from ethanol produced in other states which do have such ethanol credits.
The evidence indicated that the largest and most aggressive producer of ethanol in the country was Archer Daniel Midland out of Illinois and they have the ability to fully fill any void in the market that might be left by New Energy’s leaving that market.
Antonin Scalia:
General Farrin, do these subsidy laws tend to predominate in those states that have a lot of air or those states that have a lot of corn?
I mean, do you really think that that’s what’s going on here?
Richard C. Farrin:
Justice Scalia, if you’re referring simply to a subsidy provision such as the one that Indiana had at one time, I’m not aware that there are any, if many, of those types of provisions.
Most of the states that I’m aware of have addressed this problem through their tax system.
Antonin Scalia:
They are corn growing, aren’t they?
Richard C. Farrin:
Justice Scalia, I’m not an expert on agriculture, but it would not surprise me that those states that have large corn surpluses would find that also to be an additional reason for encouraging the use of ethanol, because clearly the more ethanol that is used, the more corn, which is a primary raw material, is used.
I would point out that there is no restriction whatsoever in the Ohio statutory scheme that limits the source of the corn used to make ethanol.
And in fact, the record reveals that one Ohio producer used as much Indiana corn as Ohio corn in producing it.
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Antonin Scalia:
There is a national market in corn, of course.
You can take it from anywhere and the national market’s going to help your domestic corn.
Richard C. Farrin:
That’s correct, Justice Scalia.
And I suggest the same reasons point to the necessity for having a national market in ethanol.
It’s simply a matter of things such as economies of scale.
If a producer is going to be limited to the market it can distribute its product, it’s simply not going to get to the level where it can compete with the major gas producers of the country.
The Ohio scheme has not caused any impact on the flow of ethanol from Indiana due to any prohibition or to any regulation on the way or method by which it can come into Ohio.
The impact on the flow if any ethanol from New Energy is due to Ohio making it more lucrative for Ohio motor vehicle fuelers to use that fuel because they get a credit if they use fuel that’s produced in Ohio or in any other state that grants a similar credit.
This is not the type of State action which this Court has ever held the Commerce Clause was intended to prohibit.
In fact, it does not interfere with the private market forces.
It simply exerts a market force to encourage or give an incentive to motor vehicle fuel dealers upon whom the tax is applied and to whom the credit is given.
John Paul Stevens:
General Farrin, how do you distinguish the Hawaiian tax case on these exotic beverages they had over there, the tax credit for those local–
Richard C. Farrin:
Justice Stevens, perhaps the major distinction is that there was no purpose other than simply to protect local industry in that case.
In this situation, I submit that the record demonstrates that there is a legitimate purpose for the statutory scheme involved.
Sandra Day O’Connor:
–And that purpose is the health and environment purpose?
Richard C. Farrin:
I believe it’s the health environment purpose.
I think it’s also the resulting effects that encouragement of ethanol has on the corn market and in our attempts to reduce our dependency on foreign oil.
And I would point out that’s another reason why we allow an exemption for coal-fired plants, rather than gas-fired plants because we’re looking for alternative sources of energy.
One of the fast depleting sources is gas.
If we allow the credit for plants that use gas, it simply defeats the purpose.
Sandra Day O’Connor:
Well, has the Court required a close fit, even if the purpose is legitimate?
In other words, does the scheme have to fit very closely to that legitimate purpose?
And does this kind of reciprocity provision meet that kind of requirement?
Richard C. Farrin:
Justice O’Connor, I don’t think this Court has ever stated that you actually need an alternative purpose other than to protect the local businesses.
In Alexandria Scrap, it seemed to be accepted by the Court that the amendment that resulted in favoring Maryland processors and in reducing the flow of hulks into Maryland was done for the purpose of protecting Maryland processors.
Anthony M. Kennedy:
But that was because Maryland created a market that had not previously existed.
And this is a market that exists quite without regard to the intervention of the State of Ohio.
Richard C. Farrin:
Justice Kennedy, the majority in Alexandria Scrap found that the record in that case did not establish that the market in that scrap processing did not exist.
Justice Stevens in his concurring opinion so found but the majority found that the record simply wasn’t sufficient.
I would suggest in this case the record is replete with evidence that shows that the ethanol market in Ohio would not exist without the State subsidy.
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Richard C. Farrin:
It simply could not compete with gasoline in the naturally functioning market without the state subsidy.
Byron R. White:
Well, how about gasohol from other States?
Richard C. Farrin:
Justice White, gasohol or ethanol from, other States cannot compete with gasoline either without subsidies, and again, that goes back to what I submit is one of the purposes of the reciprocity provision.
We’re looking to have a national market which we believe is essential for the future of the ethanol industry.
If all the states, or if a number of the states choose not to provide ethanol credits, the ethanol industry will not survive, at least at no significant level in those states.
Byron R. White:
Well, how does keeping out a seller from another state that doesn’t grant reciprocity, that doesn’t grant Ohio people a credit there, how does keeping them out serve the health’s interest of Ohio?
Richard C. Farrin:
Justice White, it’s because of the method by which that encouragement is taken.
We are encouraging those states to enact similar credits so that ethanol will be used in those states and so that there will be a national market for ethanol which will be beneficial to the entire industry.
Byron R. White:
Well, here’s an outsider that wants to, that apparently has enough product to sell in Ohio.
And if he can’t come in, why his share of the market’s going to be taken up by another ethanol producer, either an Ohio one or a foreign one, or by gasoline.
Richard C. Farrin:
That’s correct, Justice White.
I don’t think it will affect–
Byron R. White:
Well, what difference does it make where the ethanol comes from?
Richard C. Farrin:
–For the purposes of–
Byron R. White:
Looks to me like the more sellers of ethanol you’ve got in Ohio, the more service to your health’s interest you’d have.
Richard C. Farrin:
–Justice White, that goes part of the way, I believe.
And I think to follow out that thought, the more ethanol use you have in the country, it even further advances that purpose.
And that is the purpose of the reciprocity.
It’s not simply to keep out… it’s not because Indiana ethanol is any less effective.
It’s to encourage Indiana and other states to grant ethanol credits so that the national ethanol market will grow and so that all states will use the environmentally benign product so that the environment of the nation, which will affect all Ohio citizens plus citizens of the nation will be benefitted.
Along the lines of the questioning as to where this Court is going with the market participant theory, I think perhaps a comment in a footnote of the Reeves case by the majority points out where the limits might ultimately be.
In footnote 10, the Court noted that marketplace actions involving integral operations in traditional areas of governmental functions may not be subject even to Congressional regulation pursuant to the commerce power.
And it went on to state that it follows easily that the intrinsic limits of the Commerce Clause do not prohibit state marketplace conduct if it falls within this sphere.
To me that suggests that what the Court is thinking is that if you’re dealing with a legitimate state purpose in your overall statutory scheme, you are not subject to the Commerce Clause.
If you are not subject to the Commerce Clause, it doesn’t make any difference whether or not portions of that scheme may have an effect on the flow of commerce.
John Paul Stevens:
If you state it that broadly, I guess the Dean Milk case was incorrectly decided.
Because there certainly was a legitimate health purpose in their regulation.
Richard C. Farrin:
Justice Stevens, perhaps the distinguishing fact in Dean Milk was that it in effect barred, completely barred a product from coming into a marketplace unless it complied with the statute.
In this case, there is no bar to ethanol coming into Ohio from any State.
Any producer may sell its ethanol in Ohio if it can sell it in the marketplace.
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John Paul Stevens:
How much Indiana ethanol is sold in Ohio when you have this particular situation?
There isn’t any, is there?
Richard C. Farrin:
Justice Stevens, the record doesn’t indicate it because this case was filed before the statute went into effect, but I would not dispute that it is very likely that they sell little or no ethanol.
John Paul Stevens:
None at all.
It’s the equivalent of an absolute bar.
Richard C. Farrin:
Justice Stevens, I think it’s different.
I think there’s a difference between a statute intended to encourage something that puts an economic incentive–
John Paul Stevens:
Well, but maybe Madison, Wisconsin, because if we really want to encourage everybody else in the country to have the same strict health regulations we have, too, the best way to do it is to have everybody adopt this kind of protectionist ordinance that no milk can be shipped–
Richard C. Farrin:
–Justice Stevens, if in Dean Milk, the ordinance said, you will do it within five miles of the city, I believe, or in a plant in another area which has the same requirements, I think that would have passed the Constitutional test.
I think that’s what Ohio does.
It says, you shall use Ohio ethanol or you shall use ethanol which is produced in a state which has similar credits.
John Paul Stevens:
–Not other ethanol, but meets the same physical requirements and health standards and all the rest but just that it’s produced in states that adopt the same public policies of how to subsidize the industry that we think are the wisest.
Richard C. Farrin:
That’s correct, Justice Stevens, and I think that’s a matter for the legislature to determine as to the wisdom of its course of action, and whether it believes it will effect that result.
Sandra Day O’Connor:
Well, Mr. Farrin, this Court so far has invalidated all these reciprocity laws.
It did so in Sporhase v. Nebraska; it did it in A&P Tea Company; it did it in Baldwin v. Seelig.
Dean Milk.
I mean, find some cases where we’ve upheld this kind of a scheme.
Richard C. Farrin:
Justice O’Connor, I don’t think in any of those cases, this Court struck down a scheme such as the one at issue here.
In Great A&P Tea Company and in Sporhase, the reciprocity provisions themselves were not the subject of a per se rule of invalidity, it was the effect of those reciprocity provisions which was to impose an absolute ban on the sale or distribution or movement of a matter or a product in interstate commerce.
I’d point out that in Great A&P Tea Company, this Court also recognized that the purported purpose by the State of Mississippi bordered on the frivolous.
But in any event, I would submit that what the cases stand for is that you cannot impose an absolute ban on the movement of goods in commerce.
Neither of those cases, by the way, dealt with a tax subsidy or a straight subsidy program.
Sandra Day O’Connor:
I don’t think the Court has distinguished between an absolute ban and a substantial burden on interstate commerce.
Richard C. Farrin:
Justice O’Connor, I believe this Court has distinguished for purposes of determining which type of Commerce Clause test to apply whether it subjected it to a regular balancing test or whether it subjected it to a stricter scrutiny test, such as was used in the A&P case.
I would submit that Baldwin was in fact not a reciprocity provision, to my understanding.
They simply precluded the movement of those goods without any ability for other states to allow that movement by granting reciprocity.
Antonin Scalia:
Do you think that Ohio could impose a penny tax on all gasoline from states that don’t subsidize ethanol?
I mean, if it’s, you know, the national scheme is in its interest, why does it have to limit its incentives to ethanol?
Why can’t it start fiddling with other imports into the state, subsidize some of them and tax others in order to induce other states to subsidize ethanol?
Is there anything in the nature of your theory that would require Ohio to limit itself to ethanol as a device to get other states to go along?
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Richard C. Farrin:
No, Justice Scalia, it would not be limited to ethanol.
I think–
Antonin Scalia:
That’s scary, isn’t it?
Richard C. Farrin:
–I think what it would be limited to is whether or not they had a legitimate purpose that was carried out other than simply to protect their local businesses.
John Paul Stevens:
It would be the same purpose you have in this case, to encourage other states to adopt this kind of an ethanol policy.
Richard C. Farrin:
That’s correct.
John Paul Stevens:
You could perhaps tax all imports from Indiana unless Indiana adopted this type of tax credit.
Richard C. Farrin:
I assume I would believe that this Court would not allow that broad a prohibition, of an absolute prohibition.
John Paul Stevens:
No, I don’t think it would, either, but I think your theory would.
Richard C. Farrin:
The second issue that was discussed in the Alexandria case, but was not decided because the majority of the Court felt there was not an adequate record upon which to determine it, was whether or not the Commerce Clause forbids state action affecting a flow of commerce that is dependent for its existence on state subsidies rather than on private market forces.
The majority noted in a footnote that if the facts had so shown, it would have hesitated to find that the Commerce Clause did in fact prohibit such action.
Concurring opinion by Justice Stevens indicated that that Justice felt that the Commerce Clause did not prohibit such state action.
I think the reasoning in both that footnote and in Justice Stevens’ concurring opinion supports that thought.
The Commerce Clause only prohibits state action which affects the operation of a free market or a natural functioning of the private marketplace.
If there is no naturally functioning private marketplace, how can any burden that is imposed upon such a flow involve the Commerce Clause?
It simply doesn’t interfere with a subject that the Commerce Clause was intended to cover.
While the record in Alexandria Scrap might not have been sufficient for the Court to determine that issue, the record in this case is replete with evidence that the ethanol market would not exist at its present level or at any significant level in Ohio, absent the state credit that’s granted by this scheme.
Thank you, Your Honor.
William H. Rehnquist:
Thank you, Mr. Farrin.
Mr. Schwartz, you have four minutes remaining.
Herman Schwartz:
Your Honor, I am not going to take any rebuttal time unless the Court has questions for me.
I will however confess with some embarrassment that the thrust of the Chief Justice’s question about least drastic alternative was absolutely correct.
The Court in Sporhase used the phrase, narrowly tailored.
And in some other cases, it has referred to, less burdensome alternatives, but has not used that particular phrase of less drastic alternative.
I don’t have any doubt in my mind judging by the questions and so on that the point has been made that that are less burdensome alternatives, and that this was not narrowly tailored.
But I did want to make that clear, Your Honor, to correct what was stated in my brief.
