NYU Tax Policy Colloquium, week 5: paper by Linda Sugin

We had a week off from the colloquium last week, as the usual Tuesday was a "legislative Monday" at NYU Law School.  But yesterday we were back in business, discussing Linda Sugin's article, Invisible Taxpayers.

The article discusses tax issues related to standing, and in particular to the difficulty of getting judicial review of IRS decisions that fall outside of the "traditional dyad," i.e., IRS versus taxpayer.

A taxpayer who pays "too much," due to an IRS decision that arguably misinterprets the law, or a legislative rule that arguably is unconstitutional, unmistakably has standing and thus can get it reviewed by the courts

But whenever a taxpayer pays "too little" for the same reasons, others may lack standing, and thus be unable to get it reviewed by the courts, potentially permitting legally incorrect or unconstitutional policies to keep right on going as there is no forum for raising the challenges.

The paper notes up front that we are all fiscally interconnected.  Given the intertemporal budget constraint for all US taxpayers considered together, anytime you pay a dollar less or get a dollar more that's bad for me in a certain sense, and vice versa.

This alone, of course, probably would not make it wise to grant universal standing to challenge others' tax outcomes (e,g., for me to sue the IRS on the ground that it gave GE an unduly favorable advance transfer pricing agreement), even if there were no constitutional restraints based on separation of powers, the need for a proper case or controversy within the ambit of the adversarial system, etc.

But in some instances, third parties may have a stronger claim than this for invoking the judicial process.  For example, consider the Sklar case, which the paper discusses.  Here what happened is the following.  First, the IRS won a favorable Supreme Court ruling (in a case called Hernandez) regarding the non-deductibility of supposedly charitable gifts by Scientologists to their church that arguably were quid pro quos for goods and services.  Second, the IRS decided to unilaterally concede the issue that it had won in the Supreme Court, arguably to call off aggressive harassment of IRS auditors who were attempting to enforce the Hernandez rule.  This meant that people practicing Scientology were arguably getting charitable deductions despite the quid pro quo.  Third, in Sklar itself, Orthodox Jews that their free exercise rights would be violated if the IRS enforced against them rules that it had expressly agreed not to enforce against Scientologists.  Here there literally was standing for the Sklars to contest their own tax liability, but the court arguably declined to give due heed to the issue of equal treatment

More generally, First Amendment rights to equal treatment of different religions are hard to vindicate when the members of one religion are treated unduly favorably, rather than unduly unfavorably (in which they will probably be able to bring a challenge).

In a more recent case, the lamentable ACS v. Winn, the Supreme Court held as follows  Even if it is unconstitutional for a state to fund people's private religious school tuition directly, the very same policy is beyond judicial review if the state instead provides a 100% tax credit for such tuition.  This rested on a childishly - though probably deliberately - naive view of clearcut tax expenditures as mere "inaction" from not taxing, whereas direct spending is reviewable stat "action."

One could say a lot more about why this is so wrongheaded a view.  Treating clearcut tax expenditures as equivalent to direct outlays does NOT rest on some notion that your money belongs to the government whether they tax it or not. I have addressed this canard, for example, here.  And you don't need to be a constitutional lawyer to realize that it is idiotic to permit constitutional requirements to be evaded through purely nominal changes in form.  (The question of whether direct outlays for religious school tuition should generally be unconstitutional is separate.  But if one views this as unconstitutional, it's unconscionable to let states dodge the rule by playing silly semantic games.)

It's easy to conclude that ACS v. Winn was wrongly decided, and that the Supreme Court should have treated that particular state program exactly as they would have treated a direct outlay.  Other issues involving tax expenditures might, admittedly, be more ambiguous, since the category doesn't have absolutely clear boundaries.  But that is certainly something that the courts could deal with.

With regard to "invisible' taxpayer issues more generally, I would say that one needs a theory of standing.  Why limit it, given that there may be social value to having ambiguous legal issues addressed publicly by the courts, and to correcting misinterpretations of the law and instances of unconstitutional decision-making.  Presumably, the values on the other side of the ledger include not just avoiding over-burdening of the courts, but also upholding the bona fide adversarial structure (if one thinks it is a good thing) and perhaps limiting the courts' ability to throw their weight around, even when they can at least claim to be merely performing their normal interpretive function.

Despite those concerns, it is plausible that current standing doctrine is far too narrow in some settings.  One could argue, for example, for more regularly granting standing based on equal treatment claims that have a specific constitutional basis (e.g., pertaining to religion or race).

Suppose Congress enacted a s"White People's Tax Credit," offering white people a tax credit that equaled $X outright, or say a 100% credit for food outlays up to $X.  Could this be challenged in court under current standing doctrine?  White taxpayers wouldn't have standing to challenge it since they are the direct fiscal beneficiaries, and other taxpayers would  face doctrinal and precedential impediments to their being allowed to challenge it.

I find it hard to believe that the provision wouldn't be somehow reviewable and struck down.  But apparently those who have read the relevant case law carefully (in particular, ACS v, Winn, along with various cases denying taxpayer standing) don't universally share my perhaps naive confidence on this point.