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CRS — Constitutionality of Retroactive Tax Legislation

November 21, 2012

Constitutionality of Retroactive Tax Legislation

Source: Congressional Research Service (via Federation of American Scientists)

The question is frequently asked whether Congress can enact retroactive tax legislation. It can be an important one for Congress because (1) an ever-growing number of tax provisions have expiration dates and some may not always be extended in a timely manner; (2) an interest in finding new revenue can encourage making a provision retroactive in order to increase the amount raised; and (3) an intent to influence behavior by means of a tax provision can sometimes include a desire to “penalize” past conduct. It is clear there is no absolute constitutional bar to retroactive tax legislation. Nonetheless, it is possible, albeit rare, for retroactive tax legislation that increases a taxpayer’s tax liability to violate the Constitution. For example, some cases where retroactive taxes have been struck down suggest that extended periods of retroactivity and lack of notice of a wholly new tax can raise due process concerns under the Fifth Amendment.

While it is often asked whether such legislation would violate another of the Fifth Amendment’s provisions—the Takings Clause—it seems unlikely this would be the case. The Supreme Court has long ruled that the sovereign’s taxing power and its power to take private property upon payment of just compensation are distinct. Most of the retroactivity challenges to taxes have been litigated on a substantive due process rather than takings theory. On the other hand, if a court can be convinced that what looks like a tax is, in reality, an arbitrary confiscation of property, then a taking might be found.

Other provisions of the Constitution may be implicated if the legislation appears to target certain taxpayers or attempts to penalize past conduct. Any retroactive tax legislation found to be a criminal penalty will likely be struck down as a violation of the Ex Post Facto Clause, which the Supreme Court has done on at least one occasion. In extremely rare circumstances, tax legislation that seems to target certain taxpayers might raise concerns under the equal protection guarantees of the Fifth Amendment. Finally, it might also be asked whether such legislation is an unconstitutional bill of attainder. While there do not appear to be any instances of this occurring, it seems possible that retroactive tax legislation could, depending on its specifics, meet the criteria to be a bill of attainder. The two main criteria that courts have used to determine whether legislation is an unconstitutional bill of attainder are (1) whether specific individuals are affected by the statute (“specificity” prong), and (2) whether the legislation inflicts a punishment on those individuals (“punishment” prong). The Supreme Court has identified three types of legislation that would fulfill the “punishment” prong of the test: (1) where the burden is such as has “traditionally” been found to be punitive; (2) where the type and severity of burdens imposed cannot reasonably be said to further “non-punitive legislative purposes”; and (3) where the legislative record evinces a “congressional intent to punish.”

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