Justice Alito, State Tax Hero?

Murphy v. NCAA delivers an unexpected boost to state revenue (and to sanctuary cities too)

I had been waiting with bated breath for the Supreme Court’s decision in Murphy v. NCAA, formerly Christie v. NCAA. (Sorry, Chris Christie: You won’t have your name attached to the winning side of a landmark constitutional case — your successor will.) Anyhow, it came down yesterday — and it’s way more interesting than I anticipated. In a nutshell: Not only did the Supreme Court strike down the federal law at issue, which had stopped states, counties, and cities from legalizing sports gambling within their borders, but it also appears to have invalidated a broad swath of congressional limitations on state tax authority. (Oh, and it also saved sanctuary cities.)

Murphy concerned the constitutionality of 28 U.S.C. § 3702, part of the Professional and Amateur Sports Protection Act (PASPA), which provided (most relevantly) that “[i]t shall be unlawful for … a governmental entity to … authorize by law or compact … a … gambling or wagering scheme based, directly or indirectly … on one or more competitive games in which amateur or professional athletes participate ….” (Thanks in part to Harry Reid, Nevada was exempt from the law.) New Jersey, which also had an opportunity to qualify for an exemption but let that opportunity pass it by, decided in 2012 that it in fact did want to legalize sports gambling in Atlantic City, and it enacted a state law to that effect.

PASPA now stood in its way. The NCAA and the major professional sports leagues all challenged the New Jersey law as a violation of the federal statute — and they succeeded the first time around in federal district court and in the Third Circuit. (The Supreme Court chose to remain on the sidelines). New Jersey next came up with the clever idea of repealing its existing general gambling prohibition with respect to sports gambling by individuals over 21 at casinos in Atlantic City. New Jersey argued that it was not “authoriz[ing]” sports gambling — it was just no longer prohibiting sports gambling among a segment of the population in a particular location. Every state other than Nevada also has a law on its books that prohibits sports gambling, so if New Jersey’s strategy worked, then every other state could repeal its ban on sports gambling too. (To misquote Frank Sinatra: “If I can make it there, I’m gonna make it anywhere. It’s up to you, New Jersey, New Jersey ….”)

The sports leagues again challenged the New Jersey law, and they again succeeded in federal district court and the Third Circuit. But this time, the Supreme Court decided to enter the fray, holding oral arguments in December and issuing its decision yesterday. Justice Alito — incidentally, a New Jersey native — authored the majority opinion, joined in full by four of his colleagues and in part by Justice Breyer. Justice Ginsburg filed a dissent that Justice Sotomayor joined in full and Justice Breyer joined in part, but interestingly, the dissent does not dispute the proposition that PASPA is unconstitutional insofar as it bars states from authorizing sports gambling within their borders.

Justice Alito first says that New Jersey’s partial repeal of its old laws banning sports gambling amounts to “authoriz[ation]” for purposes of PASPA, and so if PASPA stands, the New Jersey law must fall. But then — and here’s where things start to get very interesting — he says that insofar as PASPA prohibits New Jersey from authorizing sports gambling, PASPA violates the constitutional anti-commandeering doctrine and must be struck down on those grounds.

As articulated in New York v. United States and Printz v. United States, the anti-commandeering doctrine prohibits Congress from imposing affirmative duties upon state legislatures or executive officials to enact or enforce specific laws. What we didn’t know until yesterday was whether the anti-commandeering doctrine also prohibits Congress from issuing negative commands to states that prevent their legislatures from passing specific laws.

Justice Alito’s opinion answers that question. The distinction between “affirmative” duties and negative prohibitions is “empty,” he says. “The basic principle — that Congress cannot issue direct orders to state legislatures — applies in any event.” He then imagines: “Suppose Congress ordered States with legalized sports betting to take the affirmative step of criminalizing that activity and ordered the remaining States to retain their laws prohibiting sports betting.” In Justice Alito’s view, “There is no good reason why the former would intrude more deeply on state sovereignty than the latter.”

Fair enough, but what about the “fundamental principle of the Constitution” that “Congress has the power to preempt state law”? Cf. Crosby v. National Foreign Trade Council, 530 U.S. 363, 372 (2000). Totally different, says Justice Alito:

“[All] types of preemption … work in the same way: Congress enacts a law that imposes restrictions or confers rights on private actors; a state law confers rights or imposes restrictions that conflict with the federal law; and therefore the federal law takes precedence and the state law is preempted. … [E]very form of preemption is based on a federal law that regulates the conduct of private actors, not the States. Once this is understood, it is clear that the PASPA provision prohibiting state authorization of sports gambling is not a preemption provision because there is no way in which this provision can be understood as a regulation of private actors” (paragraph breaks omitted).

Well, that pretty much resolves the constitutionality of 8 U.S.C. § 1373, the provision that (according to the Trump administration) prohibits state and local governments from enacting “sanctuary state” and “sanctuary city” laws. Section 1373 says that “a Federal, State, or local government entity or official may not prohibit, or in any way restrict, any government entity or official from sending to, or receiving from, the [Department of Homeland Security] information regarding the citizenship or immigration status, lawful or unlawful, of any individual.” That directs state and local governments but does not regulate private actors, so it cannot be saved under the preemption exception to the anti-commandeering doctrine. Nice! (And sorry, ICE ….)

Some of us predicted that Murphy v. NCAA would have important implications for the sanctuary cities controversy. What I, for one, didn’t expect is that it would have such significant implications for state tax law as well. Why might it? Well, a whole host of federal statutes limit the tax authority of states and their subdivisions. To borrow from Justice Alito, they violate “[t]he basic principle … that Congress cannot issue direct orders to state legislatures,” and these provisions cannot “be understood as a regulation of private actors.” To illustrate:

— “No State … in which a Member of Congress maintains a place of abode for purposes of attending sessions of Congress may, for purposes of any income tax … treat such Member as a resident or domiciliary ….” 4 U.S.C. § 113. (Maryland and Virginia: Looks like you can tax members of Congress who stay in your states for 183 days. DC: Sorry, the anti-commandeering doctrine probably doesn’t apply to you. Fourth Circuit: United States v. Maryland, 636 F.2d 73 (4th Cir. 1980), now looks quite questionable.)

— “No State … shall impose any tax on any change in beneficial or record ownership of securities effected through the facilities of a registered clearing agency … unless such change in beneficial or record ownership or such transfer or delivery or receipt would otherwise be taxable by such State or political subdivision if the facilities of such registered clearing agency … were not physically located in the taxing State ….” 15 U.S.C. § 78bb(d). (Illinois and New York: As homes to the largest registered clearing agencies, take note!)

— “No State … shall have power to impose … a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are … the solicitation of orders … for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State ….” 15 U.S.C. § 381. (States: Regardless of the result in South Dakota v. Wayfair, which concerns sales taxes, you probably can extend your business income taxes to out-of-state retailers that solicit in-state customers. The Supreme Court has said that “[s]ection 381 was designed to define clearly a lower limit for the exercise” of state power to tax the income of out-of-state businesses, see Heublein, Inc. v. South Carolina Tax Commission, 409 U.S. 275, 280 (1972), but it looks like maybe that’s a limit no longer.)

— “No State … may impose or assess a tax on or with respect to the generation or transmission of electricity which … results, either directly or indirectly, in a greater tax burden on electricity which is generated and transmitted in interstate commerce than on electricity which is generated and transmitted in intrastate commerce.” 15 U.S.C. § 391. (The Supreme Court has held that section 391 “was within the constitutional power of Congress to enact,” see Arizona Public Service Co. v. Snead, 441 U.S. 141, 150 (1979), but that now seems doubtful.)

— “No State … may impose any … [t]axes on Internet access ….” 47 U.S.C. § 151 note. (There goes the Internet Tax Freedom Act . . . . )

(I am confident that this list is not exhaustive. Tweet at me or e-mail me if you have more examples, or leave them in the comments section below.)

[Update: Another provision that appears to fit the bill is 4 U.S.C. § 114: “No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State ….” H/t Bruce Steiner. A harder (and very big) question concerns 31 U.S.C. § 3124: “Stocks and obligations of the United States Government are exempt from taxation by a State or a political subdivision of a State.” It’s phrased as an exemption rather than a prohibition, but per Justice Alito, “it is a mistake to be confused by the way in which a preemption provision is phrased.”]

Might some of these federal laws be salvaged on the grounds that they implicitly “impose[] restrictions or confer[] rights on private actors” (e.g., that the Internet Tax Freedom Act implicitly confers upon private actors a right to be free from taxes on Internet access)? Maybe, but if words have meaning, then probably not. Any federal law that says “states cannot regulate X” can be redescribed as a law that says “private actors have the right to do X notwithstanding any state law to the contrary”; any law that says “states cannot authorize X” can be redescribed as a law that says “private actors are prohibited from doing X notwithstanding any state law that authorizes them.” If this sort of redescription maneuver works, then Murphy itself should have come out the other way, because the challenged provision of PASPA could be redescribed as a permissible regulation of private actors (which the Supreme Court said it was not).

Finally, note that nothing in Murphy prevents Congress from paying states not to regulate or tax or authorize X; it simply shifts an important entitlement from the federal government to the states. [Shameless plug: For more on the practical and distributional implications of this shift, see Federalism as a Safeguard of Progressive Taxation, 93 N.Y.U. L. Rev. 1 (2018).] So, for example, Congress could pay Maryland and Virginia not to tax members of Congress who spend 183 or more days in those states, or it could pay Illinois and New York not to tax registered clearing agencies in those states, or it could pay states not to extend their business income taxes to out-of-state retailers that solicit in-state customers. What Murphy appears to do — and rather fittingly so in light of its wagering origins — is to force Congress now to ante up.