Court-ordered tax: What are the limits?

Years ago, former Governor Phil Batt and the Idaho Legislature approved a property tax law that limits local governments to no more than a 3 percent increase in base property taxes each year.

Yet on November 10, Chief Judge B. Lynn Winmill of the Idaho Federal District Court ordered Boise County to levy taxes that may exceed that limit.

The order raises the question of whether there are limits to the authority of a Federal Court to order a state governmental entity to impose taxes.

The issue originated on December 16, 2010, when Alamar Ranch, LLC obtained a jury verdict against Boise County for more than $4 million for a finding the county violated the Federal Fair Housing Act. Alamar sought additional attorneys’ fees and costs of more than $1.2 million. Boise County appealed with the 9th Circuit Court of Appeals on January 18.

Unable to reach a settlement directly with Alamar and fearing that Alamar would seize the county’s cash assets necessary for essential services, Boise County filed for Chapter 9 bankruptcy protection on March 1. On September 2, the Bankruptcy Court dismissed Boise County’s bankruptcy case, finding, in part, that the county did not meet the Bankruptcy Act’s statutory tests for insolvency.

At the center of the decision are Articles VII and VIII of the Idaho Constitution, and Idaho statutes that affect the ability of municipal or governmental entities to obtain funds for paying a judgment.

Of significant importance, the Bankruptcy Court observed that “…When interpreting state law, this court is bound by the decisions of the state’s highest court. When state law is unsettled or has not directly addressed an issue, this court ‘must predict how the highest state court would decide the issue.’”

With two recent Idaho Supreme Court decisions, City of Boise v. Frazier and City of Idaho Falls v. Fuhriman, on the issue of what governmental obligations are “ordinary and necessary” under Article VIII, §3 of the Idaho Constitution, the Bankruptcy Court predicted that the Idaho Supreme Court would find that the Alamar judgment was an “ordinary and necessary” expense. The “…complexity and uncertainty attendant to this field of law, exacerbated, according to some commentators, by the recent Idaho Supreme Court decisions in” Frazier and Fuhriman, make this question alone one which cities, counties and any taxing district in the state find both perplexing and of significant import.

With this backdrop, Judge Winmill’s order directing Boise County officials to conditionally raise taxes beyond the confines of state statute is likewise of keen interest, and here’s why.

With few limited exceptions, cities and counties are expressly precluded by state statute from making expenditures in excess of their annual budget appropriations. The Legislature’s chosen method of assuring compliance is to impose personal liability on the county official making the prohibited expenditure and not on the county itself. (See, I.C. §31-1607). One of the exceptions is for expenditures made upon order of a court of competent jurisdiction, such as the Federal District Court.

However, an unanswered question in the context of the Boise County order is whether or not federal courts may order local governments to increase taxes to enforce tort judgments based upon federal law, as opposed to those that remedy U.S. constitutional violations. A bit of legislative history makes the dilemma more troublesome. The Idaho statutes were first amended to provide a mechanism for paying judgments. However, the statutes were subsequently amended by placing a cap on raising taxes. Does the most recent act of the Idaho Legislature control the conflict between the statutes? This issue, and other questions arising from the Boise County case will be discussed in the continuation of this article in the next edition of the Idaho Business Review.

Kim J. Trout is a partner at Trout Jones Gledhill Fuhrman Gourley, P.A. Kim specializes in guiding clients through their business ventures and litigation. He can be reached at [email protected]