Tax season is right around the corner, and many Americans will soon discover that they paid more taxes in 2015 than they lawfully owed. On filing their returns, they will happily claim a tax refund.
Suppose, however, that the President, with the support of Congress, decides that the rules should retroactively change. Rather than return overpayments to the taxpayers, the government might rewrite prior laws and increase the tax liabilities of Americans. In this way, refunds that were otherwise owed would be denied.
To combat this inequitable result, the Supreme Court has recognized “substantive” due process limits on retroactive legislation.* Though its case law does not draw perfectly clear lines, the Court has not allowed Congress to change the tax law beyond “the year preceding the legislative session in which the law was enacted,” United States v. Carlton, 512 U.S. 26, 38 (1994) (O’Connor, J., concurring), and even then only if it furthers a legitimate interest.**
Hillary Clinton proposes to abrogate these principles. Many U.S. companies have filed tax returns for prior years, and have claimed lawful tax benefits for their domestic production activities or for their U.S. research & development activities. Yet, for various reasons, these companies, going forward, may move jobs or operations overseas. As reported by various media outlets, Secretary Clinton wants to “claw back” these companies’ tax benefits for “several past years.” This retroactive tax proposal would be a “new approach at the federal level.”
As a matter of abstract policy, Clinton’s proposal may or may not be a wise one. To keep jobs in America, it might make sense to threaten severe and retroactive tax penalties on U.S. companies, rather than try to improve the domestic economic environment. But whatever its wisdom, Clinton’s proposal raises serious constitutional problems.
First, as noted above, Clinton’s proposal to rewrite the tax laws for “several previous years” raises due process concerns. The Court has noted that “the presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic.” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994). Simple fairness requires that persons “should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted.” Id. If, as Clinton proposes, the laws should be changed such that U.S. companies cannot rely on the tax laws as they exist when they file their tax returns, a serious due process challenge arises.
Additionally, the heated rhetoric surrounding the proposal (Clinton wishes to “to confront corporations that walk out on America”)raises serious questions regarding unconstitutional bills of attainder. An unconstitutional bill of attainder generally arises when a law is passed that targets a specific person or group for a form punishment, including an “exaction of a tax.” McKesson Corp. v. Div. of Alcoholic Beverages and Tobacco, 496 U.S. 18, 36 (1990). If Clinton, with Congress, successfully passes a narrow law that retroactively punishes companies for moving jobs overseas, those companies can legitimately challenge the validity of that law. See also Consol. Edison Co. of N.Y. v. Pataki, 292 F.3d 338, 347 (2d. Cir. 2002) (holding that Bill of Attainder Clause applies to corporations).
Matters of international economic competition provide a legitimate area of concern for Presidential candidates and legislators. Also, the many improper distortions introduced by the Internal Revenue Code deserve scrutiny. However, any concerns should be addressed through valid laws, not through retroactive tax legislation that tramples on the due process rights of taxpayers and that raises bill of attainder questions.
The constitutional problems raised by Clinton’s tax proposal are especially troubling in light of her claim that she has “‘a bunch of litmus tests’ for Supreme Court nominees.” If Clinton eventually appoints a Justice to the Supreme Court, that Justice should neutrally address the constitutional issues related to Clinton’s retroactive tax penalties, without promising to rule one way or another as part of any “litmus tests” imposed as a condition of the nomination.
This is not to say that Republican candidates will necessarily offer anything better. Clinton’s tax plan for multinationals seems patterned after Donald Trump’s earlier proposal, though Trump’s tax penalties would apply only prospectively, or at least so it seems (one can never tell with him). In any event, when it comes time to actually propose tax legislation, one can only hope that the President, whether it is Clinton or Trump or someone else, will take the Constitution seriously.
*See United States v. Darusmont, 449 U.S. 292, 296-97 (1981) (retroactive tax legislation has been “confined to short and limited periods required by the practicalities of producing national legislation”).
**See also maj. opinion, id. at 32 (application of 1987 statute to 1986 transaction did not violate due process in part because “Congress acted promptly and established only a modest period of retroactivity”).