Many states impose absolute limits on municipal taxes, such as a one percent maximum property tax. States also commonly require electoral approval of municipal taxes. California’s Proposition 13 is the best-known example of such state-imposed requirements. Such restrictions reduce municipal flexibility in dealing with financial distress and may contribute to municipal financial distress.
This Article argues that Congress may constitutionally preempt such rules in the exercise of its bankruptcy power. Preemption of state tax limits in bankruptcy should be found to lie within Congress’s power under the Bankruptcy Clause. The Clause has been interpreted to provide expansive authority to legislate on the subject of insolvency—that is, a person’s general inability to pay debts. Taxation is intimately bound up with municipal ability to pay debts. Indeed, taxation occupies a position in municipal debt collection roughly analogous to that of property in non-municipal debt collection. The Supreme Court’s understanding of the scope of the Bankruptcy Clause has consistently evolved in the direction of finding broader authority under the Clause to meet novel conditions, such as the unprecedented potentially impending municipal debt crisis brought on by a squeeze between pension obligations that cannot be changed and taxes that cannot be increased.
The most serious objection to the Article’s thesis may be that preempting state tax limits would violate the Tenth Amendment. This Article argues that the requirement that states consent to their municipalities’ bankruptcies cures any Tenth Amendment problem. Perhaps somewhat surprisingly, the power of state consent to municipal bankruptcy is such that it authorizes municipalities to propose bankruptcy plans that would otherwise violate state law, including the state constitution. The landmark decisions in Detroit and Stockton, which held that municipal bankruptcy trumped state constitutional protections for municipal retirees, are recent and prominent cases that embrace this proposition.