Academic

Can a City tax Universities for enrolling Out-of-State Students?

By Calvin Massey

     That's what Providence,R.I., proposes to do.  It wants the Rhode Island legislature to authorize cities in the state to impose a tax of $150 per student who comes from outside Rhode Island.  Paul Caron, TaxProf Blog, has links to news accounts of the proposal.  Rhode Island's Governor is opposed to the measure but, should it be enacted, is it constitutionally valid? 

     One likely challenge is under the dormant commerce clause.  Higher education is big business, and universities like Brown compete strenuously for students from around the country, who pay considerable sums of money for their education.  The operative test comes from Complete Auto Transit v. Brady, 430 U.S. 274 (1977).  For the tax to be valid it may not discriminate against interstate commerce unless the state can prove a legitimate reason for the discrimination and that there is no less discriminatory way to achieve its legitimate objective.  This is a tough burden to overcome.  The proposed tax is facially discriminatory.  Providence may assert that its legitimate interest is to apportion the cost of city services more equitably upon those who use the services.  Even assuming this is a legitimate state interest, and not a tautology or an euphemism for local rent-seeking, it could be accomplished by making city services available on a user fee basis rather than through general taxation. 

      Nor is this proposal likely to be valid as a compensatory tax.  Under the tests laid down in Fulton Corp. v. Faulkner, 516 U.S. 325 (1996), and Oregon Waste Systems v. Dep't of Environmental Quality, 511 U.S. 93 (1994), a discriminatory tax is valid as a compensatory tax if the state can establish 1) a specific intrastate tax for which the discriminatory tax compensates, 2) that the discriminatory tax approximates but does not exceed the tax on intrastate commerce, and 3) that the discriminatory tax and the intrastate tax fall on substantially equivalent events.  Rhode Island cannot sustain this burden. I doubt that there is a specific intrastate tax burden for which the $150 out-of-state-student tax compensates.  The classic example of the valid compensatory tax is a use tax levied on out-of-state purchases by state residents of goods to be used in-state, and that makes the total tax bill (use tax plus out-of-state sales tax, if any) equal to the sales tax that would be charged if the goods were  in-state. 

     It is likely true that the proposed tax would not violate Article IV's privileges and immunities clause because higher education is probably not a matter fundamental to interstate harmony and national union.  But the tax will be dead long before it gets to this point. 

    The remainder of the Providence proposal is designed to levy taxes on non-profit institutions owning more than $20 million in real property in Providence.  The tax would be as much as 25% of the amount of property taxes that would be due the city if the taxed entities were not tax-exempt.  That may be (and, in my judgment, is) a bad policy choice, but I do not see any obvious constitutional flaws in the proposal.  

Thanks to fellow Faculty Lounger Al Brophy for bringing this to my attention. 

Full post as published by The Faculty Lounge on May 22, 2009 (boomark / email).