Tax Injunction Act Needs Facelift to Resolve State Case Backlogs

Students in my state tax course often ask why my casebook has so many state decisions and very few federal ones. Behind that innocent question lurks the 1937 Tax Injunction Act, which provides that state tax claims must proceed in state courts “as long as a plain, speedy and efficient remedy may be had” there.

The Tax Injunction Act has never been amended in its 87 years. I can think of no other intrusion on state taxation that suffers from this neglect. In addition to the obvious structural changes in the world during that time, Covid-19 struck in 2020.

The pandemic created a backlog in the courts and tax administrations as things ground to a halt. Added to the pre-existing backlog, cases have now languished for 10 years or more. A speedy remedy no longer exists. The Tax Injunction Act should be interpreted by the courts or changed by Congress to address this delay in justice and grant access to the federal courts.

The TIA was a response to a common strategy by large property taxpayers during the Great Depression that would run to the federal courts and get an injunction against the municipality, which tolled the payment of taxes. Because they were the largest taxpayers in town, their injunction could choke a city and bring it to the negotiating table where it would be squeezed into a favorable settlement.

This strategy wouldn’t work in the state courts where injunctions in tax cases often weren’t available, but even if they were, contested taxes had to be paid.

Until 1988, the TIA didn’t greatly interfere with federal review of state taxes. But that year, Congress terminated mandatory US Supreme Court review of state court decisions dealing with interstate commerce and replaced it with the normal certiorari process. With so few petitions granted, this shift greatly limited review.

The change occurred at the worst time: Interstate commerce was exploding and judicial constraints on state taxation were being relaxed, which guaranteed an increase in litigation yet a decline in Supreme Court review.

Any hope that the TIA would be interpreted to offset this new constraint on Supreme Court review and grant access to the federal courts was rapidly dashed by a series of high-profile taxpayer losses. The federal courts apparently weren’t interested in increasing their workloads.

Fast forward to Covid-19, which clogged the judicial and administrative pipelines as courts and tax administrations were closed or worked at reduced hours. Cases languished and still haven’t been resolved as the pandemic’s effects filtered down throughout the system. Covid-19 also led to retirements of more seasoned personnel, without their being replaced.

State and local tax practitioners can tell stories of decade-long delays. Ryan’s Jim Eads, for example, cites one unresolved refund request that has been pending in a state tax agency for 10 years. Two different administrative law judges held for the taxpayer. Each time, the quasi-judicial commission in charge of the agency remanded the case at the agency’s request for development of additional facts, without any further instruction.

The second judge specifically noted that he thought all the facts had already been developed. The case is once again on remand to yet a new judge, so the saga continues. To make matters worse, the state doesn’t pay interest, and a writ of mandamus was denied.

Although the TIA requires a state to provide a speedy remedy, the lower federal courts treat “plain, speedy and efficient” together and analyze them as a whole. One lower federal court held that a “full hearing and judicial determination” in which the taxpayer “may raise any and all constitutional objections to the tax” is sufficient to satisfy the act.

The Supreme Court, however, recognized that each of the three conditions requires its own inquiry and analysis, and it concluded that a two-year delay under the facts of that case satisfies the “speedy” requirement. It provided no further guidance.

The TIA has never been amended. Public Law 86-272 is routinely criticized for being unamended at age 65. It is time that similar opprobrium be extended to the TIA.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Richard D. Pomp is professor at University of Connecticut Law School and member of the American College of Tax Counsel.

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