eGnus

July 1, 2016 Federal Tax Reform & State & Local Authority & Revenues. Increasingly it appears the new Congress elected in November will take up tax reform next year—likely considering federal tax changes that would affect every state, city, and county in the country—but, as with 1986, with less than a full understanding or appreciation of how such Congressional actions would impact the nation’s state and local governments. House Speaker Paul Ryan (R-Wis.) has presented his federal tax reform proposal— a proposal which seeks a substantial tax cut for businesses and high income individuals, especially investors and high-income households. It would take a big step towards a business cash flow tax; it proposes steep business tax rate cuts, and substantial cuts for high and middle income taxpayers. To pay for or offset the steep tax cuts, his plan would eliminate the deductibility of state and local taxes, potentially, as happened nearly four decades ago under former President Ronald Reagan, initiating a major tax reform debate in Congress with signal risks for the authority of states and local governments, as happened in 1986: to issue tax-exempt municipal bonds, e.g. raising the issue with regard to reciprocal immunity: that is, whether the current system whereby states, cities, and counties may not impose state or local income taxes on the interest paid to their taxpayers from U.S. Treasury bonds, just as the federal government may not impose federal income tax liabilities on the interest of state and local bonds. In introducing his proposal, Speaker Ryan claimed that “no income group will see an increase in its federal tax burden” and that the plan would raise roughly the same amount of revenues as the current tax code—seemingly based upon optimistic assumptions that the tax cuts would trigger significant economic growth. Where’s the money, honey? Irrespective of what next November’s election results are, because some $400 billion in federal tax expenditures are on course to expire, it seems more and more certain that 2017 will witness—no matter who is elected—a major debate about federal tax policy. The next president, whoever that might be, will confront a number of fiscal challenges during her or his first term, including growing deficits, virtually unprecedented levels of debt, and an aging population. Currently, debt held by the public totals $14 trillion, or 75 percent of Gross Domestic Product (GDP), which is nearly twice the historic average and the highest share of the economy other than right after World War II. The debt is projected to grow as a share of the economy to almost 86 percent by 2026 and close to 130 percent by 2040. Moreover, in an aging nation, Social Security, Medicare, and Medicaid—entitlement programs—can only continue to grow; so something, fiscally, will have to give: either steep cuts in discretionary spending affecting state and local leaders, or significant changes in federal revenues and tax policy. In both the blueprint and at a news conference, Republican leaders said efforts to implement these changes are targeted for 2017. The House GOP-released tax reform blueprint would lower the corporate tax rate to

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20 percent, reduce the number of individual tax brackets to three, allow 100 percent business expensing, and eliminate the deductibility of interest for businesses. It proposes a 50 percent deduction for capital gains and the repeal of the estate tax and the alternative minimum tax. Proponents say they want to simplify the income tax until taxpayers can file postcard-sized returns. The plan retains a few popular individual tax preferences, such as the earned income tax credit, the mortgage interest deduction, exclusions for contributions to retirement savings plans and the deduction for charitable giving. The Citizens for Tax Justice has guesstimated the plan, if adopted as proposed, would increase the federal debt and deficit by $4 trillion over the next decade—with the bulk of the benefits accruing to the nation’s wealthiest individuals. It estimates that some 60 percent of the individual income tax cuts would go the nation’s top one percent. The Tax Policy Center has not formally estimated either the revenue or distributional effects of the proposal. But it is hard to imagine how these tax cuts could pay for themselves. As proposed, the plan would collapse the current seven-rate individual tax system to three rates: 12-25-33 percent; it would approximately double the current standard deduction and personal exemption to $24,000 for joint filers ($12,000 for singles). It would reduce the corporate income tax rate to 20%; a reduction of the current seven-bracket individual income tax rate to three brackets with a top rate of 33%; and a repeal of the Alternative Minimum Tax for both corporations and individuals. As in 1986, the proposed steep rate cuts on corporations and higher income Americans would reduce current federal tax revenues—even as the federal government has not just a large and growing federal deficit, but an increasing national debt. That will force—as happened to President Reagan in 1986--the issue of how to pay for or offset the significant loss of federal tax revenues. That led a House Republican task force last March to release a set of principles wherein it sought to limit current federal tax expenditures: deductions, exclusions and credits in the current tax code as well as close existing loopholes or tax expenditures— currently the fastest growing part of the federal budget. Thus, the most current version would repeal the individual Alternative Minimum Tax and the estate and gift tax; eliminate the deductibility of state and local taxes, and most smaller deductions and credits; it would retain the mortgage interest and charitable giving, as well as tax preferences to encourage savings for retirement and higher education, and for buying health insurance. Half of investment income would be tax-free. The rest would be taxed at ordinary income rates, effectively setting a top rate on capital gains, dividends, and interest of 16.5 percent. Reciprocal Immunity. It was a relatively comparable situation which, in 1986, led the former Reagan administration to propose both the elimination of the deductibility of state and local taxes, but also to eliminate reciprocal immunity—meaning that while the proposed plan would have continued to bar states and local governments to impose income taxes on the interest on Treasury bonds, it would have eliminated the immunity of municipal bonds issued by states and local governments from having the interest on such bonds being federally taxable. Brexit or Breaks it? The dynamic duo of Natalie Cohen, Senior Analyst, and Roy Eappen of Wells Fargo this week considered how the vote in England to exit the EU might affect state and local tax-exempt bonds—noting: “We see the immediate effects as intensifying trends that have already been underway for some time, about which we have been writing and highlight below. Longer term, a high level of uncertainty has the ability to curb individual and corporate spending and investment and makes state and local budget planning more difficult. They note that investors have continued—over the last 38 weeks—to pour money into state and municipal funds—and that foreign investors continue to flow money into municipal mutual funds, adding that “Foreign investment into municipals continues to grow. European insurance companies find taxable municipal bonds attractive,” noting that the muni markets reflect changes in Treasury market activity in investors’ “flight to quality:” long term (30-year) municipal securities have continued to outperform.” And capital borrowing costs for states, cities, and counties closed last week at 2.08%, the lowest rate since June of 1980! They note: “[I]f there was a time for state and local governments to borrow for infrastructure a few months ago, these new, lower rates may shake loose additional new money

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borrowing—as well as refinance. The dynamic tag team warns, however, that the Wall Street reaction could translate into lower state and local income and capital gains tax revenues. With regard to state and local tax revenues, they noted that “market losses at upper income levels (and to an extent across income levels) affect spending on goods and services. Sales tax reliant states would feel the pinch of constraint. These include Tennessee (9.46% combined average state and local rate according to the Tax Foundation), Arkansas (9.30%), Louisiana (9%), Alabama (8.97%), and Washington (8.9%).” Finally, they point out that state and local public pension funds invested in capital markets assets suffer losses—which can translate to lower funding levels — putting further pressure on the tax base to meet targeted returns. The share of investment in international assets runs the gamut in public pension funds, from none to more heavy allocations. Puerto Rico. President Obama signed the PROMESA Puerto Rico legislation yesterday, clearing the way for the appointment of an oversight board, such as has occurred previously with New York City and Washington, D.C., except the challenge will likely be much harder: Puerto Rico has suffered a population slide that is steeper and more financially disastrous than in any U.S. state since the end of World War II: more than 9% in the past decade, with a disproportionate number from the island’s labor force, which shrank 20% over the last decade even as it grew 5% in the continental U.S.—a decade during which the unemployment level has remained over 10 percent and nearly half the population has become dependent on the territory for health care. Net migration to the U.S., where Puerto Ricans can move with no restrictions, was 250,000 so far this decade. The population of Puerto Rican children under the age of five has declined 37% since 2000; in contrast nearly one in five residents are at least 60—a higher level than any U.S. state. It appears that the outflow of able-bodied Americans from Puerto Rico has been the result of a combination of the collapse of U.S. territory’s health-care infrastructure (Puerto Rico receives less in federal funds than what it would as a state, even though doctors must provide the same level of care and residents pay the same Medicare tax as mainland residents.) Worse, the island’s health-care funding problems are expected to worsen next year when federal grants that shored up the Medicaid program run out: Puerto Rico will have to come up with more than $1.6 billion or reduce services—even as it is the U.S. frontier to the Zika virus. What this means is a signal challenge for the new law’s to-be-appointed sevenmember oversight board, charged with the challenge of imposing balanced budgets and fiscal plans, as well as to file debt restructuring petitions on behalf of the Commonwealth and its entities in a federal district court as a last resort, should voluntary negotiations with creditors fail. Perhaps the biggest challenge will be how the oversight board addresses Puerto Rico’s long-term fiscal health—and what it will do with regard to municipal debt and pension obligations. The law does include a provision for a taskforce for economic initiatives: by Dec. 31st, the taskforce must submit its recommendations for improving Puerto Rico’s economy to the control board—with its most critical recommendations by Sept. 15th.

2016 Schedule The second session of Congress began at noon January 3rd—as it does each odd-numbered year following a general election, unless it designates a different day by law. The House and Senate will be in session next week after the 4th, before recessing in mid-July.

State & Local Finance In our special section, this week, we consider the state and local challenges associated with the quasiprivatization of emergency response in a growing number of cities and counties, and the implications of increased income inequality for state and local leaders.

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Public versus Barbarian at the Gate Critical Public Safety. Danielle Ivory, Ben Protess, and Jennifer Daniel, in a piece “What Can Go Wrong When Private Equity Takes over a Public Service,” this week in the New York Times, considered some of the critical state and local public policy issues implicated in the growing private equity investment and ownership in emergency or 9-1-1 services creating increasing tensions with regard to county and municipal duties and responsibilities to protect human lives as opposed to corporate profits: Under private equity ownership, the report found, “some ambulance response times worsened, heart monitors failed, and companies serving cities and towns went bankrupt. It seems that in the wake of the Great Recession, these enormous Wall Street private equity firms moved in with a very different perspective: profit. Firms such as Walter Pincus, Kohlberg Kravis Roberts & Company, and others have invested in emergency services—not a service that cities, towns, or counties run for profit—and where, in some cases, the private equity firms filed for bankruptcy—but not chapter 9 municipal bankruptcy wherein the federal law ensures the prevention of any interruption in vital public safety, but rather where federal bankruptcy allows a private corporation to hand over the keys and simply walk away. Income Inequality & Unfederalism. Under former President Richard Nixon—at a time when the nation’s three levels of government had both formal and informal relationships—there were organizations such as the Advisory Commission on Intergovernmental Relations so that elected leaders from each of the levels could gather to better understand the impact or potential impact of the actions of one level on the other. Thus, there was a recognition that family income was not uniformly distributed across the country, and that, therefore, there was a federal role to try to mitigate some of the fiscal disparities. No longer. Mayhap this is the age of go it alone federalism. But in a year of Ferguson and Flint, we are able to observe that income inequality has risen in every state since the 1970’s: in many such inequality has worsened since the Great Recession: in nearly half the nation’s states the top one percent—since the Great Recession—has garnered at least half of all income growth. In another ten, the highest one percent of incomes grew in double digits— but the remaining 99 percent realized falling income. Nationally, between 2009-2013, the top 1 percent captured 85.1 percent of total income growth. Unequal income growth since the late 1970s has pushed the top 1 percent’s share of all income above 24 percent (the 1928 national peak share) in five states, 22 metro areas, and 75 counties. This seems not to be a topic on any Congressional agenda—indeed, as discussed above, the tax reform proposals likely to be discussed in Congress next year would likely accelerate disparities. This information, from a June 16 Economic Policy Institute report, “Income inequality in the U.S. by state, metropolitan area, and county,” by Estelle Sommeiller, Mark Price, and Ellis Wazeter, notes the widespread extent and growth of income inequality that is heightening economic anxiety among the American electorate: In 2013, income inequality was much higher in many states, metropolitan areas, and counties than for the United States overall. In 2013 the top 1 percent of families nationally made 25.3 times as much as the bottom 99 percent: Nine states had gaps wider than the national gap. In the most unequal states—New York, Connecticut, and Wyoming—the top 1 percent earned average incomes more than 40 times those of the bottom 99 percent. It adds that fifty-four of 916 metropolitan areas had gaps wider than the national gap. In the 12 most unequal metropolitan areas, the average income of the top 1 percent was at least 40 times greater than the average income of the bottom 99 percent. Most unequal was the Jackson metropolitan area, which spans Wyoming and Idaho; there the top 1 percent in 2013 earned on average 213 times the average income of the bottom 99 percent of families. The next 11 metropolitan areas with the largest top-to-bottom ratios were:  Bridgeport-Stamford-Norwalk, Connecticut (73.7);  Naples-Immokalee-Marco Island, Florida (73.2);  Sebastian-Vero Beach, Florida (63.5);  Key West, Florida (58.5);  Gardnerville Ranchos, Nevada (46.1);  Miami-Fort Lauderdale-West Palm Beach, Florida (45.0);  Midland, Texas (44.3);  Glenwood Springs, Colorado (42.4);

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San Angelo, Texas (40.9); Las Vegas-Henderson-Paradise, Nevada (40.7); and Summit Park, Utah (40.3).

The report notes that while incomes at all levels declined as a result of the Great Recession, since then, income growth has been lopsided: the top 1 percent captured a seemingly unprecedented share of economic growth while enjoying relatively high income growth: between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent. In 24 states the top 1 percent captured at least half of all income growth between 2009 and 2013. In 15 of those states the top 1 percent captured all income growth between 2009 and 2013: Connecticut, Florida, Georgia, Louisiana, Maryland, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, South Carolina, Virginia, Washington, and Wyoming. In the other nine states, the top 1 percent captured between 50.0 and 94.4 percent of all income growth. Those states were Arizona, California, Illinois, Kansas, Massachusetts, Michigan, Oregon, Pennsylvania, and Texas. In 10 states, top 1 percent incomes grew in the double digits, while bottom 99 percent incomes fell. Those states were Wyoming (55.1 percent versus -2.3 percent), Nevada (25.6 percent versus -13.3 percent), Washington (21.6 percent versus -0.8 percent), New York (20.6 percent versus -3.9 percent), Connecticut (17.2 percent versus -1.6 percent), New Jersey (15.2 percent versus -1.4 percent), Florida (15.0 percent versus -4.3 percent), Missouri (14.8 percent versus -1.8 percent), Georgia (12.3 percent versus -2.7 percent), and South Carolina (11.3 percent versus -0.1 percent). Brexit & America. The dynamic Rockefeller Institute duo of Lucy Dadayan and Donald J. Boyd, in their latest report, “Slowing Growth in State Tax Revenues Weak Stock Market, Shaky Oil Prices, and Brexit Aftermath Leave the States with Much Uncertainty,” this week noted that state tax revenue growth slowed significantly in the second half of 2015 and, according to preliminary data, early in 2016. The authors wrote that year-over-year growth was 1.9 percent in the fourth quarter of 2015, and preliminary data for the first quarter of 2016 call for another quarter of 1.9 percent growth. Personal income tax revenue growth slowed to 5.1 percent on a year-over-year basis in the fourth quarter. Growth was weak in sales tax collections, at 2.1 percent, and motor fuels tax at 3.5 percent during this same period. State corporate income taxes declined by 9.2 percent in the fourth quarter of 2015, compared to average growth of 5.3 percent in the four previous quarters, and oil state economies continue to be suffering from significant declines in prices and production. All eight states with economies heavily dependent upon oil and mineral production had yearover-year declines in total state tax revenue in the fourth quarter of 2015, the report said. Also reported was slowing growth in withholding from wages in the fourth quarter, and first quarter slowing in estimated payments and final returns. Adding to this picture of slow growth and declines, the report put a spotlight on the potential impact of this recent slowing of state revenue performance, combined with a volatile stock market and turmoil related to Brexit. This suggests that the outlook for state budgets in the 2016-17 state fiscal year that begins on July 1st in 46 states has become "gloomier and more uncertain," the report's authors wrote. To read the report, go to www.rockinst.org/pdf/government_finance/state_revenue_report/2016-06-30-SRR_103_final.pdf. Which Governments Will Drive the Future? Here, the day after the first fatality in a self-driving car, and the week a classy cohort of senior city and county leaders released their report, “Driving the Region’s Future,” we recognize that a different kind of Indy 500 is underway: which regions will shape the future? Michigan, one of the nation’s oldest automobile centers appears to be in the forefront: it is constructing “smart roads,” in which are placed along a 125-mile triangle from St. Clair Shores to Brighton and Ann Arbor and back, more than 100 sensors capable of detecting a vehicle’s speed and location, so that state

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and federal transportation managers can see how these sensors interact with the connected and driverless vehicle prototypes automakers are developing, especially when it comes to alerting cars to oncoming hazards — whether such hazards be red traffic lights, icy roads, work zones, or lane closures. Michigan, seeking to be at the forefront in mobility research and development of automated cars, believes that socalled vehicle-to-infrastructure project will be crucial not only to understanding how the technology works to improve vehicle safety, but also, many hope, to attracting the economic benefits that come with being an R&D hub. The Michigan Department of Transportation has applied for a share of a $60 million federal grant to buy more of these devices, in conjunction with the University of Michigan, where the federal government launched a connected vehicle pilot program several years ago. The goal: to keep Michigan on the cutting edge of all things mobility, given competition from other states. Interestingly, at a time of reduced federal highway trust funds, the emerging technology is raising a new layer of fiscal challenge to the ongoing question about how the state funds its infrastructure: How to pay for the systems the country will need in the future, not just the ones we have today. That is especially critical for the state, because, for years it has under-invested in its infrastructure, one of the reasons the state ranked last among the 50 states in a 2009 study by the American Society of Civil Engineers. To date, many of the sensors set up around metro Detroit were purchased with federal dollars, but such dollars are limited, so now the state is undertaking a different kind of Treasure hunt—seeking to develop a business model that could support more “smart” infrastructure projects — including tapping the private sector for money. If you take out your handy-dandy adding machine, you can see why: at a cost of roughly $5,000 to $6,000 per sensor, the state is targeting specific locations rather than deploying them for deployment’s sake. The American Association of State Highway and Transportation, two years’ ago, projected that by 2040, when the market for connected vehicles has matured, 80 percent of the nation’s traffic signals will be equipped with sensors; 25,000 more would be set up at other roadside locations—adding that besides the wireless devices themselves, other infrastructure systems necessary to support connected vehicles likely will include cybersecurity protections; mapping and geo-positioning services that can identify a vehicle’s location; and a data center equipped with servers to collect data transmitted from vehicles and to send signals—with any number of potential applications, ranging from contributing to driver safety improvements, helping public agencies monitor road conditions, or enabling international border crossings and collect fees. To Cap or Not to Cap. North Carolina voters confront a taxing vote next November: whether to vote to cut the state’s income tax nearly in half—with that rate part of the state’s constitution—but where lowering it could risk the state’s credit rating. A bill (HB 3) pending before the North Carolina General Assembly would ask voters to lower the income tax rate to 5.5% from 10%, a move some Republicans claim is intended cap government spending. Their goal, some leaders say, is to adjourn before Monday. The bill includes a section entitled “Taxpayers Protections,” which would ask voters on the Nov. 8 ballot to amend the state’s constitution and lower the income tax rate; it would also mandate annual contributions to the state’s rainy day fund and bar the Governor from tapping the money in an emergency. Bull author Sen. Bill Rabon (R-Onslow) describes it as “the smart thing to do. It shows North Carolina is trying to work in the 21st century.” Should voters agree to lower the tax cap, Republican lawmakers say they plan to continue budgeting reforms that would include heavier reliance on the state sales and use tax, which they have broadened to include more items. North Carolina’s budget is primarily backed by income and sales tax collections.

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Book’em. Nick Samuels, vice president and senior public finance credit officer with Moody’s Investors Service, notes that a majority of state budgets rely on a combination of income and sales tax revenues: for most states, income taxes represent about 40% of revenues and sale taxes represent 30%. According to Mr. Samuels, whatever the revenue source, state budgets are sensitive to volatility in revenue, depending on how spending plans are structured: state sales and use taxes can be more sensitive to immediate economic trends, while high income states can be affected by changes in the stock market, which can have an impact on income tax filings. He adds that some states have maintained the ability to budget even with difficult-tochange revenue restrictions in their constitutions: “Generally speaking having more governance flexibility to be able to raise revenue or cut expenses is positive for a state’s credit.” Colorado, Oregon, Missouri, and Oklahoma have constraints on their ability to raise revenue or must take action if certain metrics are exceeded, but that does not necessarily affect their ratings, he adds, noting that Colorado’s Taxpayer Bill of Rights is a constitutional measure approved by voters in 1992 that limited the annual growth in state revenues or spending to the rate of inflation and the percentage of change in the state’s population. It also requires the state to rebate revenues to taxpayers in certain circumstances. In 2005, Colorado voters in a statewide referendum approved a suspension of TABOR for five years after a sharp decline in funding for K-12 schools, colleges, and health programs partly because of the recession in the early 2000s. So Mr. Samuels comments: “These kinds of provisions create some limitation and contingencies on what happens in terms of rebating revenue but don’t inhibit the state [from] otherwise maintaining a very strong credit profile...Even in states that have these provisions, the states have a lot of other governance strengths that allow them to make adjustments.” Illinois, for instance, has a flat income tax rate mandated by the state’s constitution that can be difficult to change: the state is currently mired with a negative outlook as it nears its second fiscal year without an adopted budget. In contrast, Moody’s rates North Carolina’s general obligation bonds Aaa, because of the state’s strong fiscal management and economic growth, which benefits tax collections, the credit rating agency said in a report in February. In FY2015, general fund revenues grew by 6.4% over the prior year: the largest source of state revenue, the individual income tax, came in 7.8% higher than 2014 collections, exceeding the Tarheel state’s 6% forecast. Mr. Samuels said state ratings tend to be high, because budget leaders have flexible governing strength—something the proposed constitutional amendment would remove: the amendment would require lawmakers to annually place 2% of general fund revenues into the rainy day fund until the balance equals 12.5% of the budget. In contrast, under current state law, the deposit amount is discretionary. If enacted, the fund could only be accessed by lawmakers on a vote of two-thirds in each chamber, which would potentially require a special session if an economic downturn or natural disaster occurs. Uh oh. New Jersey revenues tumbled 7.3% in May compared to a year earlier, according to acting State Treasurer Ford M. Scudder. Scudder reported late Friday that the revenue decline was attributed largely to reduced corporate, personal and sales taxes. He noted that declines in capital gains and other forms of volatile tax revenues are impacting New Jersey along with other states like California, Connecticut, Massachusetts and Pennsylvania as well as the federal government, who have all reported drops in personal income tax receipts this year. In May 18 testimony to the Assembly Budget Committee, Scudder said state revenues for fiscal 2016 will grow $603 million less than previously predicted due to a "national phenomenon" of personal income tax drops facing multiple states. The state Legislature's nonpartisan budget office reported in May that New Jersey is facing a possible $1.1 billion revenue shortfall for the current and next fiscal year with the revenue gap for Gov. Chris Christie's proposed $34.8 billion 2017 budget projected at $621.6 million. Revenue from the largest revenue source, gross income tax, fell 2.8% in May compared to May 2015 and is down 1.5% for 2016 after it was projected to grow 1.2%. The second largest revenue source, sales tax, was off 1.3% for the month but figures for the first 11 months of the fiscal year are still up 4.4% year-over-year. A 5% growth rate had been projected. The Garden State's corporate business tax was off 62.9% year-over-year in May and is off 14.3% for the fiscal year, which ends on Jun

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30. The state had projected a 12% yearly decline. Year-to-date revenues for fiscal year 2016 are off 0.2% compared to the same period in fiscal 2015, according to Scudder, who noted that results were partly impacted by an increase of $615.8 million in tax refunds from 2015. Scudder said there was a 50% refund rise in the Earned Income Tax Credit that resulted from a state initiative by the Division of Taxation and the Division of Revenue and Enterprise Services to process tax returns faster. New Jersey has the second lowest credit ratings of the 50 U.S. states due largely to underfunded pension liabilities. Moody’s Investors Service rates New Jersey Bonds at A2 with Standard & Poor's, Fitch Ratings and Kroll Bond Rating Agency all rating the state A. Somewhere over the School Rainbow. Kansas lawmakers, trying to head off a court shutdown of the state’s public schools, have increased aid to poor districts by $38 million-averting a potential constitutional clash with the Kansas Supreme Court which had ordered schools could not open absent increased funding to address “Disparities among the districts remain[ing] inequitable and unconstitutional.” As the Kansas City Star described the legislative action: “The action came after Kansas lawmakers pivoted Friday and dumped their earlier school finance plan in favor of another proposal that won’t cut [.5 percent] from every school district in the state. Schooling in Sustainability. In Michigan, the conundrum is more complex: it rather involves a noxious and complex combination of fiscal disparities and, charter schools, and population decline: Statewide shrinking enrollment combined with the expansion of charter schools has stretched state aid dollars and undercut the credit quality of public schools—thereby increasing the costs of building and repairs: the most recent quarterly deficit report submitted to the state legislature by the Michigan Department of Education notes that some schools are making progress, but others continue to struggle: Michigan’s schools accounted for about half the state’s downgrades so far this year according to Municipal Markets Analytics. Of the 40 schools in the state that began FY2016 with operating deficits, 18 projected they would be deficit-free by the end of June, and another 15 are planning on reducing their deficits by the end of the state’s fiscal year; seven school districts will have deeper debt than in the previous year. Detroit’s public schools are an epicenter of the challenge, the Detroit Public Schools, which, as we noted in this morning’s eBlog is under Transition Manager Steven Rhodes, the state-appointed emergency manager and former U.S. Bankruptcy Judge who oversaw Detroit’s municipal bankruptcy, is an epicenter of the fiscal challenge: the state bailout legislation undercut the city’s authority to have a governing role in determining the placement of charter schools—so that DPS and the City of Detroit have little ability to anticipate what kind of outflow of students will occur. DPS expects an operating deficit of $515 million—and, under the new state legislative action to address its fiscal math challenge—is the precipitous enrollment decline: A June Citizens research Council for Michigan report shows that the number of Detroit resident children enrolled in schools has been declining: In the last five years that number has fallen to about 110,000 from 144,000; DPS has lost close to 30% of its public school enrollment. During the same time the number of alternative schools that are enrolling Detroit students grew to 233, from 151. Other school districts is the state are experiencing the same challenges of student population decline coupled with charter school expansion.

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As we observe the changing economy—what with the sharing economy, the impact of the internet on work hours and locations, we can anticipate it will lead to profound changes in transportation and housing. Because the internet is permitting more people to work from anywhere, anytime, the old model of cities and suburbs is becoming increasingly obsolete. The Disruptive, but Sharing Economy: What’sApp? Do States & Local Governments Need New Rules for the Sharing/Disruptive Economy? Can Cities, Counties, & States Share Too? Checkered Flag: What a champion’s week for Ohio: not only did the Cavaliers win the NBA championship, but capital Columbus defeated a half-dozen, techsavvy, boom town and Rust Belt opponents to win the U.S. Department of Transportation’s “smart city” competition, earning $40 million in federal start-up funds to link an impoverished community to jobs using driverless vehicles. The city, set to host the GOP nominating convention— and pondering a potential annexation of nearly insolvent East Cleveland, spent just $50 million in local transportation funds last year, but won the national competition that provided a “smart city” reward of $50 million—made up of the federal grant and an accompanying $10 million more from Microsoft co-founder Paul Allen’s Vulcan company — to raise matching funds of $90 State & Local Challenge: The Aging of its suburbs: American suburbs, built for returning GIs and their burgeoning families, are aging. In 1950, only 7.4 percent of suburban residents were 65 and older. By 2014, it was 14.5 percent, but now it is projected to rise dramatically in the coming decades, with the graying of 75.4 million baby boomers mostly living in suburbia. But car-centric suburban neighborhoods with multilevel homes and scarce sidewalks are a poor match for people who cannot climb stairs or drive a car. “Most [boomers] are in a state of denial about what really is possible and what’s reasonable for them as they age,” according to John Feather, a gerontologist and the CEO of Grantmakers in Aging, a national association of foundations for seniors. Mildred Warner, professor of city and regional planning at Cornell University, said too many Americans are “living in a Peter Pan world.” People become “more feeble” as they age, she said, and communities need to plan and budget for that. But state and local officials are largely unprepared to handle heightened demands for transportation, affordable housing and long-term care. One study estimated that spending on public transit would have to increase 81 percent, to $8.6 billion, by 2030 to meet the needs of seniors who want to stay in their homes. Sharing? On June 17, the New York State Legislature passed what would become one of the most stringent home-sharing laws in the nation if signed into law: the legislation would forbid not only landlords, but also tenants, to list apartments for short-term rental on Airbnb or similar sites, and, in addition, would impose fines of up to $7,500 on those who choose not to comply (It is already illegal in New York to rent out an unoccupied apartment in a building with three or more units for fewer than 30 days, but Airbnb is full of advertisements for such places regardless; about 55 percent of Airbnb listings violate the law, according to housing activists.) For its part Airbnb does not dispute the

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figure; it instead seeks to have the legislation modified, so that a costume designer living in Chelsea, for instance, could sublet her rental apartment for the four or five days a month she worked in Los Angeles with no worries that she was engaging in an illegitimate transaction. The New York moment, as it were, comes as municipal leaders around the globe appear increasingly torn between how to balance the goals of affordable housing versus encouragement of the growth of the so-called sharing economy. For instance, Chicago, last week, passed an ordinance back by Mayor Rahm Emanuel 43-7, on which some aldermen expressed concern that the ordinance did too little to protect residents from the proliferation of the business in Chicago residential neighborhoods. One noted: “investor schemes” were taking over her neighborhood by turning condos into hotels for partying out-of-towners; in contrast Alderman Proco Moreno said residents in his hip Northwest Side ward are using the online rental platform to help make ends meet so they can afford to stay in their homes. For his part, Mayor Emanuel emphasized fee on the industry to help homeless people as evidence that action could actually help, rather than hurt moderate income housing opportunities. The approved ordinance came after repeated changes as Airbnb mounted a well-funded lobbying and advertising campaign to pressure city officials not to adopt tough standards, with Airbnb hosts claiming their livelihoods were being put at risk. Thus, what was adopted, would increase taxes on shortterm rentals to 21 percent. The vote was 43-7. The short-term rental ordinance, dubbed the “Airbnb ordinance,” will impose an additional 4 percent surcharge on short-term rentals in addition to Chicago’s 17.4 percent hotel tax. Additionally, this ordinance will track rental hosts by requiring the housing platform to submit a list of the addresses of hosts in a particular ward. The new rule also includes a $60 fee to help the city enforce laws to curtail wild partying and illegal rentals. Similar to the established players in the case of ridesharing, the hotel industry shelled out thousands of dollars to aldermen to secure their support for the anti-Airbnb measure. The new ordinance has been described as “dizzyingly complex:” it sets various kinds of limits and ways to get around those limits for different types of residences in neighborhoods around the city. Buildings of fewer than five units will be allowed only one unit listed online at a time. Larger buildings will be capped at six units or 25 percent of the total number of units, whichever is less. But people who want to exceed the limit in the smaller buildings will be able to try to show the city Department of Business Affairs and Consumer Protection they are suffering “an extraordinary burden” because of it. In areas of the city with single-family homes, a late change allows residents in individual precincts to gather signatures on petitions to either outlaw new listings in those types of houses altogether, or to allow them only in the “primary residences” of the people listing the properties. If the petition gets signatures from 25 percent of registered voters in the precinct, the alderman for the area will be able to introduce a City Council ordinance enacting the language on the petition for four years. But the ordinance also includes a trap door for that process, granting residents within the precinct who oppose the petition language the right to get signatures on their own petition to overturn it. The Big Apple. Unlike in Chicago, in the case of New York City, it was the New York Legislature which approved legislation to crack down on who can operate an Airbnb in New York City: the bill would ban the advertising of illegal hotels (The term “illegal hotels” refers to the phenomenon where commercial operators or building owners rent out multiple units in the same building to a steady stream of Airbnb guests.), and entire home listings on Airbnb and other outlets. The measure, if signed into law by Gov. Cuomo, would forbid not only landlords, but also tenants, to list apartments for short-term rental on Airbnb and similar sites, and would impose fines of up to $7,500 on those who do not comply. (It is already illegal in New York to rent out an unoccupied apartment in a building with three or more units for fewer than 30 days.) Nevertheless, Airbnb is full of advertisements for such places: approximately 55 percent of Airbnb listings violate the law, according to housing activists. The increasing challenge for municipal leaders—especially in high housing cost cities, is how to balance the needs for affordable housing against the potential tax revenues, amid apprehensions that Airbnb is driving up rents to unaffordable levels. According to a report to be released by a consortium of housing activists, 16 percent of Airbnb listings in New York City, or approximately 8,000 units, should be considered “impact listings,” meaning that they are booked several times per month and listed for at least

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three months per year by someone who advertises multiple apartments on Airbnb, and not just the single apartment in which he or she lives—deeming these “commercial profiteers.” The report notes that the number of vacant and available apartments in New York City would increase by 10 percent if those listings were returned to the rental market. Precedent Setting? Airbnb Inc. has sued San Francisco in federal court in an attempt to block the city’s ordinance which imposes fines on unregistered apartment rentals. In the suit it filed this week in federal court, Airbnb claimed San Francisco is violating federal law by passing and enforcing a new ordinance that holds short-term rental companies accountable for any apartment or home listing which has not been registered with the city; Airbnb is seeking an injunction to prevent San Francisco from removing listings and from fining Airbnb for each unregistered listing. The suit is the first-ever filed against a municipality (Airbnb currently operates in some 34,000 municipalities around the globe.) But the issue in San Francisco, as we have noted before, is apprehension by San Francisco leaders that Airbnb is depleting the supply of rental housing—and undercutting efforts to assist low and moderate income families. And Airbnb has devoted massive airpower against city leaders: In San Francisco alone the company waged an $8 million campaign in opposition to last November’s Proposition F, or the “Airbnb Initiative,” which would have limited short-term housing rentals to 75 nights a year. The Airbnb legal onslaught this time relates to an ordinance the city adopted earlier this month which requires Airbnb and other home-rental sites to take down any rental listing not registered with the city or be subject to fines for each one. Thus, in its suit against the city, Airbnb has claimed San Francisco has violated the Communications Decency Act, which prevents governments from holding internet platforms liable for content created by their users. In its complaint, Airbnb also said the city is violating the Stored Communications Act and the First Amendment. Here is a terrific line from the New York Times: “Self-driving cars seem just a few regulations away from our city streets.”

State & Local Leader of the Week Our State & Local Leader of the Week is Bill Pound, the long-time Executive Director of the National Conference of State Legislatures. In the many years I have been privileged to learn from him, I have always been in awe of his profound commitment to state legislators and legislatures—or, as he puts it: “Because they exemplify representative democracy. They are the chief institution in our democratic system, and they embody the voice of the people. Beyond that, legislatures are the single most important public policy arena at a time when the federal government has been gridlocked. The bulk of our major public policy issues comes out of the state legislatures and are resolved there. Or, as a colleague describes him: “I have been privileged to have Bill Pound serve on my board of directors for the last 18 years. Bill has always been a big supporter of FFIS in general, and me in particular. I can’t think of a single instance when he didn’t put his full support behind something I wanted to try. He even let me house an employee in NCSL’s Denver office so that I wouldn’t have to lose her talent. He has always been a big proponent of the Federal Funds Information for States acquisition of State Policy Reports, and he has remained a steadfast booster even in this age when newsletters are a tough business: “He always offers keen insights into the issues the state-local community confronts, and his passion for his work is on display at all times. I will always be grateful for his support over these many years.”

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Figure 1 Illustration by David P. Hayes

The Silver Tsunami. AARP reports there are 55 million workers who do not have a way to save for retirement at their workplace, and of those, only 5% take the steps to open an IRA. What does that augur for a state or local elected leader? Pay More, or Live Shorter: The Annual Survey of Public Pensions provides a comprehensive look at the financial activity of the nation’s state and locally administered defined benefit pension systems, including cash and investment holdings, receipts, payments, pension obligations and membership information. Statistics are available at the national level and for individual states. Total contributions were $180.2 billion in 2015, increasing 7.9 percent from $167.0 billion in 2014. Government contributions accounted for the bulk of them ($131.7 billion in 2015, increasing 8.3 percent from $121.5 billion in 2014), with employee contributions at $48.5 billion in 2015, climbing 6.5 percent from $45.5 billion in 2014. The other component of total revenue ─ earnings on investments ─ declined 68.4 percent, from $534.4 billion in 2014 to $168.7 billion in 2015. Earnings on investments include both realized and unrealized gains, and therefore reflect market fluctuations. The total number of beneficiaries increased 4.3 percent to 10.0 million people in 2015 (from 9,559,956 people in 2014 to 9,971,726 in 2015). The payments they received rose 5.1 percent from $272.5 billion in 2014 to $286.5 billion in 2015. Meanwhile, total assets increased 3.0 percent, from $3.7 trillion in 2014 to $3.8 trillion in 2015.

Starting January 1, 2017, Washington will be the first state to offer a state-run retirement plan for privatesector workers....Workers will be able to choose among several established retirement plan providers, which will be screened by Washington State. The system will have no contribution minimums, and such a plan will remain with the person even when they switch jobs.

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Confidence in one’s state or local elected leaders can be all too ephemeral: it is hard-earned, but can be squandered in a moment—and, if lost, can carry harsh fiscal implications for a town, city, county, or state’s fiscal future.

Ethics & Public Trust From the Richmond Times Dispatch: “Successful government relies on trust. The breakdown of comity at all levels reflects the citizenry’s lack of confidence in institutions and individuals. Washington’s woes are well documented. Local jurisdictions suffer self-inflicted damage as well.”

TIME TO STEP UP Daily Press Editorial: Running for public office takes courage, confidence and the committed support of family and friends. The endeavor is not easy — walking through neighborhoods and knocking on doors takes plenty of time and effort — nor is it cheap, since campaign signs do not grow on trees. So as we head down the stretch toward Election Day, we extend our gratitude to those who volunteered for the experience and seek a place in local government. And we encourage other civic-minded citizens to lend their time and talent to the calling of public service, since our communities will surely benefit as a result. Bill Bolling, former—and now convicted—Governor Bob McDonnell’s lieutenant governor, and current Co-Chair of the Governor’s ethics commission, writes on his Facebook page: “The public’s trust is hard to gain and easy to lose.”

There have been questions in the wake of former Virginia Governor Bob McDonnell’s conviction with regard to important ways in which public service differs from working in the private sector. The expectation is that those who work for public agencies must hold themselves to the same high standards that the public has for those who are elected or appointed to public service. While the exact combination of standards to which an employee might be held—depending on a particular individual’s job within an organization, there are three cross-cutting principles which should apply to all public servants:  City, county, and state employees are stewards of scarce public resources;  Public agencies must treat everyone fairly, irrespective of whom they know or are related;  Public service means one’s actions are subject to public scrutiny. Mary Beth Miles, the City of Durango, Colorado assistant to the city manager, has done a fine piece on Ethics for the Colorado Municipal League: Ethics is doing the right thing when no one is looking. Public Ethics & Public unTrust: In writing for a unanimous court this week, U.S. Chief Justice John G. Roberts Jr. described former Virginia Gov. Bob McDonnell’s actions as “tawdry: There is no doubt that this case is distasteful; it may be worse than that. But our concern is not with the tawdry tales of Ferraris, Rolexes, and ball gowns It is instead with the broader legal implications of the government’s boundless interpretation of the federal bribery statute.” He noted that that instructions to the jury in his case about

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what constitutes “official acts” were so broad, they could cover almost any action a public official takes. [Please see “What Constitutes Federal Corruption by a State or Local Leader?” below in Little Legalities.] In its decision, which provides guidance for every state and local elected leader in the nation, the court defined “official act,” where such an act is defined as “any decision or official act (please see immediately below)” in exchange for loans or gifts—as opposed to simply setting up and participating in a meeting. The decision is likely to ripple through politics for years to come—as it defines the fine line between legal versus unethical behavior: the decision sets bright line standards for what qualifies as public corruption and how the federal government may prosecute it. That is, even though the unanimous court found that the former Governor had not violated federal law, by the standards of conduct he publicly set for himself as a candidate and an officeholder, his behavior is — and remains — indefensible: the former Governor, his wife, Maureen, and their five children took more than $170,000 in sweetheart loans, cash, clothing, jewelry and trips from a smooth-talking businessman Mr. McDonnell barely knew, Jonnie R. Williams Sr., who was pressing for state support of his disputed, tobacco-derived dietary product. He threw a party at the Executive Mansion to promote the product and nudged his top aides to assist the guy—all the while concealing from his constituents and state taxpayers his benefactor’s inducements, because Virginia lacked either law or an ethics code that required him to disclose the pig sty into which he had made the Office of Governor. Here, the court found that the former Governor’s conduct did not cross the line of the legal definition of a corrupt act—after both the trial and 4th U.S. Circuit Court of Appeals found it did. The Justices, in effect, drew a bright line, as one writer noted of an elected official who served as “an example of the corrupting power of politics.” The Ethical Challenges of the Emerging Driverless Car Era. At this Spring’s World Affairs Conference at the University of Colorado, in a session: “Your selfdriving car hit my self-driving car,” I was derided by the tech engineers on the panel because of my focus on governance challenges—such as: does this change the age when a state might permit a child or elderly person to “drive” a car. But the emerging age of self-driving cars poses difficult ethics issues too, because any fully autonomous vehicle that eventually takes to the road will need to make decisions—such as whether to swerve to miss one pedestrian at the risk of hitting another. Unsurprisingly, many ethicists argue that a public conversation should be part of the development process. In a study published in Science, researchers found people want the cars to be programmed to minimize casualties while on the road; however, when asked about what kind of vehicle they might actually purchase, they chose a car that would protect the passengers first. In one survey, participants were asked to imagine that they are in a self-driving vehicle traveling at the speed limit, then, out of nowhere, 10 pedestrians appear in the direct path of the car. So: should engineers program the car to swerve off the road in such instances, killing the passenger, but leaving the 10 pedestrians unharmed? According to researchers, most people would concur that sacrificing one life to save 10 makes sense; yet, as researchers in the study continued with their surveys, eventually involving over 1,900 people in total, they identified what they call a “social dilemma:” when the researchers asked participants which car they would prefer to actually purchase, one programmed to put a heavier premium on saving more lives, or one that might sacrifice them or family members in the name of the greater good; they found, mayhap unsurprisingly, that participants “preferred the self-protective model for themselves.”

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Little Legalities

Decisions Directly Affecting State & Local Leaders

CASES OF INTEREST to State & Local Leaders Don’t Mess with States. The U.S. Supreme Court issued its three final decisions of the term Monday: What Constitutes Federal Corruption by a State or Local Leader? In a case, in which a unanimous jury two years ago found former Virginia Governor Robert McDonnell guilty on 11 corruption-related felony counts in 2014, including “honest services” fraud, extortion, and conspiracy, based upon evidence that, as Governor, he and the First Lady had accepted over $175,000-worth of loans and gifts, such as vacations, designer clothes and a Rolex watch, from a businessman seeking the state’s help in promoting a tobacco-based dietary supplement. Mr. McDonnell was sentenced to two years in prison, but never began serving the time in the wake of the Supreme Court putting his sentence on hold last year. The decision came as a broad array of Democratic and Republican ex-officials and attorneys warned the Supreme Court that upholding the former Governor’s conviction would leave officeholders open to potential prosecution over the kinds of benefits routinely given to donors, such as invitations to meetings and social events. As a result of the new ruling, Mr. McDonnell’s sentence has been vacated, and the case will be returned to the district court. Among the possibilities are a new trial or a plea bargain similar to one the former Governor reportedly turned down early on in the case. U.S. Supreme Court Chief Justice Roberts, Monday, in his opinion for a unanimous Supreme Court, in a decision, which provides guidance for every state and local elected leader in the nation, defined “official act,” where such an act is defined as “any decision or official act (please see immediately below)” in exchange for loans or gifts—as opposed to simply setting up and participating in a meeting. In addition to being inconsistent with both text and precedent, the Government’s expansive interpretation of “official act” would raise significant constitutional concerns. Section 201 prohibits quid pro quo corruption—the exchange of a thing of value for an “official act.” In the Government’s view, nearly anything a public official accepts—from a campaign contribution to lunch—counts as a quid; and nearly anything a public official does—from arranging a meeting to inviting a guest to an event— counts as a quo. See Brief for United States 14, 27; Tr. of Oral Arg. 34–35, 44–46. But conscientious public officials arrange meetings for constituents, contact other officials on their behalf, and include them in events all the time. The basic compact underlying representative government assumes that public officials will hear from their constituents and act appropriately on their concerns—whether it is the union official worried about a plant closing or the homeowners who wonder why it took five days to restore power to their neighborhood after a storm. The Government’s position could cast a pall of potential prosecution over these relationships if the union had given a campaign contribution in the past or the homeowners invited the official to join them on their annual outing to the ballgame. Officials might wonder whether they could respond to even the

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most commonplace requests for assistance, and citizens with legitimate concerns might shrink from participating in democratic discourse. This concern is substantial. The decision, which overturned former Virginia Governor Robert McDonnell’s conviction related to his acceptance of $175,000 in loans, gifts, and other benefits in return for favors, ergo, raised the issue under the federal honest services fraud and Hobbs Acts (extortion) statutes as to whether, in his capacity as Governor, Mr. McDonnell’s conviction by the trial court, and upheld by the 4th U.S. Circuit Court of Appeals should stand. In its opinion, the unanimous court made clear that to violate the federal law, a state or local public official must either make a decision or take an official action: that is she or he must do more than just agree to act. As the court noted: “Conscientious public officials arrange meetings for constituents, contact other officials on their behalf, and include them in events at times.” Deeming that too expansive, the court not only rejected the Justice Department’s interpretation, but also noted that interpretation raised due process and federalism concerns: In addition to being inconsistent with both text and precedent, the Government’s expansive interpretation of “official act” would raise significant constitutional concerns. Section 201 prohibits quid pro quo corruption—the exchange of a thing of value for an “official act.” In the Government’s view, nearly anything a public official accepts—from a campaign contribution to lunch—counts as a quid; and nearly anything a public official does—from arranging a meeting to inviting a guest to an event— counts as a quo. See Brief for United States 14, 27; Tr. of Oral Arg. 34–35, 44–46. But conscientious public officials arrange meetings for constituents, contact other officials on their behalf, and include them in events all the time. The basic compact underlying representative government assumes that public officials will hear from their constituents and act appropriately on their concerns—whether it is the union official worried about a plant closing or the homeowners who wonder why it took five days to restore power to their neighborhood after a storm. The Government’s position could cast a pall of potential prosecution over these relationships if the union had given a campaign contribution in the past or the homeowners invited the official to join them on their annual outing to the ballgame. Officials might wonder whether they could respond to even the most commonplace requests for assistance, and citizens with legitimate concerns might shrink from participating in democratic discourse. This concern is substantial. The Government’s position also raises significant federalism concerns. A State defines itself as a sovereign through “the structure of its government, and the character of those who exercise government authority.” Gregory v. Ashcroft, 501 U. S. 452, 460 (1991). That includes the prerogative to regulate the permissible scope of interactions between state officials and their constituents. Here, where a more limited interpretation of “official act” is supported by both text and precedent, we decline to “construe the statute in a manner that leaves its outer boundaries ambiguous and involves the Federal Government in setting standards” of “good government for local and state officials.” McNally v. United States, 483 U. S. 350, 360 (1987); see also United States v. Enmons, 410 U. S. 396, 410–411 (1973) (rejecting a “broad concept of extortion” that would lead to “an unprecedented incursion into the criminal jurisdiction of the States”). The Justices determined that because the jury conviction might have been for conduct that was not unlawful, the former Governor’s conviction should be vacated. Importantly, the Justices rejected two of the former Governor’s contentions: that the Honest Services and Hobbs Acts are unconstitutionally vague. Second, in response to the former Gov.’s claim of insufficient evidence that he committed an “official act,” the court remanded that issue to the 4th U.S. Circuit Court of Appeals. McDonnell v. United States, U.S. Supreme Court, No. 15-474, June 27. 2016.,

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Constitutional Rights to Safety. A divided U.S. Supreme Court struck down Texas abortion restrictions that had threatened to close three-quarters of the state’s clinics by putting new requirements on facilities and doctors: the effect of the law was to leave some patients hundreds of miles away from the nearest provider. The case tested how much leeway the government has to regulate clinics in the name of protecting women’s health. The high court’s 5-3 ruling is the court’s first abortion decision in almost a decade. It invalidates provisions that required clinics to meet hospital-like surgical standards and forced abortion doctors to get admitting privileges at a local hospital. Texas said the rules safeguarded patient safety, while opponents said the real aim was to reduce access to abortion. The law provides "few, if any, health benefits for women, poses a substantial obstacle to women seeking abortions, and constitutes an undue burden on their constitutional right to do so," Justice Stephen Breyer wrote for the court. The case divided the court along ideological lines. Chief Justice John Roberts and Justices Clarence Thomas and Samuel Alito dissented. Writing for the group, Alito said the court should have thrown out the suit on procedural grounds because of an earlier, unsuccessful challenge to the admitting-privileges requirement. "If at first you don’t succeed, sue, sue again," Alito said from the bench as he read a summary of his opinion. Justices Anthony Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined Breyer in the majority. The ruling raises new questions about some of the more than 300 abortion restrictions put in place around the country since 2010. Those laws include limits on drug-induced abortions and bans on procedures after specified points in a pregnancy. The New Orleans-based 5th U.S. Circuit Court of Appeals had largely upheld the rules. The Supreme Court blocked the surgical-center requirement during the litigation, but the admitting-privileges rule had been in effect. Texas had argued that its admitting-privileges rule ensured qualified doctors and promoted continuity of care in the event of complications. The state said the surgicalcenter requirements provided a sterile environment for abortions and protected patients from being treated in substandard clinics; but the clinics and doctors challenging the law said the state failed to show the regulations actually further its stated objectives. Texas was one of 10 states with admitting-privileges requirements and one of six that requires clinics to meet surgical-center standards, according to the Center for Reproductive Rights, which is representing the clinics and doctors. About half of those laws have been on hold. The Texas law was backed by lawmakers opposed to abortion who say the measure would protect the health of women who have chosen to end their pregnancies. The American Medical Association and other organizations representing the medical profession filed briefs arguing the law does little to promote women’s health while reducing access to abortion. Whole Woman’s Health et al. v. Hellerstedt, Commissioner, Texas Dept. of Health Services, et al., No. 15-274, June 27, 2016. Domestic Violence. The last remaining case from the term that began in October asks how specific a state’s laws against domestic violence must be to trigger a federal statute banning some people with such convictions from possessing firearms. The final case came from Maine and involves the convictions of two men in separate incidents. One of the cases involved the arrest of William Voisine for killing a bald eagle. He had a previous conviction for misdemeanor assault of a woman with whom he had a relationship. Under federal law, individuals who have been convicted in state court of “misdemeanor crimes of domestic violence” are forbidden from possessing firearms, on the theory that such people are more likely to be violent in future. The defendant argued that the firearm-prohibition shouldn’t apply to him, because the Maine law under which he was convicted didn't require prosecutors to prove that he intentionally used physical force on the woman. Voisine v. United States, U.S. Supreme Court, No. 14-10154, June 27, 2016.

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Property Tax Assessments. Plaintiffs filed three petitions for relief from property tax assessments on their home for the tax years 2009 through 2011. The petitions and appeals were consolidated. The trial justice granted judgment in favor of Plaintiffs in all three appeals, concluding that Plaintiffs sustained their burden of proving that their property was overvalued by the tax assessor. The Supreme Court affirmed, holding (1) the trial justice did not err in determining that Plaintiffs met their burden of proving that the tax assessor’s valuation was above the fair market value; (2) there was sufficient evidence to support the trial justice’s valuation; and (3) the trial justice should have dismissed Plaintiffs’ third petition challenging their 2011 assessment based on Plaintiffs’ failure to timely file an account. Remanded. Whittemore v. Thompson, Rhode Island Supreme Court, #14157, June 24, 2016. Challenging Alabama. The internet retailer Newegg has filed a notice of appeal with the Alabama Tax Tribunal, arguing the Department of Revenue’s (DOR) Sales and Use Tax Rule Number 810-6-2-.90.03, entitled Requirements for Certain Out-of-State Sellers Making Significant Sales into Alabama is unconstitutional and violates U.S. Supreme Court precedent requiring a company to have a physical presence in a state before it can be required to collect and remit sales and use tax to a state. Newegg argues that it does not have physical presence in the state and all of its sales are interstate sales with orders received, processed and filled from locations outside the state. DOR issued a press release on June 15th announcing the challenge by Newegg to the new regulation and said that the regulation was purposely designed to challenge Quill v. North Dakota and it hopes that the U.S. Supreme Court will see this as an opportunity to reconsider the physical presence standard in light of technology and the new retail economy. Hey! Let Your Customers Know What Taxes They Owe! A Louisiana proposal recently signed into law requires remote retailers with more than $50,000 in in-state sales per calendar year to notify customers of their use tax obligation by January 31 of each year. It also mandates that businesses send a report of their prior year’s sales to the Department of Revenue by March 1 each year. The legislation requires that the annual notice to customers contains the total amount paid by the purchaser for purchases in the preceding calendar year and, if known by the retailer, whether the property or service is exempt from the sales and use tax. The notice is required to state that the state use tax may be due on the purchases from the retailer, with payment of the use tax made on the individual’s income tax return. The annual statement submitted by the remote retailer to DOR is due by March 1 of each year and include the total amount paid by each purchaser to the retailer on sales to Louisiana purchasers. Violating Indian Law. The U.S. Supreme Court on June 13 declined to hear Seminole Tribe of Florida v. Stranburg, U.S. Supreme Court Docket No. 15-1064, allowing the Eleventh Circuit’s decision to stand. The issue in the case was a Florida law that allows utility taxes to be passed to a federally recognized Indian tribe. The Eleventh Circuit held that Florida’s rental tax violated federal Indian law because it affected activities on tribal land, but the court ruled that the state law permitting utility companies to separately state the utility tax on a retail customer's bill does not violate federal law, finding that the legal incidence of the tax falls on the utility companies and not the tribe. Guiding Texas? Texas filed suit seeking a declaration that an Enforcement Guidance document from the EEOC regarding the hiring of persons with criminal backgrounds violates the Administrative Procedure Act (APA), 5 U.S.C. 701–06. On appeal, the State challenged the district court’s order dismissing the action under FRCP 12(b)(1) for lack of subject matter jurisdiction. The court concluded that

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Texas has constitutional standing to challenge the Enforcement Guidance under the APA where Texas is an object of the Guidance and, taking the complaint’s allegations as true, has alleged a sufficient injury in fact - the Guidance forces Texas to alter its hiring policies or incur significant costs; the “flexible” and “pragmatic” approach to assessing the finality of agency action, leads to the conclusion that the Guidance is “final agency action” under section 704 of the APA; the EEOC erred in relying on AT&T Co. v. Equal Employment Opportunity Commission to suggest that agency actions are “final” under the APA only when federal courts are later bound to give deference to the agency’s interpretation of the statute at issue; and it is also sufficient that the Enforcement Guidance has the immediate effect of altering the rights and obligations of the “regulated community” by offering them a detailed and conclusive means to avoid an adverse EEOC finding, and, by extension, agency referral and a government-backed enforcement action. The Guidance is an agency determination in its final form and is applicable to all employers nation-wide; it is not an intermediate step in a specific enforcement action that may or may not lead to concrete injury. Because the district court erred in dismissing this action on justiciability and subject matter jurisdiction grounds, the court reversed and remanded. State of Texas v. EEOC, U.S. 5th Circuit Court of Appeals, #1410949, June 27. 2016. Sales and Use Tax Decisions Streamlining a State’s Private Rights of Action? The Iowa Supreme Court held that Iowa’s version of the Streamlined Sales and Use Tax Agreement (SSUTA) does not create a private right of action by a taxpayer against an Internet retailer. The court said the SSUTA provides the exclusive remedy for disputes between consumers and retailers over a retailer’s representations about the tax consequences of transactions. The state is a member of the SSUTA, and a tax specialist for J.C. Penney Company, Inc. (J.C. Penney) contacted the Department of Revenue (DOR) to obtain a clarification of the company’s internet sales and their “transportation and handling” charges. A DOR employee advised that freight charges are exempt from the sales tax if separately invoiced or separately stated on the bill and that shipping and handling charges, if stated as a single item and mandatory to obtain the merchandise, are part of the purchase price and subject to the sales tax. In September 2015 DOR published a newsletter clarifying the issue and said that delivery charges are exempt from the sales tax a long as they were separately stated, reasonable in amount and related to the cost of transportation. A customer of J.C. Penney who was charged sales tax on her shipping, handling and delivery charges contacted the company who once again contacted DOR for a clarification and the company concluded that because it charged a flat fee for these charges, it did not qualify for the exemption. Two years later another customer made the same inquiry and the company gave her the same advice, but refunded the tax to her. She ultimately filed a class action lawsuit seeking, among other things, to prevent the company from charging the sales tax on its delivery charges. After that suit was filed the company remitted all the sales tax collected on these charges to DOR. The district court dismissed the injunction claim on the ground that the collection of the tax was not illegal or void but merely irregular, and such irregularity could be adequately compensated by the customer’s administrative remedy with the IDOR. The district court also held that the SSUTA did not create a private right because it would be inconsistent with the purpose of the statute and would intrude on the DOR’s exclusive jurisdiction over the interpretation of tax law. The district court, at a later date, also granted the company’s motion for summary judgment on the other counts of the complaint, finding that because the company had remitted the sales tax to the state the customer’s only remedy for allegedly improperly collected tax was with the DOR. The customer filed this appeal. The court said the first question was whether the SSUTA creates a private right of action either expressly or by implication and the second question is whether the SSUTA extinguishes the plaintiff's remaining causes of action against the retailer when the internet retailer exercises its option to remit collected taxes to the DOR. The court then discussed the history of the SSUTA and the state’s amendments to its sales tax statute to come into compliance with the agreement’s requirements, noting that

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the intent of the legislation was to simplify the administration of the tax to substantially reduce the burden of tax compliance for all sellers. The court then took note of the statute’s provisions regarding refunds of the tax that provide that a purchaser can request a refund of the tax from the retailer, with documentation of the overpayment, and the purchaser does not have a cause of action against the retailer if the refund is made within 60 days. The statute also provides that the retailer has the option of remitting the tax to DOR, rather than make the refund to the purchaser. Another section of the statute then provides for the refund of an overpayment by DOR. In this appeal, the purchaser argued that even if the statute does not expressly create a cause of action, a private cause of action should be implied from the statute under the familiar fourpart test presented in Cort v. Ash, 422 U.S. 66, 78, 95 S. Ct. 2080, 2088, 45 L. Ed. 2d 26, 36-37 (1975), as modified in Seeman v. Liberty Mutual Insurance Co., 322 N.W.2d 35, 40 (Iowa 1982), and Shumate v. Drake University, 846 N.W.2d 503, 508 (Iowa 2014). The purchaser argued that a private cause of action is consistent with the purposes of the legislation, and while there might be a remedy for refund of taxes remitted to the DOR by a retailer, nothing in the statute suggests the administrative remedy should be exclusive. J.C. Penney argued that the statute does not expressly or impliedly create a private cause of action against a retailer who remits taxes collected to the DOR and further argued that the statute provides a safe harbor to the retailer. In support of its position, J.C. Penney points to appellate decisions in two states under those states’ respective versions of SSUTA, Kawa v. Wakefern Food Corp. Shoprite Supermarkets and Georgia Power Co. v. Cazier, 740 S.E.2d 458, 462-63 (Ga. Ct. App. 2013). The court noted that while the purpose of the state statute enacting SSUTA was to simplify and modernize sales tax to ease the burden on retailers, the statutory changes did not suggest that the legislation was designed to provide taxpayers with a new statutory remedy, and the court said that it did not believe the language in the statute was designed to create a private cause of action. It said that the uniform provision is best understood as being designed to ensure that in all participating member states retailers are entitled to a sixty-day notice period before a cause of action, if any otherwise exists under local law, may be brought against the retailer and concluded that the district court correctly granted J.C. Penney’s motion for summary judgment on the plaintiff’s statutory claims grounded in SSUTA. The plaintiff also asserts that even if the SSUTA does not create a statutory cause of action, she still has other common law and statutory claims against the retailer for collection of excess taxes, including a statutory claim under the Iowa Consumer Frauds Act, Iowa Code chapter 714H, and common law claims of negligent misrepresentation, fraud and fraudulent misrepresentation, unjust enrichment, and conversion. The court held that the statute provides a remedy for the purchaser when the retailer has remitted the tax to DOR. The refund provision in the statute provides that DOR can pay a refund in the event that the payment was made by mistake by the person who made the erroneous payment. The statute also makes it clear that the legal incidence of the tax is on the purchaser and not the retailer who is required to collect and remit the tax to DOR. The court concluded that the state statute provides an exclusive remedy for disputes between consumers and retailers over retailers' representations to consumers about the tax consequences of transactions. SSUTA allows the retailer, when faced with a consumer complaint regarding the imposition of sales tax, to either refund the tax or to pass the funds on to the state. Once the funds are passed on to the state, the consumer has a remedy pursuant to the statute. The court said that allowing retailers to be sued over taxability questions when the retailer has forwarded the funds to the DOR is in conflict with the fundamental statutory purpose of the SSUTA. Finally, the court rejected the plaintiff’s argument that J.C. Penney made a material misrepresentation regarding the shipping and handling charges. The shipping and handling charges were described on the company’s website as based on the total cost of the items ordered and the type of delivery requested by the purchaser and nowhere on the website did the company claim that these charges were based on actual cost. Bass v. J.C. Penney Co. Inc., Iowa Supreme Court, No. 15-0334, 6/10/16.

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The Fiscal Taxing at Fitness Clubs. The Texas Court of Appeals, Third District, held that a health club’s purchases of items like towels and basketballs qualified for the resale exemption. The court also held that cardio machines and weight racks did not qualify for the exemption because legal title and possession was never transferred to the customers. The taxpayer owns and operates health clubs in the state selling memberships under Membership Agreements (Agreements) granting customers access to use its facilities and amenities. The Agreements provide that the taxpayer may at its sole discretion and at any time amend the clubs' policies, including the hours of operation and facilities it makes available to members and may, upon notice and refund of pre-paid dues, terminate a member’s membership and right to use its facilities and exercise equipment. Use of the large exercise equipment in the taxpayer’s facilities, including cardio machines, is limited to the taxpayer’s hours of operation and the fixed location of the equipment within the facilities, which it determines at its sole discretion. The taxpayer’s employees are charged with cleaning, repairing, and maintaining the exercise equipment although members are encouraged to wipe off equipment after using it. The taxpayer also maintains property and liability insurance covering the exercise equipment. The taxpayer’s operation of its health clubs come within the provision of taxable “amusement Services” as that term is defined in the state’s tax statute and regulations. The taxpayer filed for a refund to sales tax it paid on its purchases of certain tangible personal property for use by its members at its health clubs, claiming that the purchases were exempt at sales for resale. The trial court rendered judgment that certain of the purchased items were exempt from the tax but that certain other items were not and the taxpayer filed this appeal. The taxpayer argued in the appeal that the evidence showed that its purchases met the exemption requirements because members paid a monthly fee to “rent” the items. It also argued that the provisions of the statute that the trial court relied on, providing that a person performing services taxable under those provisions is the consumer of machinery and equipment used in performing the services, do not apply here because the taxpayer does not use the items at issue to “perform” any services. The court first looked to the language of the resale exemption. The statute defines what a “sale for resale” is and specifically provides, in pertinent part, that it means a sale of tangible personal property for the purpose of reselling it with or as a taxable item in the normal course of business or the sale of tangible personal property to a person who acquires it for the purpose of transferring it as an integral part of a taxable service. The court said, therefore, that the ultimate question in the case was whether the taxpayer purchases the items at issue for the purpose of reselling or transferring them to its members as an integral part of the taxable service. The statute did not define transfer or resell and the court, therefore, looked to the plain and common meanings of those words. Based on the common definitions and meanings of these words, the court said it was not reasonable to conclude that the taxpayer purchased the exercise equipment and other items at issue for the purpose of reselling them, transferring them or offering them for lease or rental. The court rejected the witnesses’ direct testimony that the taxpayer’s intent in purchasing the items was so that they could be transferred or rented to members for use in the clubs as not dispositive and at odds with the taxpayer’s business model and operations. The court pointed to the Agreements, which it said could not reasonably be construed as leases or rental agreements. The court found that the taxpayer retained superior legal possession of the items and merely provided access to and use of its facilities, including whatever exercise equipment may be on site and functioning at any given time, under terms and conditions completely within its own discretion for a specified monthly fee. The court held that the trial court properly determined that the taxpayer was not entitled to the “Sale for Resale” exemption for the items identified as non-exempt in its final judgment. Fitness Int’l LLC v. Hegar, Texas Court of Appeals, Third District, NO. 03-15-00534-CV, 6/16/16. When Can Equipment Used in Extraction Be Exempt from State Taxation? The Texas Supreme Court affirmed a Court of Appeals decision that equipment used in oil extraction was not exempt from sales tax as manufacturing equipment finding that the equipment did not process the extracted materials by modifying or changing their characteristics. The legal database on the FTA’s website contains a discussion of the Court of Appeals

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decision. This is a tax refund case and the issue is whether an oil and gas exploration and production company proved that its purchases of casing, tubing, other well equipment, and associated services were exempt from sales taxes under a statutory exemption. The trial court found that the company did not prove it was entitled to the exemption and the court of appeals affirmed that decision. The taxpayer is an oil, gas exploration, and production company; it purchased and paid sales taxes on equipment, materials, and associated services related to its oil and gas production operations for the period from January 1, 1997, to April 30, 2001. In 2009, it filed a tax refund claim with the Comptroller, contending that it was entitled to the exemption for property used in manufacturing for some of the equipment, including casing, tubing, and pumps, together with associated services. The taxpayer argued that this equipment was used in or during the process of extracting oil, gas, and associated substances (hydrocarbons) from underground mineral reservoirs, separating the hydrocarbons into their component substances, and bringing them to the surface. The Comptroller denied the refund noting a previous determination that the type of equipment at issue was used for transportation and not manufacturing. The taxpayer asserted that hydrocarbons extracted from an underground reservoir must be separated into their component parts to produce saleable products, and the equipment at issue here was used in separating the hydrocarbons into their different components. The Comptroller argued that the taxpayer was not a manufacturer and extracting minerals and bringing them to the surface is not manufacturing. The appeals court found that the statute was ambiguous regarding what qualifies as property or services used during manufacturing and deferred to the Comptroller’s interpretation, which it said was not plainly erroneous or inconsistent with the statutory language. The taxpayer filed this appeal. The court first addressed the issue of whether the statutory provision at issue here is ambiguous. It noted that the statute provides that the sales tax exemption applies to tangible personal property used in “the actual manufacturing, processing, or fabrication of tangible personal property.” The primary disagreement between the parties was whether the equipment was used for “processing” and the court pointed out that when a statutory term is undefined as it was in this case, the term is typically given its ordinary meaning, but it must also be in harmony and be consistent with other statutory terms. The court, citing prior case law, said that if an undefined term has multiple common meanings, it is not necessarily ambiguous and the court will apply the definition most consistent with the context of the statutory scheme. The court agreed with the taxpayer that the use of the word “processing” must refer to something different from “manufacturing” and “fabrication” and that the use of the separate term “processing” indicates that the legislature understood and intended that “processing” includes matters outside the confines of “manufacturing. The court noted that the Comptroller had defined “processing” in this context as being the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property. The court found that the essence of all the common meanings of “processing” correlated with the definition adopted by the Comptroller. The court found, in context, the statutory language was not subject to multiple understandings and said the legislature intended “processing” to mean the application of materials and labor necessary to modify or change characteristics of tangible personal property. The court then turned to the question of whether the equipment at issue here was used in processing. The court said it was undisputed that hydrocarbons undergo physical changes as they move from underground reservoirs to the surface, but the disagreement is about the role the taxpayer’s equipment plays in those changes. Hydrocarbons generally reside within porous formations or reservoirs of rock under great pressure from the overlaying earth. The taxpayer argued that the casing and tubing system both begins and continues the “processing” of hydrocarbons into separate substances of oil, gas, and condensates. The trial court found that the direct causes of the changes in the hydrocarbons were pressure and temperature changes, while the equipment was only an indirect cause of them and the court noted that the evidence supporting those findings was not challenged by the taxpayer. The court found that while the equipment unquestionably was both used in and necessary to the efficient recovery of hydrocarbons from the taxpayer’s reservoirs, there was no evidence that the equipment acted upon the hydrocarbons to modify or change their characteristics. Instead, the court found that the changes in the substances were caused not by the application of equipment and materials to them, but by the natural pressure and temperature changes that occurred as the hydrocarbons traveled from the reservoir through the casing and tubing to the surface. Southwest Royalties Inc. v. Hegar, Texas Supreme Court, No. 14-0743, 6/17/16.

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When Might a State Be Bound by the IRS? The Massachusetts Appeals Court has held that the Bay state did not have to allow a deduction for interest payments in intercompany transactions based on an IRS closing agreement that allowed for the federal deduction. The court found that the state was not bound by the agreement. The background for this case is the court’s decision in National Grid Holdings, Inc. v. Commissioner of Rev., 89 Mass. App. Ct. (2016) (National Grid Holdings, Inc.). See above discussion of that case. This separate action arose when the Board of Tax Appeals (BTA), in hearing the first appeal, declined to admit the closing agreement taxpayer had entered into with the IRS in evidence. The undisputed facts in the case are that the taxpayer’s tax returns for the 2002 tax year were audited by both the Commissioner of Revenue (Commissioner) and the IRS. On May 1, 2007, the taxpayer entered into a closing agreement with the IRS, pursuant to 26 U.S.C. § 7121 of the Internal Revenue Code (IRC), in connection with the taxpayer’s federal tax return. As part of that agreement, the IRS allowed a Federal deduction for a portion of the amount claimed by the taxpayer as interest on the deferred subscription arrangements (DSAs). The Commissioner determined that the DSAs on the taxpayer’s 2002 state return were not indebtedness and that payments made in connection therewith were not interest and filed an assessment, which the taxpayer appealed to the BTA. The taxpayer at its hearing attempted to introduce the closing agreement it had entered into with the IRS and the BTA denied that request and subsequently upheld the Commissioner’s assessment. This appeal was filed. The issue before the court was whether the closing agreement between the taxpayer and the IRS is binding on the Commissioner as to the deductions allowed under the state’s corporate excise tax. The court noted that the BTA determined that the IRS's allowance of a portion of the disputed interest deductions, as part of the closing agreement, did not dictate the Commissioner’s treatment of the interest payments for state tax purposes. Massachusetts deductions are determined by reference to those that are “allowable under the provisions of the Federal Internal Revenue Code” and the BTA reasoned that by permitting only some of the claimed Federal interest deductions for the DSA payments, and not all, the closing agreement did not establish that the DSA payments qualified as interest. The court said that the undisputed fact that only a portion of the interest deductions was allowed by the IRS goes against the taxpayer’s argument, noting that the taxpayer provided no proof that the claimed interest payments under the DSAs were anything but homogenous or that there was a factual basis to distinguish among them for Federal tax purposes. The court said that a deduction for the DSA payments cannot be deemed allowable under the code if some of those payments actually were allowed as deductions by the IRS while others were not. It pointed out that the distinction between allowable and allowed is not minor. The court concluded that the interest deduction provided in the closing agreement between the taxpayer and the IRS did not constitute a binding determination of the interest deductions allowable for Massachusetts corporate excise purposes. National Grid USA Serv. Co. Inc. v. Comm’r of Revenue, Massachusetts Appeals Court, No. 14-P-1861, 6/8/16.

Property Tax Assessing Valuation. The Kansas Supreme Court held that the Court of Tax Appeals erred in determining the value of the taxpayer’s residence for the 2012 tax year because it ignored evidence that the home suffered a 2.94 percent decrease in value from its prior-year valuation. The court remanded the case with directions for its proper valuation. This case is tied to the taxpayer’s 2011 appeal of her valuation, In re Equalization Appeal of Wagner, No. 107,472, 2012 WL 3290147 (Kan. App. 2012) (unpublished opinion) (Wagner I). In 2011, the taxpayer received a Notice of Value from the County showing that, based on comparable properties and a quality rating of 4.33 good+, the appraised value of her property was $569,000. She appealed, complaining that the appraised value was higher than that of 2006 despite no improvements to the property and a “substantial downturn” in the real estate market during the interim. She filed an appeal

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and the Court of Tax Appeals determined that the appraised value for tax year 2011 should be reduced to $553,600. The taxpayer disagreed with COTA’s determination and appealed. The Wagner I court concluded that COTA had improperly shifted the burden of proof on the quality rating issue and that COTA's underlying factual findings concerning the quality rating were not based on evidence that was substantial when viewed in the light of the record as a whole. Accordingly, the court reversed COTA’s decision and remanded with directions that COTA establish the appraised value of the taxpayer’s property for 2011 based on a 4.00 good quality rating. The Wagner I decision became final in September 2012. While that case was pending, the County, utilizing a sales comparison approach and, once more, a construction quality rating of 4.33 good+, appraised the taxpayer’s property for the 2012 tax year at $537,300 -- a 2.94% decrease from the value assessed in 2011 ($553,600) prior to the taxpayer’s successful appeal to the Court of Appeals. The taxpayer appealed the 2012 appraisal, arguing before the Small Claims and Expedited Hearings Division of COTA that the property's fair market value had fallen to $490,000. The hearing officer found in favor of the County, and the taxpayer appealed. COTA conducted a hearing on October 11, 2012 -- after the Wagner I opinion had become final. The taxpayer argued that based on the Court of Appeals’ decision in Wagner I (remanding with orders that a 4.00 good quality rating be used for the 2011 appraisal) and the fact that she made no improvements to her home between 2011 and 2012, the County was legally required to use a 4.00 good quality rating to appraise her home in 2012. Because the County had the burden of proof before COTA pursuant to the statute, the taxpayer contends that COTA relieved the County of its burden when it failed to order that the County produce a 2012 appraisal of her property using a 4.00 good quality rating, but the court rejected this argument finding that Wagner I only involved the appraisal of her home for the 2011 tax year and concluded that for that tax year the county had failed to prove that the rating was properly applied to the appraisal. The court said that as long as the county meets its burden, Wagner I did not foreclose the possibility of a 4.33 good+ quality rating being applied to future appraisals of the taxpayer’s home. And when different tax years are involved in matters of taxation, principles of res judicata and collateral estoppel do not apply because taxes are levied annually. The taxpayer also argued that COTA improperly rejected her argument that her home's 2012 valuation should be 2.94% less than the value assigned to it for 2011 tax year. The statute provides that when “the valuation for real property has been reduced due to a final determination made pursuant to the valuation appeals process,” the valuation of the property for the next taxable year will not be increased unless the county appraiser provides “documented substantial and compelling reasons” for increasing the valuation. See K.S.A. 2012 Supp. 79-1460(a)(2). The court said that the record showed that COTA’s 2012 valuation resulted from COTA merely adopting the 2011 valuation for 2012. It was never updated for the 2012 tax year to reflect market changes, nor was there a new appraisal conducted for the 2012 tax year. The court found that as evidenced by the 2011 and 2012 appraisals, which were uncontested evidence which the County produced, the taxpayer’s home suffered a 2.94% decrease in value between 2011 and 2012. The court agreed with the taxpayer that her home’s 2012 valuation should reflect this reduction and reversed the Court of Appeals’ decision and remanded the case to COTA with instructions that the taxpayer’s home be valued at $479,600 for the 2012 tax year. In re Equalization Appeal of Wagner, Kansas Supreme Court, No. 109,783, 6/10/16.

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