A Virginia business’s constitutional challenge to two Virginia transportation taxes was rejected by the Fairfax County Circuit Court and is now headed to the Virginia Supreme Court. GCPC represents the petitioner, FFW Enterprises.
The taxes subject to this challenge are Va. Code §§ 58.1-3221.3 and 33.1-435. The first statute allows local governments within the Northern Virginia Transportation Authority to assess a tax on commercial and industrial real property to pay for transportation improvements throughout the taxing jurisdiction. The second statute allows for the creation of special transportation districts in which commercial and industrial real property, as well as taxable leasehold estates, can be taxed to raise money for transportation improvements within that district. FFW Enterprises owns commercial real property in Tysons Corner that is subject to both taxes, and filed its complaint seeking to have the taxes struck down as unconstitutional and have the proceeds from those taxes returned to the taxpayers.
Although this challenge may be seen as controversial because Va. Code § 33.1-435 is the tax being used to fund Fairfax County’s share of the cost for Phase I of the Dulles Metrorail extension, the implications of this challenge actually go far beyond any one project. Simply put, if these taxes pass constitutional muster, then the General Assembly will be able to force commercial and industrial real property owners to shoulder the entire burden of any and all public improvements throughout the Commonwealth. Read more after the jump.
The constitutional basis for the challenge lies in Article X of the Virginia Constitution. Like most states, Virginia has a constitutional provision requiring that all taxes be “uniform.” The same constitutional provision empowers the General Assembly to classify property that is to be subject to taxation. The Virginia Constitution goes on to define certain kinds of real property that may be exempted from taxation, like horticultural land. The question becomes whether the General Assembly exceeded its power to classify property for taxation by only taxing commercial/industrial real property and excluding residential real property, which is not exempted from taxation under the Constitution, for the purpose of providing a public benefit like transportation.
The initial argument is simply that the Virginia Constitution does not allow the General Assembly to exempt any kind of real property from a real property tax except as specifically noted in the Constitution itself. In other words, non-exempted real property must be treated as one indivisible class of property subject to taxation — an approach already adopted by at least one other state with a similar constitutional uniformity provision.
The second argument is largely derived from a relatively obscure Virginia Supreme Court case, City of Hampton v. Ins. Co. of North America, 177 Va. 494, 14 S.E.2d 396 (1941). In that case, a tax on fire insurance premiums that funded firefighter pensions was struck down as unconstitutional by the Court. Using the standard rational basis test, the Court reasoned that since all people benefited from fire departments, and those without fire insurance benefited “as much or more” than those who were being taxed, the tax was not uniform and thus unconstitutional. This case presents very similar facts: these taxes on businesses are being used to provide transportation improvements that will clearly benefit residents as much or more than the businesses being taxed.
Obviously, these are but thumbnail sketches of the overall arguments being presented. Nonetheless, Fairfax Circuit Court Judge Jane Marum Roush rejected FFW Enterprises’s arguments and ruled that the taxes were constitutional. That decision is now on appeal.
The Fairfax County Economic Development Authority meanwhile filed a Complaint in the Fairfax Circuit Court seeking a judicial determination of the legality of the bonds that will be issued to pay for the Dulles Metrorail extension. Part of that determination involved a ruling on the constitutionality of Va. Code § 33.1-435. Since Judge Roush already ruled that the tax was constitutional, Judge Stanley P. Klein did so as well, and validated the bonds accordingly. Thus, FFW Enterprises has also noticed its appeal of the bond validation ruling to preserve its constitutional argument against the Metrorail tax. One can expect these two appeals to eventually be combined for singular consideration by the Virginia Supreme Court.
But again, the precedent set by these taxes reaches far beyond the legality of the bonds underwriting the Dulles Metrorail extension. These taxes force businesses to shoulder the entire cost of all transportation improvements in Fairfax County, regardless of whether the roads abut residential or commercial property. Typical road taxes in the past taxed the property that abutted the road based on “frontage,” or how much of the property touched the road. These taxes instead force a tiny minority of landowners in the County to pay for all of the roads everyone uses. If this is constitutional, then there is nothing preventing the General Assembly from issuing a tax wherein, say, all commercial landowners must shoulder the entire cost of all the public parks. Or public monuments. Or public buildings. There’s no need to make residential landowners pay for anything.
Or it could go the other direction — if commercial/industrial landowners can be taxed to pay for all the roads, why not a subclassification of commercial landowners, like supermarkets? Surely supermarkets benefit from the roads. But does that mean they should pay for all of them and give everyone else a free ride? At that point, the difference between the taxed and the untaxed merely becomes a matter of who has political sway in the General Assembly. That is a far cry, in our view, from the “uniform” taxation guaranteed by the Virginia Constitution.
Under the current timetable, FFW Enterprises’s Petition for Appeal in the original tax challenge is due on September 17. Its Petition for the bond validation matter is due on September 28. Please direct any questions to James N. Markels.
