Congress has been working diligently on comprehensive tax reform proposals to be passed through the budget reconciliation process following passage of the 2018 budget resolution. Lowering the corporate and individual tax rates will require offsets like repealing certain tax credits available to corporations. What is unclear is whether repeal of some tax credits might be retroactive in effect, which would raise arguments of unfairness for companies that have detrimentally relied on current law.
One example is the Section 45 tax credit, which provides a credit for the production and sale of electricity from wind energy facilities (the PTC), among others. The credit applies to the first ten years of production. The PTC was first enacted in 1992 and has been extended a number of times, most recently in 2015 as part of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). This last extension provided for a phase-out of the credit beginning January 1, 2017, with gradual reduction until December 31, 2019, with the end of the program.
Under the PATH Act, companies that broke ground on the construction of new wind facilities before December 31, 2017, were to receive the full-strength PTC. After that date, the PTC reduced to 80 percent. Many companies made substantial business decisions and investments in 2016 by breaking ground on new facilities while relying upon the law that they would receive 100 percent of the PTC for ten years.
It is not clear whether retroactive repeal would be constitutionally permissible. In a 2012 report for Congress, the Congressional Research Service (CRS) examined laws that impose a retroactive tax burden on taxpayers and concluded it was unlikely that those laws would be unconstitutional. There is a difference here in that the action of Congress described above would be the retroactive repeal of a tax benefit relied upon by the taxpayer.
Using the CRS analysis, the most common challenge to retroactive tax laws is the due process clause of the Fifth Amendment. The clause states, “No person shall…be deprived of life, liberty, or property, without due process of law.” Under United States v. Carlton, 512 U.S. 26 (1994), Congress would clearly meet the low standard of review using the rational basis test for a “legitimate legislative purpose.” However, the length of the retroactivity in this case could be a problem. Although Carlton only requires that the retroactivity be “rationally related,” the length of retroactivity in this case extends into a previous calendar year if it were to be enacted in 2017. Generally retroactive tax laws are accepted by courts if they extend back to the beginning of the calendar year in which they were enacted.
Although not binding in federal courts, there has recently been a New York state case decided by the New York Court of Appeals, New York’s highest court, which is very similar to the case here. It involved retroactively changing a tax credit program in June 2009, with the changes effective January 1, 2008. The result was that companies lost access to tax credits to which they were previously entitled. The court found that because the new rules applied to the prior year retroactively, the law violated constitutional due process rights.
Currently pending before the US Supreme Court is a case — Dot Foods, Inc. v. Dept. of Revenue for the State of Washington — that does seek a ruling on the question of due process and the relation to the length of retroactivity. If the Court makes a bright-line ruling as to the length of retroactivity with regard to retroactive tax legislation, we should be able to answer the underlying question very easily.