City of New Orleans v. Scramuzza

• Decision Date: 18 May 1987
• Docket Number: No. 87-CA-0378,87-CA-0378
• Citation: 507 So.2d 215
• Parties: The CITY OF NEW ORLEANS v. Al SCRAMUZZA and the Class of Resident Tax-Payers of the City of New Orleans Earnings Tax, William Sanchez, Kenneth C. Fonte and Colleen Conrad Fonte and the Class of Non-Resident Tax-Payers of the City of New Orleans Earnings Tax, and Donald Johnston, in his Capacity as President of/and D.H. Holmes Co., Ltd. and the Class of Employers of Taxpayers of the City of New Orleans Earnings Tax.
• Court: Louisiana Supreme Court

Page 215

507 So.2d 215

The CITY OF NEW ORLEANS v. Al SCRAMUZZA and the Class of Resident Tax-Payers of the City of New Orleans Earnings Tax, William Sanchez, Kenneth C. Fonte and Colleen Conrad Fonte and the Class of Non-Resident Tax-Payers of the City of New Orleans Earnings Tax, and Donald Johnston, in his Capacity as President of/and D.H. Holmes Co., Ltd. and the Class of Employers of Taxpayers of the City of New Orleans Earnings Tax.

No. 87-CA-0378.

Supreme Court of Louisiana.

May 18, 1987.

Okla Jones, City Atty., Jackson P. McNeely, Thomas W. Milliner, Bruce E Naccari, Deputy City Attys., Eleanor K. Roemer, Asst. City Atty., Donald R. Mintz, Ellis Murov, Timothy Francis, McGlinchey, Stafford, Mintz, Cellini & Long, Mack E. Barham, Galen S. Brown, M. Lizabeth Talbott, Gail N. Wise, Barham & Churchill, New Orleans, for applicant.

Jessie Guillot, Cy Courtney, Maurice E. Clark, New Orleans, Anthony R. Messina, Metairie, Louis G. Gruntz, Jr., Jefferson, James Arceneaux, Metairie, Craig C. Cimo, Asst. Parish Atty., Gretna, Walter Reed, Dist. Atty., Lane Carson, Asst. Dist. Atty., Covington, John Rowley, Dist. Atty., Marcel Gueniot, William Schuler, Asst. Dist. Attys., Chalmette, Richard D. Faulkner, New Orleans, Lawrence Chehardy, Metairie, R. Lawrence Kurt, New Orleans, Louis L. Robein, Metairie, Gilbert R. Buras, Jr., New Orleans, Gardner, Robein & Healey, Metairie, Kenneth C. Fonte, New Orleans, for defendants.

COLE, Justice.

The issue presented is whether or not the New Orleans Earnings Tax Ordinance ¹, No. 11, 416 M.C.S., imposes an "income tax" and is, therefore, unconstitutional under Article VII, Section 4(C) of the Louisiana Constitution of 1974. The lower court ruled the ordinance unconstitutional. For the reasons to follow, we affirm.

The City of New Orleans (City) filed this declaratory action seeking a determination of the legality and constitutionality of the Earnings Tax Ordinance. Named as defendants were all classes of persons affected by the earnings tax. The classes certified were: Resident Taxpayers of the Earnings Tax, Non-Resident Taxpayers of the Earnings Tax, and Employers of Taxpayers of the Earnings Tax. Separate suits were instituted against the City by the Parish of Jefferson, the Parish of St. Tammany, the Parish of St. Bernard, et al., and by Robert L. Deviney, et al. By motion of the parties these actions were consolidated with the City's original suit. Additionally, various parties originally named as defendants were allowed to re-align as party plaintiffs representing the class of Non-Resident Taxpayers who support the Earnings Tax.

The ordinance in question imposes a tax of 1.5% of annual gross earnings, in excess of $5,000, of every person working in the City of New Orleans. ² The City maintains the Earnings Tax is not an "income tax" within the meaning of Article VII, Section 4(C), because it is a tax only upon gross earnings, as distinguished from the traditional income tax premised upon a different structure, locus, and base.

Opponents of the tax argue the Earnings Tax is a form of local government income tax, prohibited under Article VII, Section 4(C) of the state constitution. ³ They point out it is beyond dispute the ordinance taxes the major source of income, namely wages and salaries. It is argued a constitutional prohibition against political subdivisions taxing all income, a fortiori, includes a prohibition against a municipality taxing a component of income, i.e., earnings.

Stated another way, the prohibition against local income taxes is a prohibition against any form of local tax levied on, or measured by, a source of income. Opponents maintain the City's legal arguments are based on "semantic sophism." The City maintains the opposition presents a "simplistic semantic theory."

At trial the City presented experts qualified in the fields of economics, political science, legal history, finance, and accounting. The general consensus of these experts was that an earnings tax differs in some respects from a traditional income tax.

Based on the testimony of its experts, the City contends a political subdivision is prohibited only from imposing an income tax which mirrors the characteristics of the complex, progressive tax levied on net income by our state and federal governments. It is argued the framers of our constitution intended only to prohibit a political subdivision from levying a comprehensive tax on net income. In brief, the City carefully distinguishes the characteristics of the state and federal income taxes from those of the Earnings Tax. The City relies heavily on the fact the Earnings Tax is levied only on one source of income and is measured by a percentage of gross earnings, rather than net income. Additionally, the City notes the Earnings Tax is for the most part not progressive and does not incorporate a complex system of deductions, exemptions, and credits. Based on its comparison of basic characteristics, the City concludes:

In light of the fact the ordinance taxes working rather than income ... one must conclude that it is not even similar to an income tax.

Under the City's interpretation, the Earnings Tax would appear to be outside the scope of Article VII, Section 4(C).

The City sought also to show it is authorized to impose an Earnings Tax under its home rule charter. Article VI, Section 4 of the Louisiana Constitution of 1974 provides every home rule charter existing when the constitution was adopted remained in effect and local governmental subdivisions retained all powers and functions provided for under their charters, except those inconsistent with the constitution.

The City of New Orleans is currently organized under a Home Rule Charter effective since May of 1954. Section 3-101(2) provides:

The Council shall have the right to levy any and all classes of taxes excises (sic), licenses, liens and fees necessary for the proper operation and maintenance of the municipality for the payment of debt, and for capital improvements that are not expressly prohibited by the Constitution....

In Acorn v. City of New Orleans, 377 So.2d 1206 (La.1979), we acknowledged the City of New Orleans has full and complete power to impose all kinds and classes of taxes, except as expressly prohibited by the Constitution of the State of Louisiana.

The City argues correctly Constitutional scrutiny favors the ordinance. Statutes are presumed to be valid, and the constitutionality should be upheld whenever possible. State v. Griffin, 495 So.2d 1306 (La.1986). Accordingly, judicial self-restraint is appropriate when statutes are under constitutional attack. Sherman v. Cabildo Construction Company, 490 So.2d 1386 (La.1986). The presumption of validity accorded acts of the legislature applies with equal force to a municipal ordinance. City of Lake Charles v. Henning, 414 So.2d 331 (La.1982). It is clear the Earnings Tax should be accorded a presumption of validity with the burden resting upon those challenging the ordinance to prove it unconstitutional. State v. Griffin, supra.

* * *

* * *

Our task is to interpret the meaning of "income tax" within the factual context presented. The words and terms expressed in the Constitution are to be interpreted by the courts with an understanding of the definitions which would have been given to those words or terms by the people when they adopted the Constitution. Chehardy v. Democratic Executive Committee, 249 So.2d 196 (La.1971).

Constitutional provisions are to be construed and interpreted by the same rules as are other laws. Aguillard v. Treen, 440 So.2d 704 (La.1983). Constitutional provisions which are plain and unambiguous must be given effect. Aguillard, supra. Provisions of the Constitution, no less than other laws, must be construed to give effect to the purpose indicated by a fair interpretation of the language used. State Ex Rel. Guste v. Board of Commissioners of the Orleans Levee District, 456 So.2d 605 (La.1984).

Classification of a tax must be determined by its operational effect rather than by the descriptive language used in drafting the enactment. The realities of the tax must be examined; its substance, not its form. Trainer v. U.S., 800 F.2d 1086 (Fed.Cir.1986). To ascertain a precise definition of an income tax would prove to be a near impossible task. Such a definition must necessarily vary to conform to the various systems of income taxation. ⁴

Our state income tax is generally "a tax upon the net income of residents, and non-residents, estates, trusts, and corporations...." La.R.S. 47:31.

According to Black's Law Dictionary 5th Ed., the term "income tax" may be defined as "A tax on a person's income, wages, salaries, commissions...."

Under 4 U.S.C. §§ 105-110, known as the Buck Act, it was clarified that state and other taxing authorities could collect income tax from employees of the federal government working in federal areas. For purposes of this act "income tax" was defined as "any tax levied on, with respect to, or measured by, net income, gross income, or gross receipts." 4 U.S.C. § 110.

Fortunately, our task is not to define "income tax," but merely to determine if the Earnings Tax should be classified as a prohibited form of "income tax" under our Constitution. Clearly we believe it...