Jensen v. Franchise Tax Bd.

• Decision Date: 14 October 2009
• Docket Number: No. B211815.,B211815.
• Citation: 178 Cal.App.4th 426,100 Cal. Rptr. 3d 408
• Court: California Court of Appeals Court of Appeals
• Parties: CRAIG JENSEN et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.

178 Cal.App.4th 426

100 Cal. Rptr. 3d 408

CRAIG JENSEN et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.

No. B211815.

Court of Appeals of California, Second District, Division Two.

October 14, 2009.

Lappen and Lappen, Jonathan Bailey Lappen; Moxon & Kobrin and Kendrick L. Moxon for Plaintiffs and Appellants.

Edmund G. Brown, Jr., Attorney General, W. Dean Freeman, Felix E. Leatherwood and Anthony F. Sgherzi, Deputy Attorneys General, for Defendant and Respondent.

OPINION

BOREN, P. J.—

This is a challenge to the constitutionality of the Mental Health Services Act, added by California voters through an initiative measure, Proposition 63, at the November 2, 2004 General Election (Proposition 63). Proposition 63 expands funding for mental health services for all Californians by imposing an additional tax of 1 percent on annual income in excess of $1 million. (Rev. & Tax. Code, § 17043.) Proposition 63 also prevents future state funding for mental health services from falling below the amounts allocated for these services in 2003. (Welf. & Inst. Code, § 5891.)

We find no constitutional infirmity in the challenged portions of Proposition 63. An income tax may be rationally based on a taxpayer's income level and ability to pay, and there is no need to show that a particular taxpayer personally benefits from a tax assessed for the public good. Taxpayers earning more than $1 million annually do not comprise a "suspect class" requiring a strict scrutiny constitutional analysis. Further, Proposition 63 is valid even if it is not a constitutional amendment.

FACTS

Craig and Sally Jensen (the Taxpayers) sued the Franchise Tax Board (FTB) to recover part of their 2006 California state income tax. The tax was imposed by Revenue and Taxation Code section 17043 on income that exceeded $1 million. The Taxpayers remitted the tax under protest and filed a "Claim for Refund" with the FTB. The FTB took no action on the Taxpayers' claim for a refund.

The Taxpayers allege that they are victims of arbitrary discrimination, in violation of the federal and state equal protection clauses. In their view, wealthy individuals are singled out to bear the burden of a public expense, while others are excused from that burden. The Taxpayers reason that the wealth of a taxpayer is not a rational basis for a tax assessed for a specific purpose, such as mental health services.

The Taxpayers also challenge the requirement in Welfare and Institutions Code section 5891 that the state maintain funding for mental health services at 2003 levels. They claim that this is an unconstitutional suspension of state budgetary powers, so that the budgets for mental health services "are cast in stone, and are not subject to reduction by either the legislature or the governor without a statutory change." The Taxpayers allege that making this change in the creation of the state budget required an amendment to the state Constitution. Proposition 63 is not a constitutional amendment.

The FTB demurred to the Taxpayers' complaint. The trial court declined to strike down a generally applicable tax scheme based on income, noting that states have great leeway in making classifications that produce reasonable systems of taxation. The court also refused to strike down Proposition 63 simply because it was not presented as a constitutional amendment. The court sustained the FTB's demurrers without leave to amend and dismissed the Taxpayers' lawsuit.

DISCUSSION

Standard of Review and Standing to Sue

Appeal lies from the trial court's signed dismissal order, after demurrers were sustained without leave to amend. (Code Civ. Proc., §§ 581, subd. (f)(1), 581d; Serra Canyon Co. v. California Coastal Com. (2004) 120 Cal.App.4th 663, 667 .) Review is de novo: we exercise our independent judgment to determine whether a cause of action has been stated as a matter of law. (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115 .) In reviewing initiative measures, "`[w]e do not consider or weigh the economic or social wisdom or general propriety of the initiative, but rather evaluate its constitutionality in the context of established constitutional standards.'" (California Family Bioethics Council, LLC v. California Institute for Regenerative Medicine (2007) 147 Cal.App.4th 1319 1338 .) The "`initiative power must be liberally construed to promote the democratic process.'" (Ibid.)

(1) A taxpayer may file suit to recover "a tax claimed to be illegal," after the tax has been paid. (Cal. Const., art. XIII, § 32.) A taxpayer's claim to recover taxes is deemed to have been denied—and a taxpayer may proceed with a lawsuit—if the FTB takes no action within six months after the claim is filed. (Rev. & Tax. Code, §§ 19382, 19385.) The FTB does not contest that the Taxpayers have standing to bring this lawsuit after they paid their taxes and brought a claim before the FTB to recover those taxes.

Overview of Proposition 63

The text of Proposition 63 articulates the purpose or policy motivating enactment of the Mental Health Services Act. The measure's findings and declarations acknowledge that "[m]ental illnesses are extremely common; they affect almost every family in California." "Failure to provide timely treatment can destroy individuals and families," and untreated mental illness "is the leading cause of disability and suicide and imposes high costs on state and local government." Untreated children are unable to learn, and untreated adults lose their ability to work and be independent, often becoming homeless and subject to frequent hospitalizations or incarceration, costing billions of dollars annually. California has developed effective models of providing a full range of integrated services for individuals with serious mental illness, with the goal of self-sufficiency for people who may otherwise face homelessness or dependence on the state for years to come. The programs include early diagnosis and treatment to prevent disability and thereby save lives and money. (Prop. 63, § 2.)

Proposition 63 elaborates the mechanism for funding these mental health programs. "To provide an equitable way to fund these expanded services while protecting other vital state services from being cut, very high-income individuals should pay an additional 1 percent of that portion of their annual income that exceeds one million dollars ($1,000,000). About one-tenth of 1 percent of Californians have incomes in excess of one million dollars ($1,000,000). They have average pre-tax income of nearly five million dollars ($5,000,000). The additional tax paid pursuant to this represents only a small fraction of the amount of tax reduction they are realizing through recent changes in the federal income tax law and only a small portion of what they save on property taxes by living in California as compared to the property taxes they would be paying on multi-million dollar homes in other states." (Prop. 63, § 2.)

Constitutionality of Revenue and Taxation Code Section 17043¹

(2) The Taxpayers challenge Revenue and Taxation Code section 17043 on the grounds that it violates the equal protection clause.² The equal protection clause "`compel[s] recognition of the proposition that persons similarly situated with respect to the legitimate purpose of the law receive like treatment.'" (Darces v. Woods (1984) 35 Cal.3d 871, 885 [201 Cal.Rptr. 807, 679 P.2d 458].) State taxation statutes are subject to equal protection challenges. (Western & Southern L. I. Co. v. Bd. of Equalization (1981) 451 U.S. 648, 655-656 [68 L.Ed.2d 514, 101 S.Ct. 2070].) Statutes must be upheld unless they are clearly, positively and unmistakably unconstitutional. (Voters for Responsible Retirement v. Board of Supervisors (1994) 8 Cal.4th 765, 780 [35 Cal.Rptr.2d 814, 884 P.2d 645].)

a. Wealthy Individuals Are Not Part of a Suspect Class Requiring Strict Scrutiny

(3) The Taxpayers argue that a strict scrutiny constitutional analysis applies. Classifications that disadvantage a "suspect class" or impinge upon the exercise of a "fundamental right" are subject to strict scrutiny; this requires the state to demonstrate that its classification "has been precisely tailored to serve a compelling governmental interest." (Plyler v. Doe (1982) 457 U.S. 202, 216-217 [72 L.Ed.2d 786, 102 S.Ct. 2382]; see Darces v. Woods, supra, 35 Cal.3d at p. 886.)³ The Taxpayers maintain that wealth is a suspect classification and the tax imposed by Proposition 63 affects only "the class of `wealthy' persons."

(4) We are unaware of any case authority holding that wealthy individuals form a "suspect class" deserving of a heightened degree of scrutiny. Suspect classifications include race, gender, national origin, and alienage. Wealth generally confers benefits, and does not require the special protections afforded to suspect classes. Wealth has "none of the traditional indicia of suspectness: the class is not saddled with such disabilities, or subjected to such a history of purposeful unequal treatment, or relegated to such a position of political powerlessness as to command extraordinary protection from the majoritarian political process." (San Antonio School District v. Rodriguez (1973) 411 U.S. 1, 28 [36 L.Ed.2d 16, 93 S.Ct. 1278].) The Supreme Court "has never heretofore held that wealth discrimination alone provides an adequate basis for invoking strict scrutiny." (Id. at p. 29.) Punitive damages— which require a jury to consider "the financial condition of the tortfeasor"—do not violate the equal protection clause even though they have a disproportionate impact on wealthy defendants. (Germanio v. Goodyear Tire & Rubber Co. (D.N.J. 1990) 732 F.Supp. 1297, 1305 ["we are unaware of any cases . . . which suggest that a heightened degree of scrutiny for the wealthy is appropriate"].)

The Taxpayers rely on Serrano v. Priest (1971) 5 Cal.3d 584 [96 Cal.Rptr. 601, 487 P.2d 1241] (Serrano), in which the Supreme Court...