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April 29, 2012 The Tax Lawyer

Does the California Governor’s Enterprise Zone Proposal Pass Constitutional Muster: An In-Depth Look at Federal Due Process Restrictions on State Enacted Legislation that Eliminates Carryforward Tax Credits

Vol. 64, No. 4 - Summer 2011

Vikram Agarwal


    In late 2007, the suffered a historic collapse in the financial and real estate markets. The resulting economic downturn that created nationwide economic distress has infected the financial stability of many states. Accordingly, many states are operating with substantial revenue shortfalls and are facing bankruptcy. To combat the budget gaps, governors employed an assortment of tools to raise revenue. California Governor Jerry Brown attempted to create such a tool. Governor Brown would have liked the legislature to enact legislation that retroactively eliminates carryforward tax credits that have been earned in previous years.

    There is a long history of evaluating retroactive legislation in the economic and tax spheres. Federal courts have long been hostile to legislation that interferes with settled expectations. It is clear, however, that the legislature may, without violating the Due Process Clause, enact legislation imposing economic burdens retroactively if it is justified by a “legitimate legislative purpose furthered by rational means.” The Fourteenth Amendment of the U.S. Constitution provides the legal backbone the courts must employ when evaluating retroactive legislation that arguably strips a taxpayer of property they have earned in the form of state tax credits. The Fourteenth Amendment states that “[n]or shall any state deprive any person of life, liberty, or property without due process of law.”

    Governor Brown’s proposal was estimated to raise an additional $1 billion in revenues and would have likely been adopted by other states if Governor Brown succeeded. Governor Brown faced ferocious opposition, however. The primary argument of the opposition is that Governor Brown’s proposal would have violated the Fourteenth Amendment by depriving the taxpayers of their carryforward tax credits without due process of law. Although the jurisprudence of this legal question generally favors legislative action in the economic and tax arena, Governor Brown’s proposal may have actually surpassed the bounds of federal constitutionality.

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