Former Justice Sandra Day O’Connor passed away on December 1, the Supreme Court announced, at age 93. Justice O’Connor served on the Court from 1981 to 2006, earning a reputation for being thoughtful, cautious, and moderate. Her practical outlook may have come from being the most recent justice to have served in a legislature (the Arizona Senate, 1969-1975, including serving as Majority Leader).
In tax cases, Justice O’Connor was generally a friend of the taxpayer. One case in particular stands out: United States v. Carlton (1994), dealing with retroactive taxation. Congress amended the tax code in 1986 and made a problematic and unintended change to employee stock ownership plans that the IRS immediately announced they would seek to fix. Congress ultimately amended the law 14 months later but retroactive back to the beginning, and the Court faced the question of whether retroactive application violated the Constitution’s Due Process Clause. The majority ruled that the short period of time and the IRS’s early announcement that it would seek a legislative fix minimized any reliance and was constitutional.
Justice O’Connor was clearly not comfortable with that result being definitive, and she wrote a separate opinion concurring only in the result. She warned that the power of retroactive taxation was not unlimited and that it was in her view narrower than might be understood from the case’s outcome. As she wrote, “A period of retroactivity longer than the year preceding the legislative session in which the law was enacted would raise, in my view, serious constitutional questions.” Unfortunately, federal and state governments now routinely claim they can impose years’ worth of retroactivity, citing Carlton.
One goal of NTUF’s Taxpayer Defense Center is to vindicate Justice O’Connor’s opinion in Carlton, and limit the scope of retroactive tax increases. Retroactive taxes violate the fundamental principles of transparency and stability. Retroactive tax increases undermine certainty in the law and the ability of taxpayers to plan their affairs by relying on the law today, not based on what legislators in the future decide the law was. One day, I hope, Justice O’Connor’s Carlton concurring opinion will be the majority opinion. And for all her contributions, may she rest in peace.