Jensen v. Franchise Tax Board

Opinion

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

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 [ 16 Cal.Rptr.3d 110 ].) 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 [ 55 Cal.Rptr.2d 276 ].) 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 ,

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 “[mjental 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.)

In a rational basis analysis, any conceivable state purpose or policy may be considered by the courts. (Nordlinger v. Hahn (1992) 505 U.S. 1 , 15 [ 120 L.Ed.2d 1 , 112 S.Ct. 2326 ]; Heller v. Doe (1993) 509 U.S. 312 , 320 [ 125 L.Ed.2d 257 , 113 S.Ct. 2637 ].) The state “has no obligation to produce evidence to sustain the rationality of a statutory classification,” which “ ‘may be based on rational speculation unsupported by evidence or empirical data.’ ” (Heller v. Doe, supra, 509 U.S. at p. 320.) The party challenging the constitutionality of a state law must “ ‘negative every conceivable basis which might support it.’ ” (Ibid.) “A classification does not fail rational-basis review because it ‘ “is not made with mathematical nicety or because in practice it results in some inequality.” ’ ” (Id. at p. 321.) The burden of demonstrating the invalidity of a challenged classification “rests squarely upon the party who assails it.” (D ’Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1 , 17 [ 112 Cal.Rptr. 786 , 520 P.2d 10 ].)

c. There Is a Rational Basis for Taxing Incomes over $1 Million

The Supreme Court has “long held that ‘[w]here taxation is concerned and no specific federal right, apart from equal protection, is imperiled, the States have large leeway in making classifications and drawing lines which in their judgment produce reasonable systems of taxation.’ ” (Kahn v. Shevin, supra, 416 U.S. at p. 355; see Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, supra, 22 Cal.3d at pp. 233-234.) The Taxpayers argue that “in arriving at a reasonable system of taxation, a state may not arbitrarily single out a specific group to bear the burden while excusing non-group members.” They maintain that there must be a rational connection “between the group being taxed and the problem being addressed” by the tax.

The Taxpayers are mistaken in thinking that taxpayers in a particular tax bracket cannot be singled out for an income tax to benefit society at large.

“A tax is not an assessment of benefits. It is, as we have said, a means of distributing the burden of the cost of government. The only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes. [Citation.] Any other view would preclude the levying of taxes except as they are used to compensate for the burden on those who pay them, and would involve the abandonment of the most fundamental principle of government—that it exists primarily to provide for the common good.” (Carmichael, supra, 301 U.S. at pp. 522-523; see Thomas v. Gay (1898) 169 U.S. 264 , 279-280 [ 42 L.Ed. 740 , 18 S.Ct. 340 ]; Commonwealth Edison Co. v. Montana (1981) 453 U.S. 609 , 622-623 [ 69 L.Ed.2d 884 , 101 S.Ct. 2946 ].)

In this instance, the Taxpayers object that individuals with high incomes do not have a particular need or use for the mental health services funded by Proposition 63, i.e., there is no connection “between the group being assessed and the use of the funds collected.” The argument fails, because there is no need to contrive a link between the taxpayer and the services being funded. For example, “A corporation cannot object to the use of the taxes which it pays for the maintenance of schools because it has no children.” (Carmichael, supra, 301 U.S. at p. 523.) In short, the Taxpayers cannot “resist the payment of the tax because it is not expended for purposes which are peculiarly beneficial to [them].” (Ibid.)

The Taxpayers assert that the tax imposed by Proposition 63 on high-income individuals “is arbitrary and capricious.” A classification among

Taxpayer income is a valid basis for drawing distinctions between taxpayers, even if the result is an unequal burden among all taxpayers. “The Federal Constitution imposes no restraints on the State in regard to unequal taxation.” (Magoun v. Illinois Trust & Savings Bank, supra, 170 U.S. at p. 295.) “ ‘Indeed, this whole argument of a right under the Federal Constitution to challenge the tax law on the ground of inequality in the burdens resulting from the operation of the law’ ” has been “ ‘put at rest.’ ” (Id. at p. 296.) The Fourteenth Amendment “was not intended to compel the State to adopt an iron rule of equal taxation.” (170 U.S. at p. 295.)

The tax imposed by Proposition 63 is not arbitrary merely because a person earning $1,000,001 is subject to the tax, while a person earning $999,999 is exempt. The government has leeway in “ ‘drawing lines’ ” below which individuals are exempt from a tax. (Kahn v. Shevin, supra, 416 U.S. at p. 355; see Williams v. Vermont (1985) 472 U.S. 14 , 22 [ 86 L.Ed.2d 11 , 105 S.Ct. 2465 ].) Drawing a line, for purposes of taxation, “is the type of distinction which the law is often called upon to make. ... It separates large incomes which are taxed from the smaller ones which are exempt, as it marks here the difference between the proprietors of larger businesses who are taxed and the proprietors of smaller businesses who are not.” (Carmichael, supra, 301 U.S. at pp. 510-511, fin. omitted [upholding the imposition of an unemployment compensation tax on businesses with eight or more employees while exempting businesses with seven or fewer].)

A tax will be upheld if it operates “ ‘equally and uniformly upon all persons in similar circumstances.’ ” (Magoun v. Illinois Trust & Savings Bank,

The Taxpayers perceive themselves as victims of a populist movement to “soak the rich.” The desire of the majority of the electorate to tax a minority of citizens based on their earnings is not a basis for overturning an income tax. The courts “do not substitute their social and economic beliefs” to supplant the judgment of the enacting body. (Ferguson v. Skrupa (1963) 372 U.S. 726 , 730 [ 10 L.Ed.2d 93 , 83 S.Ct. 1028 ]; see Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805 , 814 [ 258 Cal.Rptr. 161 , 771 P.2d 1247 ].) “[R]ational-basis review in equal protection analysis ‘is not a license for courts to judge the wisdom, fairness, or logic of legislative choices.’ ” (Heller v. Doe, supra, 509 U.S. at p. 319.) “[E]ven improvident decisions will eventually be rectified by the democratic process and . . . judicial intervention is generally unwarranted no matter how unwisely we may think a political branch has acted.” (Vance v. Bradley (1979) 440 U.S. 93 , 97 [ 59 L.Ed.2d 171 , 99 S.Ct. 939 ], fn. omitted; see American Bank & Trust Co. v. Community Hospital (1984) 36 Cal.3d 359 , 396 [ 204 Cal.Rptr. 671 , 683 P.2d 670 ]; Nordlinger v. Hahn, supra, 505 U.S. at pp. 17-18 [upholding California’s Prop. 13 against a claim that it denies equal protection by disadvantaging “younger and poorer California families” buying homes, and “startup businesses” purchasing commercial property, that are obliged to pay much higher property taxes than established families and businesses owning similar properties].)

Income tax rates may be rationally based on a taxpayer’s ability to pay. “Income taxes are a recognized method of distributing the burdens of government, favored because requiring contributions from those who realize current pecuniary benefits under the protection of the government, and because the tax may be readily proportioned to their ability to pay.” (Shaffer v. Carter (1920) 252 U.S. 37 , 51 [ 64 L.Ed. 445 , 40 S.Ct. 221 ].) In one challenge, a taxpayer argued that progressive tax systems are constitutionally unsound because they “are based on wealth alone” and “a mere arbitrary abuse of power.” (Brushaber v. Union Pac. R. R. (1916) 240 U.S. 1 , 21, 25 [ 60 L.Ed. 493 , 36 S.Ct. 236 ].) The Supreme Court replied that progressive taxes have been an accepted fixture since the early history of the country, and it does not offend constitutional principles to tax people unequally. (Id. at pp. 25-26.) In an earlier challenge to a progressive tax, the court wrote, “taxes imposed with reference to the ability of the person upon whom the burden is placed to bear the same have been levied from the foundation of the government.” (Knowlton v. Moore (1900) 178 U.S. 41 , 109 [ 44 L.Ed. 969 ,

The judgment is affirmed.

Ashmann-Gerst, J., and Chavez, J., concurred.

Appellants’ petition for review by the Supreme Court was denied January 21, 2010, S178199.