Raleigh attorney Gene Boyce and his colleagues are back in state court arguing another case of what they allege to be illegal fiscal policies by the State of North Carolina. Based on past experience and the letter of the law in the latest case, the political class in the state capital should have ample reason for worry.
Boyce was the attorney behind several costly court losses by former Attorney General, now Governor, Mike Easley during the 1990s. In one case, Boyce secured his plaintiffs hundreds of millions of dollars in refunded taxes on their government pensions. In another case, he won his clients hundreds of millions of dollars in refunded taxes on their out-of-state stocks and other intangible assets. Still another case involved disability payments. He won that one, too.
The current case stems from Gov. Easley’s decision last year to redirect $211 million in local tax revenues collected by the state. Easley said the money was needed to help close an unforeseen deficit in the state budget, and that his constitutional power to transfer state funds in a fiscal emergency justifed his action. Cities and counties weren’t persuaded by this argument, convinced that the revenues in question weren’t the governor’s to redirect, and some of the bravest of the lot decided (despite being essentially threatened by one of Easley’s aides) to employ Boyce to sue over the matter. Eventually, with the path clearer by the early pioneers and a nagging fear that they might be left out of a subsequent settlement, many other cities and counties joined in the litigation.
The governor and his staffers have seemed confident in denying the logic of the localities’ claim and in their ability to defend themselves in court. Is Boyce’s previous record not grounds enough to raise doubt? If not, I’d also point to what appears to be a key issue in the case and wonder what the state’s attorneys are thinking.
Boyce and one of his law partners, Philip Isley (who just happens to be a member of the Raleigh City Council, nice touch), argued before Wake Superior Court Judge Joseph John Wednesday that the $210 million in withheld revenues belonged to the local governments. The state had merely been acting as a collection agent for the funds. But Norma Harrell of the Attorney General’s office told the judge that the money was really from a state revenue source, that the funding stream originated in statewide corporate and individual income taxes enacted in 1939.
She further argued that money collected to compensate cities and counties was commingled with General Fund money in the state treasury, and was thus indisguishable from a legal standpoint from other state revenues. “Moneys that are ultimately to be paid to the local governments are not separated,” she said. “It is not local money. It is not kept in a separate account. It is not earmarked to begin with…. It is always state money.”
I’m not an attorney, and I haven’t read her brief. But this claim seems incredible to me. Sure, when the state grants state tax money to local governments, for the operation of public schools, for example, that flow of funds is always under the state’s control. In a time of fiscal emergency, it seems to me, the constitution would give the governor the right to interrupt that flow in order to balance the state budget. But the revenues in question are, legally, local taxes. Just by intermingling the actual cash balances in state accounts, or citing previous financial arrangements between the state and localities, you can’t turn a local tax into a state tax.
A related issue is the separation of powers. After the General Assembly has acted to clarify whether a particular tax is a state tax, subject to state appropriation, or a local tax collected and “passed through” by the state to cities and counties, can the governor unilaterally reclassify the tax and its resulting revenues as available to the state General Fund? The constitution gives him the power to second-guess legislative decisions on appropriating state funds when circumstances warrant, but it doesn’t appear to give him the power to second-guess legislative decisions about what is available for the state to spend in the first place.
Interesting issues — and an important decision, likely out from the judge in January. Easley and other state politicians ought to be watching this latest Boyce lawsuit closely if they’re not already. The last time they took their eye off this particular ball, it bounced up and smacked them silly.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.