On certification to the Superior Court, Chancery Division.
For reversal and remandment -- Chief Justice Wilentz, Justices Clifford, Schreiber, Garibaldi and Sullivan and Judges Matthews and Fritz. For reversal -- None. The opinion of the Court was delivered by Schreiber, J.
[93 NJ Page 449] This case concerns the constitutionality of the Emergency Transportation Tax Act (ETT), N.J.S.A. 54:8A-1 to -57. Plaintiffs are three New York residents who commute or have commuted from their homes in New York to work in New Jersey. Claiming that the ETT, an obligation levied on the New Jersey-derived income of only New York residents, discriminates unconstitutionally against them, plaintiffs seek declaratory and injunctive relief in addition to damages. This cause was initially decided by the trial court after a summary proceeding without testimony pursuant to R. 4:67 and was certified for direct appeal to this Court. 81 N.J. 269 (1979). In Salorio v. Glaser (Salorio I), 82 N.J. 482, cert. denied, 449 U.S. 874, 101 S. Ct. 215, 66 L. Ed. 2d 94 (1980), we held that the ETT does not violate the Equal Protection Clause of the fourteenth amendment, U.S. Const., amend. XIV, § 1. We remanded for plenary hearing to
make a complete record so as to enable the trial court to determine whether the ETT contravenes the Privileges and Immunities Clause of the federal constitution, U.S. Const., art. IV, § 2, cl. 1. Today we review the proceedings that followed our remand.
The facts were fully described by Justice Pashman in Salorio I. 82 N.J. at 488-90. A summary is sufficient for an understanding of this opinion. New Jersey has developed, constructed and maintained commuter transportation facilities so that residents of New Jersey and New York residing in one state and working in the other can move more readily between these states. State expenditures for this purpose have been and are financed in part by general revenue taxes and in part by taxes collected specifically to defray the cost of transportation programs. One revenue source earmarked for these state expenditures is the Emergency Transportation Tax (ETT), first enacted in 1961. L. 1961, c. 32.*fn1
Under the existing scheme New York residents who commute to work in New Jersey must pay the higher of the New Jersey Gross Income Tax, N.J.S.A. 54A:1-1 to :10-12, or the ETT, each of which is imposed only on income earned in New Jersey. If the ETT obligation is the greater of the two and is therefore imposed, that part of the ETT revenues equivalent to the New Jersey Gross Income Tax is paid into the Property Tax Relief Fund. N.J.S.A. 54:8A-121; N.J.S.A. 54A:9-25.*fn2 The balance of
the ETT revenues is deposited in a special "Transportation Fund," N.J.S.A. 54:8A-120, identified for projects and programs to meet transportation problems.*fn3 N.J.S.A. 54:8A-20(a).
In Salorio I, we noted that under the Privileges and Immunities Clause*fn4 residents and nonresidents are to be treated with "substantial equality," 82 N.J. at 501, and that the ETT tax, which falls only on New York residents, involves a constitutionally-protected right to pursue an occupation outside their home state. Id. We stated that a statute that causes disparate treatment of nonresidents is invalid under the Privileges and Immunities Clause, unless (1) the State can prove that nonresidents are a "peculiar source" of the evil at which the statute is aimed and (2) the singular treatment of nonresidents bears a "substantial relationship" to the particular evil that nonresidents are said to present. Id. at 503-04. We agreed with the State that costs and expenses related to mass transportation due to the almost daily movement of large numbers of people from New York to New Jersey served as a valid independent justification for a commuter tax on nonresidents. Id. at 504-05. On the record before us in Salorio I, however, we could not identify the extent of the "peculiar source" of the transportation problem attributable to the New York commuter or the "substantial relationship" that the tax levied on the New York commuter bore to costs expended in attempting to solve that problem.
With regard to "peculiar source," we explained:
While commuters living in New York need not be the sole cause of New Jersey's transportation crisis to justify discriminatory treatment, more than merely their identification is required. The State's burden of showing that non-residents constitute a "peculiar source" of an evil would be stripped of meaning if that
obligation could be discharged simply by referring to a problem to which non-residents make but a small contribution. [ Id. at 505 (footnote omitted)]
The "substantial relationship" test also required particular proof:
Imposition of the ETT cannot be justified if it appears that the tax burden on New York residents is substantially disproportionate to their burden upon New Jersey's transportation facilities.
This is not to say that non-resident commuters cannot be charged for any benefits resulting from New Jersey's subsidization of commuter transportation facilities and expenditures for highway construction and maintenance in northern New Jersey. The Constitution does not entitle nonresident commuters to a "free ride." The State may exact from them a fair share of the cost of adequate transportation facilities without violating the Privileges and Immunities Clause.
The record discloses that expenditures for highway construction and maintenance in northern New Jersey amounted to $910 million during the years 1970 through 1977. Since none of these funds came from emergency transportation taxes, non-residents apparently did not contribute to the cost of providing these vital transportation facilities. The expenditure figures introduced also indicate, however, that ETT funds have supplied a very substantial portion of state expenditures for bus and rail facilities. While non-resident use of such facilities constitutes a very small percentage of total patronage, we recognize that a strict percentage analysis is not required for each separate type of commuter transportation facility. [ Id. at 505-06 (footnotes omitted)]
The State was thus required to produce evidence to determine whether the tax imposed on New York commuters is commensurate with the share of the expenditures related to the transportation problem they cause. See id. at 517.
After a five-day hearing pursuant to our remand in Salorio I, the trial court found the burden of the ETT on New York commuters to be "substantially commensurate with the benefit they derive from the use of New Jersey's transportation facilities." Accordingly, the trial court held that the ETT does not violate the Privileges and Immunities Clause. We certified the case for direct review on our own motion. 91 N.J. 182 (1982).
The Supreme Court has frequently observed that the principal purpose of the Privileges and Immunities Clause of article IV, section 2, of the Constitution is "to help fuse into one Nation a [93 NJ Page 453] collection of independent, sovereign States. It was designed to ensure to a citizen of State A who ventures into State B the same privileges which the citizens of State B enjoy."*fn5 Toomer v. Witsell, 334 U.S. 385, 395, 68 S. Ct. 1156, 1162, 92 L. Ed. 1460, 1471 (1948). The Clause's predecessor, which had the same intent, is found in the Articles of Confederation, art. IV, par. 1. Thus, protection is afforded the nonresident who lacked the right to vote and who was vulnerable to local bias or insensitivity. J. Ely, Democracy and Distrust 83 (1980); Simson, "Discrimination Against Nonresidents and the Privileges and Immunities Clause of Article IV," 128 U.Pa.L.Rev. 379, 384-86 (1979). At the heart of the Clause "is the right of a citizen of one state to pass into any other state of the Union for the purpose of engaging in lawful commerce, trade or business, without molestation . . . ." Ward v. Maryland, 79 U.S. (12 Wall.) 418, 430, 20 L. Ed. 449, 452 (1871). It forbids one state from unduly discriminating against citizens of another state in favor of its own. Excepted from this principle is the situation in which the discrimination against the nonresident relates to conduct or activities that are not "basic to the maintenance or well-being of the Union." Baldwin v. Fish & Game Comm'n, 436 U.S. 371, 388, 98 S. Ct. 1852, 1863, 56 L. Ed. 2d 354, 368 (1978). The theory behind this exception is that state discrimination concerning nonfundamental activities does not "frustrate the purposes of the formation of the Union." Id. at 387, 98 S. Ct. at 1862, 56 L. Ed. 2d at 368. For a criticism of this view, see Varat, "State 'Citizenship' and Interstate Equality," 48 U.Chi.L.Rev. 487, 511 (1981), contending that the purpose of the Clause was to promote political and social cohesion as well as economic interrelationship.
In analyzing a statute challenged under the Privileges and Immunities Clause, it is necessary to determine if the statute discriminates against nonresidents, to identify the nature and extent of that discrimination, and to decide whether the discrimination is reasonably related to legitimate purposes that are the bases for the discrimination. If there is no substantial reason for the discrimination, the clause is violated and the inquiry is at an end. Austin v. New Hampshire, 420 U.S. 656, 95 S. Ct. 1191, 43 L. Ed. 2d 530 (1975). If there are one or more substantial reasons for the discrimination, then the discrimination must bear a close relationship to them. Put another way, the nonresident must "constitute a peculiar source of the evil at which the statute is aimed," Hicklin v. Orbeck, 437 U.S. 518, 525-26, 98 S. Ct. 2482, 2488, 57 L. Ed. 2d 397, 404 (1978) (quoting Toomer v. Witsell, 334 U.S. at 398, 68 S. Ct. at 1163, 92 L. Ed. at 1472), and there must be a "substantial relationship" between the evil and the discrimination practiced upon them, id. at 527, 98 S. Ct. at 2488, 57 L. Ed. 2d at 405; see also Mullaney v. Anderson, 342 U.S. 415, 418, 72 S. Ct. 428, 430, 96 L. Ed. 458, 462 (1952).
When a state is exercising its taxing power, there should be substantial equality of treatment, unless a justification is advanced supportive of the discrimination. Such justifications must be linked to some evil or problem caused by the nonresident, and, if linked, the revenue derived from the tax should bear a substantial relationship to the cost of amelioration of the evil or the solution of the problem. The correlation need not be perfect and a state has "considerable leeway in analyzing local evils and in prescribing appropriate cures." Toomer v. Witsell, 334 U.S. at 396, 68 S. Ct. at 1162, 92 L. Ed. at 1471; see, e.g., Shaffer v. Carter, 252 U.S. 37, 56-57, 40 S. Ct. 221, 227, 64 L. Ed. 445, 458-59 (1920) (noting that a statutory provision limiting loss deductions for nonresidents to losses incurred within the taxing state, whereas residents could deduct all losses, was justified [93 NJ Page 455] because, unlike the income of nonresidents, residents' income wherever derived was subject to the state income tax); Travelers' Ins. Co. v. Connecticut, 185 U.S. 364, 22 S. Ct. 673, 46 L. Ed. 949 (1901) (upholding stockholder tax credit available only to residents because nonresidents were not liable for certain other taxes within the state); Davis v. Franchise Tax Bd., 71 Cal.App. 3d 998, 139 Cal.Rptr. 797, 799 (Ct.App.1977) (sustaining California income tax provision permitting only residents to utilize income averaging statute on the grounds that "the nonresident could display a fluctuating California income as a cloak for non-fluctuating total income"), dismissed for want of substantial federal question, 434 U.S. 1055, 98 S. Ct. 1222, 55 L. Ed. 2d 755 (1978); Anderson v. Tiemann, 182 Neb. 393, 155 N.W. 2d 322 (1967) (sustaining a statute permitting only residents to take food sales tax expenses as a credit under the Nebraska income tax for the reason that the credit concerned personal or nonincome-producing activities closely related to the state of residence), dismissed for want of substantial federal question, 390 U.S. 714, 88 S. Ct. 1418, 20 L. Ed. 2d 254 (1968); Berry v. State Tax Comm'n, 241 Or. 580, 397 P. 2d 780 (1964) (affirming the propriety of a provision under the Oregon income tax law that allowed only residents to deduct certain personal expenses related to their place of residency, on the grounds that the provision was part of a statutory scheme that recognized the tax problems created by interstate investors and commuters and that the personal deductions were so closely related to the state of residence that they may be limited to residents of the state), dismissed for want of substantial federal question, 382 U.S. 16, 86 S. Ct. 57, 15 L. Ed. 2d 12 (1965); Wheeler v. State, 127 Vt. 361, 249 A.2d 887 (affirming progressive tax structure that imposed upon nonresidents a tax determined from the nonresident's total income rather than the nonresident's Vermont income, because the nonresident was not thereby disadvantaged compared to Vermont residents), dismissed for want of substantial federal question, 396 U.S. 4, 90 S. Ct. 24, 24 L. Ed. 2d 4 (1969).
The imposition of a tax on the New York commuter affects a fundamental activity protected by the Privileges and Immunities Clause, the pursuit of a livelihood. See Hicklin v. Orbeck, supra; Mullaney v. Anderson, supra; Toomer v. Witsell, supra, Ward v. Maryland, supra. Prohibiting nonresidents from using state roads would affect the nonresident's freedom to trade or to operate a business or to work in an adjoining state. Indeed, the Clause "bar[s] a State from penalizing the citizens of other States by subjecting them to heavier taxation merely because they are such citizens or by discriminating against citizens of other States in the pursuit of ordinary livelihoods in competition with local citizens." Toomer v. Witsell, 334 U.S. at 408, 68 S. Ct. at 1168, 92 L. Ed. at 1477 (Frankfurter, J., concurring).
In Salorio I we acknowledged that the ETT tax discriminated against the New York resident. The following example illustrates that discrimination. Consider three persons each with income of $25,000*fn6 when
(a) one person resides in New Jersey and his income is entirely derived from sources within New Jersey;
(b) one person resides in New Jersey and his income is entirely derived from sources within New York; and
(c) one person resides in New York and his income is entirely derived from sources within New Jersey.
The total New Jersey income tax liability for a person under the above hypothetical conditions is: