filed: December 19, 1989.
CHARLES L. HARDWICK, SPEAKER OF THE GENERAL ASSEMBLY OF THE STATE OF NEW JERSEY, EDWARD H. SALMON, FRANK A. LOBIONDO, DOLORES G. COOPER, JOHN EDWARD KLINE, JACK COLLINS, GARY W. STUHLTRAGER, DENNIS L. RILEY, ANTHONY S. MARSELLA, WAYNE R. BRYANT, JOHN J. ROBERTS, JR., JOHN A. ROCCO, THOMAS J. SHUSTED, BARBARA F. KALIK, THOMAS P. FOY, HAROLD L. COLBURN, ROBERT C. SHINN, JOHN T. HENDRICKSON, JR., JEFFREY W. MORAN, JOHN PAUL DOYLE, ROBERT W. SINGER, JOSEPH A. PALAIA, JOHN VILLAPIANO, JOHN O. BENNETT, III, CLARE M. FARRAGHER, JOANN H. SMITH, JOSEPH M. KYRILLOS, JR., ANTHONY J. CIMINO, JOSEPH D. PATERO, JOHN S. WATSON, GERARD S. NAPLES, WALTER J. KAVANAUGH, JOHN S. PENN, ROBERT G. SMITH, DAVID C. SCHWARTZ, FRANK M. PELLY, GEORGE A. SPADORO, ALAN J. KARCHER, GEORGE J. OTLOWSKI, GEORGE HUDAK, THOMAS J. DEVERIN, PETER GENOVA, ROBERT D. FRANKS, MAUREEN B. OGDEN, WILLIAM E. SCHLUTER, C. RICHARD KAMIN, ROBERT E. LITTELL, GARABED HAYTAIAN, RODNEY P. FRELINGHUYSEN, ARTHUR R. ALBOHN, RALPH A. LOVEYS, ROBERT MARTIN, HARRY A. MCENROE, STEPHANIE R. BUSH, MICHAEL F. ADUBATO, JAMES ZANGARI, WILLIE B. BROWN, JACKIE R. MATTISON, JOHN V. KELLY, MARION CRECCO, JOSEPH V. DORIA, JOSEPH CHARLES JR., ANTHONY IMPREVEDUTO, DAVID C. KRONICK, BERNARD F. KENNY, JR., ROBERT MENENDEZ, NEWTON E. MILLER, GERALD ZECKER, JOHN A. GIRGENTI, WILLIAM J. PASCRELL, JR., LOUIS J. GILL, THOMAS J. DUCH, BYRON M. BAER, D. BENNETT MAZUR, WILLIAM P. SCHUBER, PATRICK J. ROMA, JR., JOHN E. ROONEY, ELIZABETH E. RANDALL, WALTER M. KERN JR., AND NICHOLAS R. FELICE, ALL DULY ELECTED MEMBERS OF THE GENERAL ASSEMBLY OF THE STATE OF NEW JERSEY, AND JOHN H. DORSEY, GERALD CARDINALE, JOSEPH BUBBA, LOUIS C. BASSANO, HENRY MCNAMARA, ALL DULY ELECTED MEMBERS OF THE SENATE OF THE STATE OF NEW JERSEY, AND JAMES MAYOR, HELEN MAYOR, KENNETH AVALLONE, DOROTHY AVALLONE, TOM STOKES, ADELE STOKES, SEYMOUR WIENER, DIANA WIENER, GEORGE BRYANT AND BARBARA BRYANT, APPELLANTS
MARIO CUOMO, GOVERNOR OF THE STATE OF NEW YORK, AND JAMES WETZLER, COMMISSIONER OF TAXATION AND FINANCE, STATE OF NEW YORK
On Appeal from the United States District Court for the District of New Jersey D.C. Civil No. 89-0965.
Mansmann and Greenberg, Circuit Judges, and Gawthrop, District Judge.*fn*
Greenberg, Circuit Judge.
This matter is before the court on appeals by plaintiffs-appellants from the denial of their motion for a preliminary injunction restraining the defendants-appellees, Mario Cuomo, Governor of New York, and James Wetzler, Commissioner of Taxation and Finance, State of New York, from enforcing certain portions of the Tax Reform and Reduction Act of 1987 of the State of New York and from a subsequent order of the district court dismissing the action for want of jurisdiction.
The factual and procedural background of the matter is as follows. The State of New York imposes a progressive personal income tax on residents and nonresidents from income generated in New York. For many years, up to and including 1987, the New York tax on nonresidents was computed by applying progressive tax rates to the nonresidents' income derived from New York sources without regard for total income. On the other hand, New York computed the tax of its own residents based on their total income, regardless of source, unless exempt from taxation by some provision of law.
Beginning in 1988, the Reform and Reduction Act changed the foregoing system. bN.Y.Tax Law § 601 (McKinney 1987). Under that statute, which reduced the marginal progressive tax rates, the New York personal income tax for both residents and nonresidents is determined by initially computing the taxpayers' income derived from New York and non-New York sources. Then taxpayers are allowed adjustments for deductions, exemptions and credits without regard for residency and the same tax rate is applied to their resultant taxable income. However, nonresidents having income from non-New York sources should receive a reduction in the amount of tax owed because the tax calculated on nonresidents' New York taxable income will be multiplied by a fraction in which the numerator is the taxpayer's New York source income and the denominator is the taxpayer's federal adjusted gross income. Thus, if the New York source income is 50% of a nonresident taxpayer's total federal adjusted gross income, the nonresident taxpayer should pay a tax of one-half of what a similarly situated New York taxpayer would pay.*fn1
In addition to the foregoing basic tax, in 1987 and 1988 New York assessed a tax with a maximum rate of three and two percent, respectively, on residents and nonresidents with New York adjusted gross incomes of $100,000 or more if they had unearned income.*fn2 N.Y.Tax Law § 601(d)(1) (McKinney 1987). Such taxpayers subtracted $100,000 from the lesser of either $200,000 or their New York adjusted gross income. The difference was then divided by $100,000. The resulting fraction, which obviously could not have a value of more than one over one, was then multiplied by the statutory tax rate for that year, three or two percent, to determine the tax rate for this additional tax. This rate was multiplied by a taxpayer's unearned income from interest and dividends to determine the additional tax base for unearned income. An adjustment was then made for nonresident taxpayers by multiplying this additional tax base by the same fraction (New York source income over federal adjusted gross income) used to adjust the nonresidents' overall income tax.*fn3
The advantage to New York of the Reform and Reduction Act over the prior system with respect to nonresident taxpayers is apparent. The state will now calculate a nonresident's tax rate on the taxpayer's total income, including income from non-New York sources. Thus, the same rates will yield more taxes from the same income than would be generated under a system not considering out-of-state income. This can be readily demonstrated. For example, under the Reform and Reduction Act a New Jersey taxpayer with $25,000 of New York income and $25,000 of non-New York income will be subject to a tax rate based on $50,000, though under a system ignoring non-New York income the tax rate would be based solely on the New York taxable income of $25,000. While the above-described fraction would be $25,000 over $50,000, the resultant net tax to the nonresident taxpayer would exceed a tax calculated solely on the $25,000 of New York income because the tax is progressive. Therefore, from the viewpoint of at least some non-New York residents employed in New York, the title of the 1987 law as the Reform and Reduction Act, is euphemistic.*fn4
Though many New Jersey residents work in New York, the impact of the Reform and Reduction Act when enacted apparently went largely unnoticed in New Jersey. Not surprisingly, however, when its effect was eventually recognized, some New Jersey residents employed in New York became disturbed, as they did not appreciate being "reformed" and "reduced" into marginal tax brackets higher than those that would have been applicable to them if the new tax rates were applied under the previous system, which disregarded their non-New York income.*fn5 Also, as might be expected, members of the New Jersey Legislature, mindful of the interests of New Jersey residents, took up cudgels for them. Accordingly, certain New Jersey residents employed in New York who thus pay taxes there, and members of the New Jersey Legislature, filed this action on March 8, 1989, challenging the enforcement of the Reform and Reduction Act.*fn6 As we have indicated, the defendants-appellees are New York's Governor and its Commissioner of Taxation and Finance. The plaintiffs-appellants' basic position is that the Reform and Reduction Act is unlawful as it imposes a tax on out-of-state taxpayers, who are obliged to pay New York income tax on the basis of income from all sources, including those outside of New York.
In their three-count amended complaint, the appellants contend that New York treats residents and nonresidents in a disparate and unequal fashion in violation of the privileges and immunities clause of the Constitution. They further contend that the New York scheme violates the equal protection clause of the Fourteenth Amendment as it discriminates in favor of residents as against nonresidents, places impermissible burdens on the rights of the residents of New Jersey to travel, do business and work in New York, and creates an arbitrary, discriminatory, irrational, and capricious classification between residents and nonresidents of New York. They assert that the Reform and Reduction Act taxes income from sources outside of New York in violation of the privileges and immunities clause and the due process and equal protection clauses of the Fourteenth Amendment. They also allege that because New Jersey grants a tax credit for taxes its residents pay in other jurisdictions, New Jersey will suffer an undue loss of revenue because of the Reform and Reduction Act, raising an "imminent threat that the taxpayers of New Jersey will be subject to either increased taxes or reduced government services." The appellants seek a declaration that the Reform and Reduction Act is unconstitutional, interlocutory and permanent injunctions against its enforcement, damages, and costs. In their jurisdictional allegations, they assert that the district court has federal question jurisdiction under 28 U.S.C. § 1331, jurisdiction under the civil rights acts, 28 U.S.C. § 1343 and 42 U.S.C. § 1983, and diversity jurisdiction, 28 U.S.C. § 1332.
After they filed their complaint, the appellants moved for a preliminary injunction. On April 4, 1989, the appellees filed an answer setting forth various separate defenses, and asserting that the court lacked jurisdiction because of the Tax Injunction Act of 1937, 28 U.S.C. § 1341. In addition, the appellees moved for summary judgment. On April 10, 1989, the district court heard argument on the application for the preliminary injunction and, on April 13, 1989, it filed its opinion and order denying the application. Hardwick v. Cuomo, No. 89-965 (D.N.J. April 12, 1989).
In its comprehensive but unreported opinion, the district court set forth the nature of the controversy, describing the application of the tax and the allegations of the complaint. The court indicated that the appellants had the burden to show that they have standing and that the court "has subject matter jurisdiction over an action to enjoin a state from levying a disputed tax." It held that the taxpayers have standing because the challenged sections of the Reform and Reduction Act subjected them to a higher percentage tax rate on their New York income than they would pay if the New York rates were applied only against their New York income.
The district court held, however, that the legislators do not have standing as they have not presented sufficiently concrete "personalized" injuries, and have suffered only political harm from the Reform and Reduction Act. The legislators alleged that the loss of revenue to New Jersey, attributable to the tax credit allowed New Jersey taxpayers for their New York income tax, raises an imminent threat that New Jersey taxpayers will be subject to either increased taxes or reduced services. The district court, however, dismissed this contention as making "no credible allegation that the effect of the new tax laws in New York will have more than a de minimis impact, if any, on the overall tax revenue of New ...
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