Supreme Court Backs Railroad, Throws Out Tax Assessment

Published March 1, 2008

In a decision establishing stronger protection for railroads from discriminatory state taxes, the U.S. Supreme Court has ruled in favor of CSX Transportation, a national railroad company that was hit with a huge jump in property taxes in Georgia. In December the court ruled unanimously for the railroad.

Supported by a friend-of-the-court brief from the Tax Foundation, a national tax research group, CSX successfully argued Georgia’s assessment method effectively gutted federal law that protects railroads from discriminatory taxes.

Spurious Assessment Method

The case, CSX Transportation v. Ga. Bd. of Equalization, dates to 2002, when Georgia hired a new utilities property assessor. Using new assessment methods he calculated a 36 percent increase in CSX’s assessed value over 2001, which led to a 47 percent increase in the firm’s property tax bill even though there was little actual change in the property.

CSX argued the assessor’s method was flawed, and an assessment expert testified other methods would have been more accurate.

CSX was able to bring a lawsuit because railroads are protected by a federal law–the “4-R Act”–from discriminatory state taxation.

The 4-R Act dates to the 1970s, when states punitively taxed captive railroads so badly that many were failing. The law prevents states from taxing more of a railroad’s “true market value” than they do for other commercial property. If a state is taxing railroads at 80 percent of their value but other commercial property at only 40 percent, the tax violates federal law.

Threat to Protections

Both the trial court and the Eleventh Circuit Court of Appeals sided with Georgia. They held that nothing in the 4-R Act allows railroads to challenge the assessment method. In attempting to prove the existence of discrimination, the courts held, railroads are limited to “checking the math” and finding a calculation error in the state’s chosen assessment method.

CSX appealed, and the Tax Foundation’s brief in support argued the lower court’s reasoning would eviscerate the 4-R Act’s purpose, meaning, and text.

“Discriminatory assessment methods cannot be shielded from legal challenge because Congress has exercised its power to limit states’ ability to use any conceivable method of assessing and taxing railroad transportation property,” the brief stated. “Otherwise, states would get immunity for even absurd assessment schemes, like basing it on the property’s height above sea level.”

A unanimous Supreme Court reversed the lower courts and held for CSX. Chief Justice John Roberts, who delivered the Court’s opinion, echoed the Tax Foundation’s argument.

‘Total Lack of Support’

“The total lack of textual support for Georgia’s position is not surprising,” the opinion states. “The dichotomy the State presses would eviscerate the statute by forcing courts to defer to the valuation estimate of the State, when discriminatory taxation by States was the very evil the Act aimed to ban.”

The Tax Foundation’s brief emphasized judges should be able to consider all available evidence in determining whether discrimination exists. Excluding evidence that the state’s chosen method is skewed simply makes it more likely a discriminatory state taxation system can persist.

“Tax legislation should be based on careful economic analysis and transparent procedures,” the Tax Foundation argued in the brief. “Permitting criticism and challenge can help ensure neutrality, simplicity, and fairness in our tax system.”

The Court’s opinion recognized that, noting “preventing courts from scrutinizing valuation methodologies would render [the 4-R Act] a largely empty command.”

Similar Tax Discrimination

CSX is not alone in facing discriminatory property taxation. Florida’s practice of imposing higher property taxes on out-of-state landowners is currently pending in the state courts, and a Pennsylvania judge recently held Allegheny County’s property tax assessment scheme is so disproportionate as to violate the state constitution.

Joseph D. Henchman ([email protected]) is tax counsel at the Tax Foundation, a national nonpartisan tax research organization in Washington, DC.

For more information …

U.S. Supreme Court decision in CSX Transportation v. Ga. Bd. of Equalization: