CHICAGO (CN) – Following an en banc rehearing, a divided 7th Circuit, has found that an Illinois federal court cannot impede the dispersal of the Horse Racing Equity Trust fund-a subsidy for horse racetracks paid for by the four highest-earning riverboat casinos in the state. The decision reverses an earlier 7th Circuit ruling.
The casinos had requested that the funds be frozen while state courts investigate an alleged pay-to-play scheme between former governor Rod Blagojevich and John Johnson, owner of two of the benefiting racetracks.
The 2006 and 2008 laws, which remain in effect until the end of this year, require the casinos to deposit 3% of their annual revenues into a trust fund which is disbursed to five in-state racetracks for the purpose of increasing race winners’ and runner-ups’ purses and funding track improvements. The Illinois Supreme Court affirmed the constitutionality of the laws.
Illinois federal Judge Mathew Kennelly initially imposed a temporary restraining order on the funds while the litigation was pending. He later determined that the Tax Injunction Act, which prevents federal courts from interfering with state tax codes, prevented relief and dissolved the restraining order.
The casinos appealed and the 7th Circuit reinstated the restraining order. A three-judge panel voted two-to-one to reverse Kennelly’s ruling, finding that the Tax Injunction Act did not bar the relief.
The racetracks then requested a rehearing en banc, which was granted. The court voted five-to-three to reverse its earlier decision.
“The [Tax Injunction] Act would be thwarted if a taxpayer could get a federal court to enjoin the collection of a state tax just by presenting evidence of corruption in the process by which the taxing statue had been enacted,” Judge Richard Posner wrote for the majority.
Despite the collection of the funds into a private trust, the charges still qualify as a state tax and are thus protected from federal jurisdiction. The subsidizing nature of the charges likens them to taxes, rather than fees, the majority found.
“‘Taxation’ is unpopular these days, so taxing authorities avoid the term. Legislatures are unpredictable, so trust funds are created to hold revenues generated by specific taxes, in order to avoid annual appropriations battles. The politics of state taxation have naught to do with the policy of the Tax Injunction Act,” Posner explained.
The decision to subsidize the horse racing industry, which employs over 30,000 people in Illinois and raises $15 million in state and local government revenues annually, is well-founded, Posner wrote. Horse racing bets in Illinois have fallen from $1.2 billion in 1996 to $0.7 billion in 2010.
“States routinely subsidize favored activities-not by taxing the persons or firms engaged in the activities, which would make the ‘tax’ a fee and negate the subsidy, but by taxing someone else. Are animals not appropriate objects of state subsidy? Cannot Citation, Man ‘o War, Seabiscuit, and Secretariat be distinguished as objects of public solitude, from roulette wheels and one-armed bandits?”
Posner offered some accompanying social commentary: “In a laissez-faire or Social Darwinist society… the government would keep its hands off the competition between the casinos and the racetracks. The disappearance of racetracks, jockeys, horses, bridles, blacksmiths, racetrack touts, and DVDs of National Velvet-replaced by croupiers, glassy-eyed retirees at one-armed bandits, roulette wheels, and blackjack tables, all on riverboat casinos-would be commended as progress. But American government is not committed to the laissez-faire vision of society. We find no hints of Social Darwinism in the Tax Injunction Act.”
Judges Diane Sykes, William Bauer, and Michael Kanne dissented, finding that funds deposited in a private trust are not protected from federal enjoinment.
“The plaintiffs have asked for a constructive trust on a private account holding money alleged to be the proceeds of a racketeering conspiracy. If they prevail and a constructive trust is imposed, the collection of state revenue will not be impaired. Not a penny of state money would be affected. The private-party defendants would be prevented from reaping the benefits of the conspiracy, but the [Act] does not block federal jurisdiction over suits to prevent private unjust enrichment,” Sykes wrote.
“What makes this case difficult is that the casino surcharge is unusual and therefore hard to classify. My colleagues call it a tax. With respect, I disagree.”
That the charge only applies to four specific casinos, rather than all casinos within the state, distinguishes it from a regular tax, the minority held.
Sykes concluded, “In short, the 3% casino surcharge is an off-budget regulatory device for relieving the competitive pressures exerted by riverboat gambling on the horse-racing tracks.”
Even if the casinos can prove a RICO conspiracy, it is not clear if they will be able to seek a refund. The State Officers and Employees Money Distribution Act may not authorize recovery of tax money that has already been dispersed, potentially leading to further litigation.
The 7th Circuit extended the temporary restraining order pending a petition to the Supreme Court for certiorari.
Bill McKenna, the attorney for the racetracks, said he and his clients are extremely pleased and gratified with the court’s decision.
“We recognize however that while this is important step, there is likely more litigation to come,” he said.
McKenna also commented on dissent.
“We disagree with their view of the law and believe [Sykes] recited the facts in a way that’s unfavorable to the tracks – it basically assumes the allegations of the complaint are true, which they are not,” he said.