CHICAGO (CN) – An Illinois levee district improperly discriminated against two railroads by using an arcane tax-calculation method to grossly inflate how much they owed, gouging one with a 8,300 percent hike from the previous year, the 7th Circuit ruled.
The Sny Island Levee Drainage District protects a 114,000 square-foot area on the Mississippi River from flooding. Approximately 99.5 percent of the district’s 700 landowners are involved in agriculture. But the area also contains tracks of the Kansas City Southern Railway and Norfolk Southern Railway.
District residents are charged an annual fee to maintain the levee system. From 1987 to 2007, landowners paid an average of $8.50 per acre. But in 2008, severe floods and the cost of diesel fuel necessitated a reassessment that was expected to increase the rate to $18.50 per acre.
The district commissioners decided not to apply this rate uniformly, opting instead to differentiate by property type. Agricultural properties would be assessed on the traditional per-acre basis, while railroads, pipelines and utilities would be assessed based on the calculated “benefit” that their properties received from the district.
The 7th Circuit spilled nearly 12 pages of ink summarizing the commissioners’ Byzantine calculation method, concluding that “there was no hard data to support [the] numbers.”
The final assessment “represented an astronomical increase in [the railroads’] assessment: $85,545 for Kansas City Southern, a 4,800% increase over its 2008 assessment of $1,774, and $93,920 for Norfolk Southern, an 8,300% increase over its 2008 assessment of $1,126,” Judge Diane Wood wrote.
“Had the railroads been assessed on a per-acre basis for 2009, Kansas City Southern would have been obligated to pay $3,898, while Norfolk Southern would have owed $2,578.” If their land had grown beans rather than moving trains, both railroads would have saved more than $80,000.
Assessors also exempted land within local municipalities from the increase, causing even greater disparity for railroads, the court explained.
“Not finished yet, the commissioners also assumed that all 14 [non-railroad or pipeline] commercial and industrial properties were located within municipal limits,” the 33-page decision states. “That assumption was incorrect, as they must have known; six commercial and industrial properties are located beyond municipal limits. These six parcels were assessed on the per-acre basis, subject only to the $10 increase between 2008 and 2009.”
This meant only the railroads and two other pipelines would be assessed using the benefits-calculation method.
After completing the reassessment, the district needed authorization from the Pike County Court. Landowners within the district were sent notice of the hearing. The notice read: “The reassessment, if approved, would generally result in a maximum $10.00-per-acre increase in annual drainage assessment to benefitted agricultural land in the district.” There was no mention of a new distinction between per-acre assessments for agricultural land and benefit-based assessments for railroads and utilities.
“Having no reason to believe that their assessment would increase by more than $10-per-acre, the railroads did not object to the assessment or attend the hearing,” Wood wrote.
But after receiving their 2009 bills, the railroads refused to pay. They instead filed suit, alleging violations of the federal Railroad Revitalization and Regulatory Reform (4-R) Act, which prevents states and their subdivisions from imposing discriminatory taxes against railroads.
U.S. District Judge Russell Koeller had denied the railroads’ request for a preliminary injunction after finding that they had not put forth any evidence that the assessment exceeded the land’s true market value by at least 5 percent, which he reasoned would demonstrate a violation of the act.
“Intent to discriminate is irrelevant under the 4-R Act,” Koeller wrote.
But the federal appeals court disagreed and rejected Koeller’s seemingly arbitrary number.
“This statement is too broad,” Wood wrote. “The intent to discriminate may be what signifies that a tax characterized nominally as one of general applicability is really one aimed at or designed to target the railroads.”
“A discriminatory tax is one that ‘imposes a proportionately heavier tax on railroading than other activities,'” she added. “The record shows that this happened here.”
Though the commissioners’ assessment formula may have been fair in theory, it was sufficiently discriminatory in practice to give rise to a claim under the 4-R Act.
“The railroads would like us to enjoin the district from collecting an assessment in excess of the $10-per-acre increase plus the 2008 assessment, but this is a step too far,” Wood wrote, noting that a state tax-related injunction must be limited in scope.
“On remand, the District Court must enjoin to 2009 assessment, while at the same time leaving the district free to go back to the drawing board and craft an assessment that is non-discriminatory, as we have explained that concept.”