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Various kinds of tax breaks have become a commonplace tool for city, county and state governments to use in competing to lure new businesses into their jurisdiction, or persuade businesses already there to stay or expand. Last week, the Illinois Supreme Court addressed one of those tools, holding in Moline School District No. 40 Board of Education v. Quinn that a property tax exemption for an aviation firm in Moline County violated the special legislation clause of the Illinois constitution. Our detailed summary of the underlying facts and lower court decisions in Moline School District is here.

The business involved in Moline School District is what’s known in the aviation industry as a fixed based operator, or FBO. FBOs operate at airports, providing support services to general aviation aircraft such as fueling, hangaring, maintenance and repair, aircraft rental and facilities for conferences and flight planning. There are many FBOs in Illinois, a state with nineteen other airport authorities in addition to the one involved in Moline School District.

The FBO involved in Moline School District has three separate operations in the Midwest – Des Moines, Minneapolis and the Quad City International Airport in Moline. Even though the FBO doesn’t own the real estate and improvements it uses at the Quad City Airport, Illinois levies property taxes on its leasehold interest. A few years ago, the FBO decided it wanted to expand, either in Moline or Des Moines. But there was an important difference between the two sites – Iowa did not levy property taxes on the company’s leasehold interest in Des Moines.

As a result, the local Chamber of Commerce asked a state legislator to support legislation to exempt the company’s leasehold interest at the Quad City Airport from property taxes. While the bill was making its way through the legislature, there was an attempt to add a second airport to its provisions, but that amendment failed. The bill was ultimately enacted and signed into law by the Governor.

The plaintiff school district received about $150,000 a year as a direct result of the FBO’s property tax bill. The District filed suit, challenging the property tax exemption as a violation of: (1) the special legislation clause; (2) due process and equal protection; (3) the property tax clause requiring uniform valuation; and (4) the constitutional limitation on property which can be exempted from property taxation. The FBO intervened in the action, and the parties filed cross motions for summary judgment. The Circuit Court rejected each of the School District’s constitutional challenges and granted the FBO’s motion for summary judgment. The Appellate Court reversed, holding that the statute was unconstitutional special legislation.

In an opinion by Justice Karmeier, the Supreme Court agreed with the Appellate Court. The special legislation clause provides that the General Assembly “shall pass no special or local law when a general law is or can be made applicable.” The courts have interpreted the clause as meaning that the legislature cannot confer special benefits or privileges on one person or group and deny the same benefits to others similarly situated. This does not, however, prevent the legislature from addressing a situation where a person or entity is uniquely situated. Assessing a special legislation challenge involves two steps: first, does the legislation discriminate, and second, is the discrimination arbitrary (which is usually assessed under the rational basis test).

The majority concluded that the tax exemption clearly met the first test for special legislation – it exempted FBOS at Quad City International Airport from property taxation – and there was only one. So the case came down to whether or not the exemption was rationally related to a legitimate state interest.

The majority held that the exemption failed the rational basis test. The problem was that there was no requirement in the legislation that the FBO actually use the money saved by the tax exemption for expansion in Illinois. As the Court pointed out, there was nothing to stop the FBO from using the savings to expand in Iowa. If the FBO took the tax exemption and ultimately didn’t expand in Rock Island County, the citizens of the county not only wouldn’t achieve the hoped-for economic benefits, they would be affirmatively injured by the lost revenue.

The FBO argued that its circumstances are unique, but the majority rejected the claim, pointing out that there were other FBOs in the state operating near states with more favorable tax circumstances. Nor was Rock Island uniquely situated, according to the Court. The majority found no evidence of economic needs there which didn’t equally exist in many other parts of the state. Ultimately, the majority concluded that it saw nothing which would justify distinguishing FBOs operating at the Quad City Airport from FBOs at other Illinois airports or, for that matter, from other Illinois businesses operating near more tax-friendly jurisdictions.

Justice Theis dissented, writing that the majority had “paid only lip service” to the duty to uphold legislation when reasonably possible to do so. Justice Theis argued that in fact, the School District had failed to satisfy either of the two prongs on the special legislation test: that the legislation discriminated, or that the classification was arbitrary. The FBO at issue had provided evidence with its cross-motion for summary judgment which “indicated that the company was arguably in a unique situation.” The FBO offered testimony that Rock Island County was the only county in Illinois with a major airport bordering Iowa, which does not tax FBO leaseholds. The School District, in contrast, “seemed to assert that FBOs” at the Quad City Airport “are similar to other FBOs in Illinois simply because there are other FBOs in Illinois.” The trial court had been persuaded by the FBO’s “stronger and more supported argument” that the FBO was in a unique position, but the Appellate Court, according to Justice Theis, had “ignored that evidence.”

Justice Theis criticized the majority’s reasoning that there are other FBOs conducting business near state borders, arguing that the majority had disregarded the limitations on judicial notice, and had also turned the presumption in favor of constitutionality on its head by disregarding the School District’s failure to present any evidence about those other FBOs’ circumstances. The FBO offered an economic impact summary from the Chamber of Commerce concluding that the property tax exemption would put Illinois and Iowa on an equal footing for an expansion project. Justice Theis concluded that the tax exemption had been based upon a reasonable judgment about the economic impact of the project and the needs of Rock Island County – a judgment which the legislature was certainly free to make.

Image courtesy of Flickr by Rennett Stowe (no changes).