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District court says occupation tax in LB 701 is constitutional PDF Print E-mail

Latest decision will be appealed to higher court.

By Russ Pankonin

The Imperial Republican

Lancaster County District Court  Judge Robert Otte ruled Monday that the occupation tax created in LB 701 is constitutional. 

However, any celebration by Republican Basin natural resources districts or the state of Nebraska was short lived. 

On Tuesday, plaintiffs in the case had already filed an appeal of the ruling. This likely means at least another nine to 12 months before a higher court rules. 

The case could go to the state’s Court of Appeals or the Nebraska Supreme Court could take the case directly. 

When the Lancaster District Court judge ruled in May 2008 that the property tax in LB 701 was unconstitutional, that appeal was handled directly by the Supreme Court. 

That decision, also declaring the tax unconstitutional, came down in February 2009. While the Nebraska Supreme Court ruled the tax unconstitutional, it was on a different basis than the district court. 

In addition to the property tax levy found unconstitutional, LB 701 also gave NRDs the right to assess a per-acre occupation tax on irrigated ground. It was this tax that was challenged in the latest case. 

Specific Areas Addressed

This time, Judge Otte addressed three specific issues in declaring the occupation tax constitutional. 

The plaintiffs who brought the suit included more than 90 people from throughout the basin, according to their attorney, LeRoy Sievers of Lincoln. 

Otte addressed the plaintiffs’ claims that:

1. The occupation tax in LB 701 applies only to the Republican Basin, making it special legislation or a closed class; 

2. The occupation taxes raised in the basin are diverted for the benefit of other taxpayers in another district, which is referred to as a commutation of a tax; and

3) The occupation tax was a property tax in disguise and that this local property tax was being collected for a state purpose; in this case, Nebraska’s compact compliance with Kansas. 

In his opinion, Otte said the burden of proof that a law is unconstitutional falls solely upon the plaintiff bringing the suit. Any reasonable doubt in an argument will be resolved in favor of a law’s constitutionality. 

Special Legislation/

Closed Class

LB 701 included language that defined the class as a “district with jurisdiction that included a river subject to an interstate compact with two or more states and that also includes one or more irrigation districts with the compact river basin. 

In the May, 2008 decision,  Lancaster District Court Judge Paul Merritt, Jr., said previous Nebraska Supreme Court rulings say that if joining a class is “merely theoretical, and not probable, the act is special legislation.”

He ruled that it was “not reasonably probable” that the state would enter into such a compact in the future as described in the bill. 

While it’s theoretically possible, he said it’s not probable. As a result, he said this represented special legislation for a closed class, making it unconstitutional.

Judge Otte’s ruling contradicted Merritt’s opinion on this issue. 

Otte cited a 2004 Nebraska Law Review article that noted compacts to address river flows and allocations remain a viable option. 

State and NRD lawyers pointed out that an eight-state compact in the Great Lakes-St. Lawrence River Basin was just ratified in 2008. 

Otte said the plaintiffs did not prove without a doubt that joining the class was “highly improbable.” As a result, in case of doubt, the law remains constitutional and is not special legislation creating a closed class. 

Commutation of a Tax

Plaintiffs contended that compact compliance is a state responsibility. As a result, the occupation tax collected solely from irrigators in the Republican Basin benefited all Nebraskans.

By paying the tax, those in the basin pay a disproportionate share so other Nebraska taxpayers can pay less. 

Otte said the occupation tax benefits not only the state but irrigators in the Republican Basin as well. 

He said the occupation tax benefits taxpayers by allowing NRDs to implement measures, such as surface water leases, retirement of irrigated acres, vegetation control and augmentation projects. 

These measures would allow the districts to avoid regulatory compliance measures in dry years, Otte said, benefitting all taxpayers. 

Since the occupation tax is not diverted for the sole use and benefit of another district, Otte said it remains constitutional on this issue as well. 

Property Tax in Disguise

Plaintiffs claimed the occupation tax was really a property tax  in disguise. In addition, they said the occupation tax was a local tax collected for a state purpose—compact compliance. 

In its February, 2009 ruling, the Nebraska Supreme Court said the property tax in LB 701 was just that, ruling it unconstitutional as a result. 

Otte said the occupation tax is not a property tax but an excise tax.

He said property taxes are based on the underlying value of the property. The occupation tax is a flat excise tax not based on property value but upon the activity of irrigation.

Since landowners have the right to decide whether or not to irrigate their land, they can opt out of paying the tax by not irrigating. 

Since the occupation tax is considered an excise tax and not a property tax, it can’t be a local property tax raised for a state purpose, thus making it constitutional on this basis as well. 

Reaction to the Ruling

Don Blankenau of Lincoln, attorney for the basin NRDs, said he was happy with the ruling but was also anticipating an appeal. 

He said his firm has done extensive case research to defend their decision so was not real surprised Otte ruled the tax constitutional. 

Sievers said he and the plaintiffs he represents were obviously disappointed with the ruling and would be going forward with an appeal.

He found it interesting the first district court judge ruled LB 701 was a closed class while Otte said it was not. Appeal is the only way to resolve it, he added. 

Jasper Fanning, manager of the Upper Republican NRD, said the only thing better would have been the same ruling from the Supreme Court. That’s what will really matter, he noted.