NFIB NY to Albany: No Anti-business Surprises in Budget

NFIB New York State Director Mike Durant today issued the following statement on the Legislature’s effort to finalize the state budget:

“As the push to finalize the state budget intensifies, small businesses are concerned by reports of new, costly mandates from Albany.  Small business owners will be deeply disappointed if the final budget agreement includes a paid leave requirement, a costly out-of-network health care mandate or an effort to link project labor agreements to design build.  All three of those measures would dramatically increase costs on small employers and taxpayers and that’s exactly what New York doesn’t need. 

 

“The tone in Albany last fall signaled a willingness to cut taxes and reduce the cost of doing business in New York.  That should remain the focus and we hope it’s reflected in the budget.  Anything less will be deflating.  We need to change, not enhance, our reputation as an unfriendly place for business.”

 

To learn more about NFIB please visit www.nfib.com.

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New York State Credit Card Surcharge Restrictions in Limbo

Do you know the New York State law regarding credit card surcharges? If not, you’re not alone. Until October 2013, New York State law prohibited merchants from imposing surcharges on credit card transactions. N.Y. Gen. Bus. Law § 518 (McKinney) and N.Y. Gen. Bus. Law § 511(1) states, “No seller . . may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means…”

In October,  a federal district court judge issued a preliminary injunction that effectively blocks enforcement of that law while a case about the surcharges is litigated. The case appears to be a matter of semantics—“surcharges” are prohibited by New York State law, but merchants can give “discounts” for cash transactions. Yet the law does not define “surcharge” or “discount” anywhere.

U.S. District Court Judge Jed S. Rakoff wrote, “Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 but charges $102 when a purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that it is adding a 2% surcharge because the credit card companies charge the vendor a 2% ‘swipe fee.’ But if, instead, the vendor tells the purchaser that its regular price for the product is $102, but that it is willing to give the purchaser a $2 discount if the purchaser pays cash, compliance with Section 518 is achieved.”

Each time a customer pays with a credit card, merchants incur “swipe fees.” The case stems from five plaintiffs that wanted to pass the swipe fee along to only customers that pay with a credit card. The judge determined that the law is unconstitutionally vague and violates First Amendment right to freedom of speech by restricting what merchants can communicate about pricing. More specifically, the law prohibits specific words– “surcharge” rather than “discount.” The case is Expressions Hair Design v. Schneiderman, 1:13-cv-03775, U.S. District Court, Southern District of New York (Manhattan).

What does this mean for merchants? In theory, they can charge a surcharge for using a credit card. However, because the judge only issued a preliminary injunction, merchants should wait to charge surcharges until there is a final determination. Even if Section 518 is determined to be unconstitutional, merchants should post signage telling customers if they are charging different prices between cash and credit card purchases.

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The Tenth Circuit’s Punt in Kerr v. Hickenlooper Opens the Door for a Torrent of Litigation

In 1992 the people of Colorado voted to amend their Constitution with adoption of a Taxpayer Bill of Rights (TABOR). This was a historic initiative that put the power in the hands of the people to decide for themselves whether to approve new taxes or tax-hikes. While many states have constitutional protections to prevent new or increased taxes—such as California’s requirement of a supermajority vote in the legislature—Colorado’s TABOR was unique in that it made the citizens of the state the final word on new taxes or increased taxes. TABOR therein served as a model that has been implemented through constitutional amendments in other states, and which NFIB has supported as a means of protecting small business owners from new and ingenious taxing schemes. But TABOR is under attack—and this may have profound implications, not only in Colorado but throughout the country.

TABOR’s Legal Challenges

TABOR was upheld as constitutional in the Colorado Supreme Court last year in the face of a lawsuit advanced by educators and the parents of school-aged children who complained that TABOR makes it harder for schools to get necessary funding. NFIB Small Business Legal Center filed in that case to defend the law, and we were pleased to see the Court ultimately affirm the constitutionality of TABOR. But TABOR faces yet another challenge—this time in federal court.

In Kerr v. Hickenlooper, a group of politically motivated legislators complain that they would like to be able to raise taxes, or to enact new taxes, but that TABOR has taken away the legislature’s power to do so. Whether this constitutes an injury sufficient for Article III standing purposes is a legitimate question—one that the Colorado Attorney General has taken issue with in a motion to dismiss the case. But, the concerning aspect of this case—for those of us outside of Colorado—is that the plaintiff’s theory, as to why a federal court should strike-down TABOR, has far-reaching implications.

A Guarantee Clause Challenge… Seriously?

The plaintiffs invoke an arcane constitutional provision. The Guarantee Clause of the United States Constitution provides simply that the United States must guarantee a “republican form of government” to every state. OK, so what does that mean?

Well, that is hard to say because no court has ever decided a Guarantee Clause case. In the 19th Century the Supreme Court refused to resolve a Guarantee Clause claim in a case challenging the constitutionality of Rhode Island’s government. In that case the Supreme Court refused to weigh into an essentially political dispute between rival groups claiming to represent the government of Rhode Island. The Court essentially said it was the prerogative of the other branches to decide which group to recognize as the legitimate state government—which is essentially what would happen if someone should ask the Court to decide which faction represents the legitimate government in Crimea today.

Since then, courts have treated Guarantee Clause arguments as non-justiciable claims because they invite the court to wade into the proverbial political thicket. Though courts have long decided cases with political ramifications (see e.g., NFIB v. Sibelius), the courts have refused to decide Guarantee Clause cases because they would essentially be impossible to decide without exercising political judgment. So the political questions doctrine holds that any decision requiring the exercise of political judgment—as opposed to the application of legal standards and reasoned analysis—is more appropriately viewed as the prerogative of the other branches of government.

Accordingly, the Supreme Court has long suggested that Guarantee Clause claims are categorically barred by the “political questions doctrine.” For this reason, in Pacific States v. Oregon, the Supreme Court rebuffed a Guarantee Clause challenge to Oregon’s direct voter initiative process in 1912—refusing to dive into the question of whether direct democratic measures (like voter initiatives) are somehow anti-republican. One would have thought the door was shut and closed on Guarantee Clause challenges since then.

But, in the Supreme Court’s opinion in New York v. United States in 1992, Justice O’Connor suggested that the door might still be ajar. This apparently gave hope to those who would like to breath life into the Guarantee Clause—who would like to see it wielded as a weapon in challenge to initiatives they might dislike, or political acts that they find offensive to their sense of good government and political philosophy. I know there are folks on the libertarian side of the equation who would welcome the opportunity to raise the Guarantee Clause in challenge to redistributive social programs or taxes. Meanwhile, the plaintiffs in Kerr advance a progressivist vision for the Guarantee Clause as a means of striking down a state constitutional amendment that impedes them from pursuing their preferred tax and spend policies. Needless to say, the Guarantee Clause could be an unruly weapon, if ever unsheathed.

A Radical Theory

In Kerr the plaintiffs maintain that Colorado is no longer a “republican form of government” because the citizens have taken away the Legislature’s power to set the state’s tax and spend policies. Though they paint this as a narrow challenge to TABOR itself, the premise of their argument is far reaching in implication. Their assumption is that a state government becomes anti-republican if the citizens assume for themselves certain functions that have traditionally been performed by the legislature. That would call into question any direct initiative process, or referendum. Accordingly, NFIB Small Business Legal Center, TABOR Foundation and other concerned organizations, argued that the case should be dismissed as a nonjusticiable challenge to the initiative process.

But, even if the Plaintiff’s theory is viewed more narrowly, as alleging only that there is a Guarantee Clause violation when citizens usurp certain fundamental legislative powers, it is still nonjusticiable. On what basis can a court determine which—if any—legislative powers are so fundamental to ‘republican government’ that the citizens of the state cannot adopt constitutional restrictions to assert direct democratic control? And by what standard can a court determine when the citizens of a state have gone too far in restricting the prerogative of their legislature to exercise any given power?

In this case the plaintiffs assume that a “republican form of government” requires the legislature to maintain at least some degree of power to raise taxes, or to create new taxes. It is unclear how they derive that posited principle from the requirement that every state must be guaranteed a “republican form of government.” And the theory has far reaching implications because it would potentially call into question any constitutional amendment restricting a legislature’s prerogative to tax and spend. It opens the door for ideologically driven litigants to challenge California’s requirement that you need a 2/3rds vote for new taxes, to North Carolina’s requirement that the legislature must balance its budget before spending taxpayer dollars, or any other abridgement of the legislature’s traditional tax and spend powers.

And even if we assume that the powers to tax and spend are somehow immutable rights of the legislature, by what discernible principle can a court say when the citizens have gone too far in restricting their legislature’s tax and spend powers through a voter approved constitutional amendment? As we argued in our amici brief, the Court cannot draw a line without addressing sticky questions: Where is this (unwritten) mandate guarantying the Legislature some minimum unfettered stream of public revenue? How can the Court determine an appropriate stream of revenue without setting public policy? Does this assume that certain programs must be funded—and at certain minimal levels? Just why is it that the Guarantee Clause requires the Legislature—and not the people—to have a final say on tax and spend issues? 

The point is that the Plaintiff’s dissolves into a series of political issues when examined closely. Since they ultimately ask the courts to enter the realm of political philosophy, NFIB Legal Center maintains that the case should have been dismissed.

The Tenth Circuit Panel Decision Failed to Identify Judicially Manageable Standards

Unfortunately the Kerr lawsuit has survived a motion dismiss thus far. Just last week the federal court of appeals for the Tenth Circuit held that the case was not barred by the political questions doctrine. This means the case will be remanded for the district court to address the merits question of whether TABOR affirmatively violates the Guarantee Clause.

The problem is that the Tenth Circuit punted instead of actually identifying judicially manageable standards for how the district court should address this Guarantee Clause challenge. In Vieth v. Jubelirer, the Supreme Court made clear that cases must be dismissed if the court cannot identify judicially manageable standards derived from the Constitution. Writing for the plurality, Justice Scalia (joined by J. Thomas, O’Connor and Chief Justice Renquist) said that an Equal Protection Clause challenge to an allegedly gerrymandered redistricting plan raised a nonjusticable claim because, on close examination, all of the proposed tests for identifying such a constitutional violation boiled down to a series of questions that required the exercise of political judgment. In concurrence Justice Kennedy agreed that the claim was nonjusticiable because the plaintiffs had failed to offer a judicially manageable test rooted in constitutional principles.

Kennedy’s concurrence only departed from the plurality in that he was not willing to say that all political gerrymandering claims are nonjusticiable. Whereas the plurality concluded outright that there were no judicially manageable standards, Kennedy held out the possibility that some plaintiff might eventually offer judicially manageable standards in a future case; however, he agreed with the plurality that all of the proposed standards thus far have been unmanageable. For this reason Kennedy agreed that the case was nonjusticiable.

Importantly all of the dissenting Justices seemed to agree that it was incumbent upon the court itself, or the plaintiff, to identify judicially manageable standards before allowing the case to move forward. They dissented only because they believed they had identified such standards. But the point remains that all nine Justices assumed that the court must first identify manageable standards before a case can be resolved on the merits.

So in Kerr, the Tenth Circuit’s panel opinion made a fundamental mistake in assuming the case to be justiciable without affirmatively identifying judicially manageable standards for resolving the case on the merits. The panel opinion assumes that a standard can be identified upon a thorough analysis of the Federalist Papers and other historical records.  But, as the plurality in Vieth makes clear, a case cannot move forward simply because the defendant has failed to prove a total lack of judicially manageable standards. Rather, the burden is on the plaintiff to identify such standards. And in this case the plaintiffs have simply failed to offer any set of workable standards.

Are Guarantee Clause Claims Categorically Barred?

It is worth noting that there is a legitimate debate as to whether Guarantee Clause challenges are categorically barred by the political questions doctrine. To be sure, we should be cautious of any approach to constitutional law that would effectively neuter a constitutional provision. And I can envision potentially viable Guarantee Clause claims.

For example, if Governor Jerry Brown should declare himself King of California, or if the Canadians should invade Minnesota and declare it the province of her Majesty the Queen, I should think there would be a Guarantee Clause problem. Short of that happening, I don’t see a viable theory for advancing a Guarantee Clause claim. And if we are at the point where a Governor is calling himself King, or another nation is asserting sovereignty over a State—like the current situation in Crimea—its highly doubtful that an opinion from a court is going to matter much in practical terms, except potentially to spur the executive branch to take action. But, I would nonetheless posit that there would be a legitimate Guarantee Clause claim in such a situation and I would be able to offer a judicially manageable standard for its resolution.

Scholarship on the Guarantee Clause confirms that if anything the term “republican form government” was used, and understood, in contradiction to monarchal rule, or more generally in contradiction to any form of governance that denies the people the right of self-determination through the political process. Contrary to the assertions of the plaintiffs in Kerr, republicanism was not used exclusively to connote a system of representative government, but more generally to refer to a government that allows the citizens a meaningful opportunity for self-governance. Accordingly, I think we could divine a judicially manageable standard for determining the viability of a Guarantee Clause challenge: Does the challenged action deprive the citizens of a state the right to self-determination through the political process?

With that posited standard guiding its analysis, a court could easily determine that Jerry Brown’s declaration of monarchal rule in California (or the Canadian occupation of Minnesota) violates the Guarantee Clause—or more precisely the United States’ failure to take action to redress such problems would constitute a violation.  Of course that proposed judicial standard is completely unhelpful for the plaintiffs in Kerr because they are challenging a constitutional amendment that affirmatively puts more power in the hands of the citizenry, not less.

So it may well be that there are some judicially manageable standards for assessing the propriety of a Guarantee Clause claim. But it is incumbent upon the plaintiff to demonstrate that there are identifiable, and judicially manageable, standards for a specific theory of an alleged constitutional violation. As recognized in Justice Kennedy’s concurrence in Vieth, a plaintiff may well be able to identify judicially manageable standards for a contemplated Guarantee Clause challenge in some future case; however, the courts have yet to find such principles in any Guarantee Clause challenge to date. The closest we have come to that is the Tenth Circuit’s ipsi dixit conclusion that there are manageable standards for assessing Kerr’s claims; however, we do not know what those standards are, only that the Tenth Circuit assumes they can be found.

UPDATE:

I am updating this post to clarify a few points. First, Colorado is one of several states that now require voter approval for new taxes. Other states have followed Colorado’s lead, and adopted nearly identical taxpayer protections through constitutional amendments. But, as Professor Robert Natelson points out, Colorado’s TABOR “is only one of the stronger fiscal-restraint provisions that appear in the constitutions of the 49 states. (The exception is Vermont).” And to our point, all such taxpayer protections may be subject to challenge if TABOR is struck-down.

Second, I was painting with too broad of a brush in saying that no court has ever decided a Guarantee Clause case. To be sure, in 1875, the Supreme Court said, in Minor v. Happersett: “No particular government is designated as republican, neither is the exact form to be guaranteed, in any manner especially designated.” But, in so rejecting an appeal to the Guarantee Clause, the opinion suggests only that there is a lack of identifiable and judicially manageable standards for assessing Guarantee Clause claims.

Of course, it must be conceded that state courts have heard Guarantee Clause cases—as they are not bound by federal justiciability rules. But, I believe those cases suffer from the same vexing problem as the courts had struggled with before Vieth in attempting to resolve political gerrymandering cases without any identifiable, principled or judicially manageable standard. On close examination, state-based Guarantee Clause decisions either prove entirely unhelpful for the plaintiffs in Kerr or they fail to offer any discernible, principled and judicially manageable standard.

Finally, I must clarify that I am not convinced that there are any justiciable Guarantee Clause cases. But regardless of whether Guarantee Clause cases are categorically barred by the political questions doctrine, my fundamental point remains that the plaintiffs in this case have utterly failed to identify judicially manageable standards for the court to address their claim that TABOR has rendered Colorado anti-republican. And the Tenth Circuit’s decision has likewise failed to identify such standards. The case should have been dismissed.

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The Right to Full and Fair Compensation: Making Sure Small Business Gets a Fair-Shake

Since the Supreme Court’s infamous decision, in Kelo v. New London, there have been some big eminent domain reforms across the country. That was the decision that allowed government to take private property from ordinary homeowners, and small businesses, for the benefit of large corporate developers. But if there was a silver-lining, Kelo brought a lot of attention to the problem of eminent domain abuse in America. The result is that citizens in some states have succeeded in limiting the government’s power of eminent domain through legislation and the initiative process. For example, last fall Virginians voted to amend their State Constitution to prohibit municipalities from taking private property for the benefit of private corporations.

NFIB Legal Center has been vocal about eminent domain abuse in both the court of law and the court of public opinion. To be sure, we led a coalition of 12 different groups in urging the Supreme Court to reconsider Kelo last year. And we continue to fight eminent domain abuse in other ways—including challenging the authority of state and local government to proceed with eminent domain takings where the authorities have failed to comply with procedural rules that are designed to protect private property owners. But, one of our biggest concerns—in the fight to end eminent domain abuse—is the problem of undervaluation. Accordingly, NFIB Legal Center has launched a special initiative to advocate for rules that ensure small business owners are fully and fairly compensated for their losses when they suffer a taking in eminent domain.

As part of our Just Compensation Project, NFIB Legal Center recently filed in an Ohio case to defend the rights of a small business owner. In that case, the City of Westerville decided to use eminent domain to take a landscaping easement—taking the owner’s right to control landscaping on his property. This was all part of a municipal beautification project. But, in taking this right for itself, the City’s actions caused the remainder of the owner’s property to depreciate in value. This is because the City was taking away the owner’s right to ensure unobstructed views to and from public roads—an especially valuable right for commercial property owners because there is a strong correlation between public visibility and consumer traffic.

But, the City is refusing to compensate the owner for the resulting depreciation, and the City is appealing a lower court’s decision in favor of the landowner. Accordingly, NFIB Legal Center filed an amicus brief arguing that the Constitution requires compensation for depreciation in value to private property when government takes away valuable property rights through eminent domain. We also defended the owner’s right—under the Ohio Constitution—to receive compensation for the taking of his legal right to continue using an existing access point. As we argued, loss of an access point can result in further depreciation to commercial property, even when there are other ways to access the property.

This is just the latest in NFIB Legal Center’s ongoing effort to ensure full and fair valuation in eminent domain cases. You would be amazed at the ingenious—sometimes Orewellian—arguments that governmental lawyers come-up with to justify low-ball compensation awards. But that is all the more reason for us to fight harder. We may have a long-way to go in the fight to end eminent domain abuse in America, but we are not going to give-up. We’re rolling-up our sleeves and ready to defend small business rights from coast-to-coast.

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How the West Was Won: What Does the Brandt Decision Mean for Property Rights?

Brandt Revocable Trust v. United States is a case that any property rights advocate should love—especially if you also happen to be an American history buff. Writing for the majority—which included the entire court, with exception of only Justice Sotomayor—Chief Justice Roberts’s eloquent opinion tells a narrative of the American west: “In the early to mid-19th century, America looked west. The period from the Louisiana Purchase in 1803 to the Gadsen Purchase in 1853 saw the acquisition of the western lands that filled out what is now the contiguous United States.”

Of course key to settlement and development of the west was the emergent railroad system. Though popular sentiment supported the expansion west and the development of railways in that process, the political ethos of the American people would not have supported publicly funded railway projects of the sort we now see in many metropolitan areas. Accordingly, the federal government supported private railroad companies in other ways—first by giving generous land grants, and later giving more limited “right of ways” to the railroads across public lands. So what does all of this 19th Century history have to do with our current fight for property rights in America?

Well, a lot has happened since Congress passed the Railroad Right-of-Way Act of 1875. This was the Act that gave railroads a “right of way” to build and maintain infrastructure across public lands for the purpose of promoting western settlement and development. In 1942 the Supreme Court explained, in Great Northern R. Co. v. United States, that the 1875 Act gave railroad companies only a limited right to use the subject property—i.e. an easement in the land, which would be extinguished if the railroad ever abandoned its railway. That would mean that the owner holding title the land on which the railroad easement once existed would then own the full and complete title to the land. Indeed, the United States argued as much in the Great Northern R. Co.

But, in Brandt —decided yesterday—the United States took the exact opposite position, arguing that the 1875 Act conveyed something other than an easement, and that upon its abandonment the subject property reverted back to the United States. In other words the United States was staking out a new position in Brandt in a manner that was essentially redefining previously recognized property rights. For the Brandt family who brought the case to the Supreme Court on a petition for certiorari, this was unacceptable because the government was now claiming public ownership of land that it had long ago conveyed to the family. Indeed, the Brandts own the full title to the land subject only to the railroad easement, which is now abandoned.

The NFIB Small Business Center and the Owners Council of America teamed up in this case to defend property rights, making the case for why government should not be able to redefine previously recognized property rights out of existence. Indeed if the United States could get away with redefining previously settled property interests in this case, it may do the same in other cases—as might state or local governments. Government should not be able to take an end-run around constitutional protections for property rights in this manner. Of course that’s the big picture issue. But on a practical level the case is of immediate concern to thousands of western landowners—especially ranchers and farmers—who have abandoned railways running across their land. The decision reaffirms what we have been saying all along: if the United States wishes to acquire these lands from the owners who now hold title to the underlying property, it must pay for what it is taking. Or as one columnist summed it up: Supreme Court tells government to take a hike — but not on private property.

On a final note, it is relieving to see the United States called out on taking explicitly contradictory positions on the same legal issues—albeit 72 years later. In previous cases I have observed, with extreme frustration and angst, that the United States has switched its position in the midst of litigation so as to defeat legitimate legal claims. For ordinary citizens–for whom government exists to serve–the doctrine of judicial estopple would prevent us from changing positions during the midst of litigation for expedient reasons; however, in at least some cases the federal government has successfully argued that this equitable principle cannot apply against the United States. That seems unconscionable and patently unjust. This is an issue that I should hope the Court will eventually address in a future case. But, perhaps the Brandt opinion offers further grounds for a citizen to hold the federal government to positions it has previously taken on a given legal issue. What is clear is that once property rights are recognized, no legislative enactment or executive order can outright extinguish that right without raising serious constitutional problems. 

For further comments and analysis check out Robert Thomas’ blog at Inversecondemnation.com. Also Brian Hodges offers interesting thoughts at the Liberty Blog. And Trevor Burrus offers further insights at Cato Institute’s blog.

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NFIB to Silver: You Want Better Schools, Reform Scaffold.

ALBANY (March 6, 2013) – All of the following may be attributed to Mike Durant, State Director of NFIB in response to Speaker Silver’s concerns over space in New York City schools.

“Yesterday, Speaker Silver expressed concerns regarding the current state of schools in New York City.  He should be concerned.  Too many children are attending school in trailers that are unsafe and inadequate.

“It is worth noting, however, that the Speaker’s continued refusal to allow a floor vote on the sensible reform to the scaffold law is a major contributor to the problem that he laments.  The scaffold law increases the legal risks, the financial risks and therefore the cost of building anything in New York, including new school facilities.  Reforming the law will remove a big barrier to construction and make it possible to put our children and teachers in safe, modern schools.  The Governor has expressed interest in addressing this problem and if Speaker Silver is truly concerned, he will take Governor Cuomo up on his offer.”

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NFIB Legal Center Submits Hard-Ball Questions to IRS Over Affordable Care Act Regulations

Yesterday the NFIB Legal Center sent IRS Commissioner Hon. John Koskinen a letter voicing concerns over recently finalized regulations governing employers under the Affordable Care Act. Specifically, the letter raised several important questions about the “transition relief” regulations, which IRS announced last month. The questions were as follows:

(1) Why Did IRS Finalize the Regulations Without Giving the Regulated Community an Opportunity for Notice and Comment on the Newly Added “Transition Relief” Provisions?

(2) What is the Legal Authority for Enforcing the Employer Mandate Against Businesses With 100 Full- Time or Full-Time Equivalent Employees, While Exempting Businesses with 99?

(3) What is the Legal Authority for Requiring Businesses to Justify Personnel Changes as a Condition of Invoking “Transition Relief?”

(4) Does IRS Claim the Authority to Require Businesses to Justify Personnel Changes Once the Employer Mandate is Fully Enforced Against Businesses with 50 or More Full-Time or Full-Time Equivalent Employees?

(5) If IRS Claims the Authority to Require Businesses to Justify Down-Sizing Below 50 Full-Time or Full-Time Equivalent Employees, Will IRS Exercise Such Authority?

(6) What is the Legal Authority for IRS Certifying that the Final Regulation is Not a Significant Regulatory Action?

We will have to wait and see what kind of response we get from the IRS. But, we think these are important questions that should be answered in a timely fashion. We specifically hope that the IRS will disavow the authority to require businesses to justify personnel changes once the Employer Mandate if fully enforced because there is no basis in the ACA for imposing such a requirement on businesses.

The full letter can be found here.

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NFIB Legal Center Dissents in Sarbanes-Oxley Case

This was a disappointing week for small business in the Supreme Court. As we have argued in the past, the heavy-handed and complex requirements of the Sarbanes-Oxley Act were never intended to apply to independent companies. The Act was meant to govern only publically traded corporations. But, the Supreme Court rejected our arguments this week in its decision in Lawson v. FMR.

This was especially frustrating because the Court ignored our essential concern that extending whistle-blower protections to employees of independent companies would only encourage lawsuits. NFIB Small Business Legal Center’s Executive Director, Karen Harned, was quoted in voicing our dissent in Bloomberg, the Chicago Tribune, CNBC and Reuters.

For more on the case, check out the SCOTUS BLOG’s coverage here.  

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‘Circuit breaker’ won’t fix New York’s property tax problem

As printed in today’s Buffalo News

Gov. Andrew M. Cuomo has rightfully focused on New York’s property tax burden since taking office. We were pleased to work in tandem with the administration in implementing both the highly touted property tax cap and pension reform. Both were essential steps in the fight to stem the unsustainable tide homeowners were facing. Our position was and remains that comprehensive property tax relief needed to be a multifaceted approach, i.e. tax cap plus mandate relief.

This year, the governor has again focused on the fiscal peril our schools and communities face while also looking at the adverse impact taxes have on business. The governor’s rhetoric has been spot on and we largely agree that property taxes continue to have a negative impact on the business climate of New York. But the methodology Cuomo is taking to address these concerns is simply wrong.

The governor is pushing a new website and doubling down on his efforts to put in place a two-year freeze on property taxes and a gradual phase-in of a “circuit breaker” tax shift concept that has been kicking around Albany for years. Both of these ideas are based on assumptions that are widely held to be not true and are also concepts that are not actual tax reform.

The assumption is that homeowners will put pressure on their schools and communities to stay under the property tax cap in order to receive the tax freeze by forcing consolidation, shared services and other tax reducing efforts. Have schools and communities not been doing that already? Are we really sure that these entities have not exhausted most, if not all, of their options within the parameters of existing law? We believe they have.

The circuit breaker concept is being touted as a tax cut, which is partly true, but not exactly. The circuit breaker bases homeowners’ property tax bills on their income. It does not reduce the entirety of the levy, just moves the pieces around the board. It will not create the financial flexibility our schools and communities need and will do nothing to reduce the enormity of New York’s property tax burden. It just shifts the costs.

The governor is right to focus further on rightsizing government and reducing taxes, but shifting costs and putting temporary freezes in place will not move New York forward. We continue to push for comprehensive mandate relief, such as Scaffold and Wicks law reform. Or perhaps reform in health contributions by public employees or dare I mention the holy grail of the unsustainability, the Triborough Amendment?

We will stand with the governor again, but only when meaningful efforts to reduce property taxes are advanced. This component of the state budget proposal should be rejected.

Mike Durant is state director of the National Federation of Independent Business.

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Should Antitrust Laws Apply to State and Local Governments Engaged in Anticompetitive Market Conduct?

Occasionally we hear from small business owners who are upset about government affirmatively competing with them for customers. It is certainly a problem if you make a living offering yoga lessons and your town decides to start providing free lessons. The City has an unfair advantage in that it can take taxpayer dollars to subsidize its services. But, assuming that the City has been vested with broad authority to promote public health and welfare, there isn’t much one can do in such a case. Perhaps in that situation your best bet is to focus on offering a superior experience to your customers. Nonetheless, this can be frustrating for a small business owner.

But, what if government is competing with your business in a manner that is so anticompetitive that it could actually violate antitrust law? In a forthcoming law review article in Competition Magazine, Jarod M. Bona and I argue that federal antitrust law should apply to state and local government actors when they are engaged in market conduct on equal footing with private businesses. In other words, when government is engaged in the market—selling goods or services—it should be subject to the same laws that private actors would be. 

For over a century, the Sherman Antitrust Act has been understood to prohibit private actors from engaging in anticompetitive conduct. There are some per se violations: for example a price-fixing agreement between competitors, or an agreement to allocate a geographic market between competitors. But, most antitrust claims are more difficult to prove because you have to show that (1) the challenged business conduct could cause prices to go up or down; and (2) the defendant has so much market power that it could actually charge more than what could be charged in a healthy competitive market. That’s boiling it down a lot. But the bottom-line is that the Sherman Act was designed to prevent businesses from engaging in anticompetitive conduct to either attain, or maintain, a monopoly.

But it has always been an open question as to whether these rules should apply just the same to public actors when they are engaged in the market, selling goods or services. As we note in our article: “governmental entities can and do enter the marketplace as competitors and may have even stronger incentives than profit-maximizing firms to harm competition.” And in an age of tightening fiscal budgets—where many municipalities are facing difficult choices, or on the verge of bankruptcy—there is a real danger that public entities might see the potential for monopolistic enterprise as a way out.

For example, a local entity could “use the power to tax to raise sufficient revenue to offer a product or service below cost for sufficient time to exclude other competitors from a market.”  This may be a tempting option for local governments because monopolies are extremely profitable. And if antitrust law does not preclude local government from engaging in anticompetitive conduct, public actors can get away with driving-out competing private businesses and extracting monopoly rents from consumers in the end.

As Bona and I argue, it is time to make clear that municipal and state actors stand on equal footing with private business under federal law—at least when we’re talking about government-run business enterprises. Why should government actors—who are supposed to be protecting the rights and interests of the people over whom they represent—be given a blank check to act in anticompetitive ways against small businesses in the community, and in a manner that ultimately hurts consumers?

But there is a major hurdle in establishing that government actors can be held liable when acting as market participants. In 1943 the U.S. Supreme Court held in Parker v. Brown, that federal antitrust laws do not apply to certain state conduct. So in many instances state sanctioned government conduct is considered immune from antitrust law. But the Supreme Court has always held out the possibility of a “market participant” exception to the Parker immunity rule. In Federal Trade Commission v. Phoebe Putney Health Systems, NFIB Legal Center argued that the Court should expressly endorse the “market participant” exception theory. That case was ultimately decided on other grounds—though affirming the principle that publicly run commercial enterprise must be (a) authorized by a “clearly articulated and affirmatively expressed state policy; and (b) subject to “active[] supervision” by state officials. Nonetheless, Phoebe Putney was a step-forward for us in the fight to hold public actors subject to antitrust law when engaged in market conduct. Indeed, the Court made clear that when local or state actors engage in anticompetitive conduct, they do so “against the backdrop of federal antitrust law.”

Bona and I suggest that this gives good reason to think that the Court would ultimately endorse the market participant exception if it was to squarely address the issue. And given that there is a current split in authority among the federal courts of appeal on the market-participant issue, there is good reason to think that Court will eventually have to take the issue up. We certainly hope that happens sooner than later. As we argue, application of a market-participant exception could even give small business new avenues to attack anticompetitive local and state regulatory conduct. This is perhaps the most controversial of our assertions. We lay-out a case for why antitrust law should preempt local regulatory conduct—or actions in eminent domain—where it is apparent that the only purpose of the government’s conduct is to protect its own commercial enterprise from competition. (For example, a condemnation action aimed at displacing private business, so as to establish a government monopoly for parking, or other services.) Not only would applying antitrust law in such a case advance the pro-competitive goals of the Sherman Act, but it would be consistent with our liberal democratic conception of good governance, and the principles of federalism.

Though not directly confronted with the market-participant exception, the Supreme Court is currently considering petition for certiorari in a case raising a similar issue. North Carolina Board of Dental Examiners v. Federal Trade Commission, raises the question of whether a state regulatory board created by state law can be treated as a “private” actor under antitrust law where a majority of the board’s members are also market participants who are elected to their official positions by other market participants. Given that the SCOTUS Blog highlighted the case as its “Petition of the Day” on February 12th, it seems there are greater than usual chances that the Court will take the case. If the opportunity presents itself, we will weigh in once more to voice small business concerns.

For more on this issue, check out Jarod Bona’s commentary at The Antitrust Attorney Blog

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