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Continental Ill. Nat'l Bank & Trust v. Zagel

OPINION FILED NOVEMBER 21, 1979.

CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO ET AL., PETITIONERS,

v.

JAMES B. ZAGEL, DIRECTOR OF REVENUE, ET AL., RESPONDENTS. — PAUL W. SWANSON ET AL., D/B/A CHAPEL HILL PROPERTIES, PETITIONERS,

v.

JAMES B. ZAGEL, DIRECTOR OF REVENUE, ET AL., RESPONDENTS.



Nos. 52339, 52366. — Original petitions for declaratory judgment and injunction.

MR. JUSTICE UNDERWOOD DELIVERED THE OPINION OF THE COURT:

Two original taxpayers' actions (Ill. Const. 1970, art. VI, sec. 4(a)) relating to revenue (see, e.g., People ex rel. Klinger v. Howlett (1972), 50 Ill.2d 242; People ex rel. Ogilvie v. Lewis (1971), 49 Ill.2d 476; Thorpe v. Mahin (1969), 43 Ill.2d 36) were filed pursuant to leave of this court (58 Ill.2d R. 381) and consolidated for argument and opinion. Both complaints seek a declaratory judgment that the Illinois replacement tax act (Pub. Act 81-1SS-1, effective August 14, 1979, hereinafter referred to as the Act) is invalid.

Cause No. 52339 was filed on the effective date of the Act by Continental Illinois National Bank and Trust Company of Chicago and Central Illinois Light Company. That petition seeks invalidation of the Act on several constitutional grounds, primarily attributable to article IX, section 5(c), of the Illinois Constitution of 1970. On August 20, 1979, we ordered cause No. 52366, a related action filed by a partnership entitled Chapel Hill Properties, to be consolidated with cause No. 52339. Relying primarily on article IX, section 3(a), of the Constitution, cause No. 52339 seeks invalidation of that portion of the Act which would impose an income tax on partnerships. On the basis of these constitutional claims, the petitioners in both causes seek an injunction to restrain the appropriate State officials from enforcing the Act. Because of the importance and urgency of the issue we expedited briefing and argument.

Appreciation of the constitutional challenges requires an examination of the Act's origin and purpose. Entitled "An Act in relation to the abolition of ad valorem personal property tax and the replacement of revenues lost thereby * * *," it was enacted pursuant to article IX, section 5(c), of the 1970 Illinois Constitution, which provides:

"On or before January 1, 1979, the General Assembly by law shall abolish all ad valorem personal property taxes and concurrently therewith and thereafter shall replace all revenue lost by units of local government and school districts as a result of the abolition of ad valorem personal property taxes subsequent to January 2, 1971. Such revenue shall be replaced by imposing statewide taxes, other than ad valorem taxes on real estate, solely on those classes relieved of the burden of paying ad valorem personal property taxes because of the abolition of such taxes subsequent to January 2, 1971. If any taxes imposed for such replacement purposes are taxes on or measured by income, such replacement taxes shall not be considered for purposes of the limitations of one tax and the ratio of 8 to 5 set forth in Section 3(a) of this Article."

The General Assembly failed to provide a replacement for the ad valorem personal property tax prior to January 1, 1979. In Client Follow-Up Co. v. Hynes (1979), 75 Ill.2d 208, 230, we held that section 5(c) of article IX rendered the existing ad valorem personal property tax invalid after January 1, 1979, and constituted a continuing mandate to the General Assembly to enact a replacement tax. On June 30, 1979, the General Assembly passed House Bill 2569, which was an earlier version of the Act. Subsequently, the Governor exercised an amendatory veto over House Bill 2569 and the General Assembly in a special session approved his recommendations on August 6, 1979. Upon the Governor's certification of the General Assembly's actions, the Act became law on August 14, 1979.

The Act imposes two taxes. One is the replacement income tax, which increases the yearly corporate income tax rate from 4% to 6.85% until January 1, 1981, and to 6.5% thereafter. This tax subjects partnerships, trusts and corporations for which there is in effect for the taxable year an election under section 1372 of the Internal Revenue Code (subchapter S) to additional income taxes at an annual rate of 1.5%. The other tax is the invested capital tax, which subjects various public utilities to a yearly tax of 0.8% on invested capital. The Act further establishes the Personal Property Tax Replacement Fund, into which proceeds from both taxes will be placed.

The petitioners assert that the Act is unconstitutional on several grounds. First, petitioners maintain that the Governor's exercise of his amendatory veto power exceeded the bounds of section 9(e) of article IV of the 1970 Illinois Constitution, which provides:

"The Governor may return a bill together with specific recommendations for change to the house in which it originated. The bill shall be considered in the same manner as a vetoed bill but the specific recommendations may be accepted by a record vote of a majority of the members elected to each house. Such bill shall be presented again to the Governor and if he certifies that such acceptance conforms to his specific recommendations, the bill shall become law. If he does not so certify, he shall return it as a vetoed bill to the house in which it originated."

The Governor employed the amendatory veto to make the following recommendations: (1) reduction of the increase in the yearly corporate income tax from the 2.85% provided in House Bill 2569 to 2.5% for the period following January 1, 1981; (2) special provisions for taxpayers' returns affected by the rate change in the middle of a tax year; and (3) consistent treatment in the computation of base income and filing of returns for partnerships and subchapter S corporations. Only the first recommendation is challenged. Arguing that this recommendation involved more than a minor or technical change of House Bill 2569, petitioners maintain that the Governor's use of the veto power was unconstitutional. We disagree.

The extent of the Governor's amendatory veto power under section 9(e) of article IV was examined by this court in People ex rel. Klinger v. Howlett (1972), 50 Ill.2d 242, 249. There, it was concluded that section 9(e)'s authorization of "specific recommendations for change" did not include the substitution of a completely new bill through the exercise of the amendatory veto power. While noting the existence of such words of limitation in the records of the constitutional convention as "corrections" and "precise corrections," a significant exchange in the debates was also noted. In response to Delegate Netsch's question: "Then was it the Committee's thought that the conditional veto would be available only to correct technical errors?", a committee member replied: "No Ma'am." (50 Ill.2d 242, 249.) The absence of further clarification, of course, leaves unclear the drafter's intent as to the precise scope of the amendatory veto power.

While recognizing that constitutional debates often assist in comprehending the purpose of unclear constitutional provisions, we have emphasized that "the true inquiry concerns the understanding of its provisions by the voters who, by their vote, have given life to the product of the convention." (Client Follow-Up Co. v. Hynes (1979), 75 Ill.2d 208, 222, citing People ex rel. Keenan v. McGuane (1958), 13 Ill.2d 520, 527; Wolfson v. Avery (1955), 6 Ill.2d 78, 88; Burke v. Snively (1904), 208 Ill. 328, 344; see also Hoogasian v. Regional Transportation Authority (1974), 58 Ill.2d 117, 126.) In Client Follow-Up Co. v. Hynes, we relied to a significant extent on public comprehension of section 5(c) of article IX of the 1970 Constitution to determine that it abolished ad valorem taxes on personal property as of January 1, 1979. We inferred public understanding in part from views expressed in the press by persons who played significant roles in framing the 1970 Constitution and whose opinions would presumably carry great weight with voters. (75 Ill.2d 208, 224-26.) Even less by way of inference is required to ferret out public understanding of section 9(e) of article IV, since the voters themselves have addressed the very question we now consider. By resolution of the General Assembly, a proposal for amending section 9(e) was submitted to the voters in 1974. That proposal would have altered the opening sentence of section 9(e) to read: "The Governor may return a bill together with specific recommendations for the correction of technical errors or matters of form to the House in which it originated." (H.J. Res. Const. Amend. 7, 78th Gen. Assem.) This amendment was rejected by the voters in the 1974 referendum. When this public rejection of the proposed restriction is viewed along with the somewhat imprecise interpretation by the delegates, it is clear that section 9(e) of article IV was not intended by the voters to restrict the amendatory veto power to a proofreading device. Although the point beyond which the amendatory veto power does not extend is not as clear from the constitutional debates or referendum, that point is not, in our judgment, reached here. The specific recommendations made by the Governor regarding House Bill 2569 contain no change in the fundamental purpose of the legislation, nor are they so substantial or so expansive as to render his use of the veto power violative of section 9(e) of article IV.

Petitioners also assert that the Act violates section 5(c) of article IX of the 1970 Illinois Constitution insofar as the revenue to be collected under the replacement tax exceeds that which would have been collected under the personal property tax. The parties have stipulated that the replacement tax will raise $520 million in revenue during 1980 and that only $468 million would have been collected under the personal property tax in 1980. Petitioner contends that the difference of $52 million establishes that the replacement tax is a "revenue generating" rather than a "revenue replacing" tax as contemplated by section 5(c) of article IX.

In our judgment the contention must fail. Section 5(c) of article IX places an affirmative duty on the legislature to "replace all revenue lost by units of local government and school districts as a result of the abolition of ad valorem personal property taxes subsequent to January 2, 1971." While this language does not limit the legislature's replacement duty to the amount of actual revenue lost, as distinguished from potential revenue lost, such a limitation is supported by delegate commentary during the constitutional debates. When questioned as to the nature and rate of the replacement tax, Delegate McCracken indicated an intention on the part of the drafters to "reimburse the local governments only for their actual lost revenue." (5 Record of Proceedings, Sixth Illinois Constitutional Convention 3835, hereinafter referred to as Proceedings.) Although this explanation was given in the context of a discussion of the replacement tax on corporate income, there is no indication of a contrary intention in the discussion of the companion replacement tax on invested capital. Accordingly, we view the mandate of section 5(c) of article IX to replace lost revenue as requiring replacement of the value of the amount collected rather than the amount extended under the personal property tax.

This construction does not, however, require a holding that section 5(c) of article IX requires a dollar-for-dollar replacement. The underlying objective of section 5(c) is to insure that local governmental entities and school districts receive operating funds sufficient to replace revenue lost through abolition of the personal property tax. (Client Follow-Up Co. v. Hynes (1979), 75 Ill.2d 208, 228, citing Elk Grove Engineering Co. v. Korzen (1973), 55 Ill.2d 393, 404.) Also of fundamental concern, however, is that the revenue raised under the replacement tax not be permitted to undermine the 8-to-5 ratio of corporate to individual income tax specified in section 3(a) of article IX, a possibility which exists because section 5(c) of article IX exempts the replacement income tax from that ratio. The following exchange is illustrative:

"MR. WILSON: I just have one additional question I'd like to ask Mr. McCracken. I just wanted to be sure that I understood you correctly. Your proposal here [the 5(c) exemption] would not disturb the eight-to-five ratio provided in section 3, except that it would allow an additional tax measured by income solely and only for the purpose of providing these replacement funds. Is that correct?

MR. McCRACKEN: Well, not `allow'; `require.' Not `allow'; `require' — require an additional tax over and above the eight-to-five.

MR. WILSON: Over and above it, but otherwise, the integrity of the eight-to-five ratio is preserved.

MR. McCRACKEN: Correct.

MR. WILSON: Thank you." 5 Proceedings 3836.

Clearly, the delegates involved in the drafting of section 5(c) of article IX recognized that their proposal was not free from problems. When asked whether the same amount of revenue would have to be raised from a particular class even though membership therein may decline, Delegate McCracken responded negatively:

"No. There are difficulties with this which you point out by your question, Mr. Knuppel, and there are even greater difficulties which we recognize.

Let me say that the answer to your question is no, but it's going to have to be determined by the legislature. It's not a categorical `no' on my part. I would just anticipate that the legislature would use reason.

But let me point out something else, and perhaps even a more difficult result of this: In 1979, each district is going to get reimbursed `X' dollars, because that's what the district raised in personal property tax in 1978. Suppose we continue to have inflation. Suppose these districts continue to grow and so on and so on and so on. We are not by this means ...


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