Argued December 12, 2013
Appeals from the United States District Court for the Northern District of Illinois, Western Division. Nos. 12 C 50227, 50230 — Frederick J. Kapala, Judge. Appeal from the United States District Court for the Eastern District of Wisconsin. No. 2:12-cv-00732-CNC — Charles N. Clevert, Jr., Judge.
Before Bauer, Cudahy, and Posner, Circuit Judges.
Posner, Circuit Judge.
These consolidated appeals, by Illinois counties, the state of Illinois, and a Wisconsin county, present a common question, to which the answer given by the district courts was "no." It is whether a state and its local subdivisions (counties, in this case) can levy a tax on sales of real property by Fannie Mae (official name: Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), a similar entity that, to simplify our opinion, we'll largely ignore. (So except where otherwise indicated, whenever we say Fannie this should be understood to mean Fannie plus Freddie.) The plaintiffs' grounds are both statutory and constitutional, and it is be- cause there is a constitutional challenge to a federal statute (actually two statutes—Fannie's and Freddie's) that the United States has intervened as an additional appellee. See 28 U.S.C. § 2403(a); Fed.R.Civ.P. 24(a)(1).
Fannie Mae was created by Congress in 1938 to bolster the housing market by providing federal money to finance home mortgages. It was tasked by Congress with buying mortgages from banks that had made mortgage loans, thus pumping money into the banking industry that could be used to make more such loans. At the outset Fannie Mae was a federal agency, federally financed. Its charter, which defined its function (just described), provided that it was exempt from state or local taxation, except real property taxation. See National Housing Act Amendments of 1938, Pub. L. No. 75-424, 52 Stat. 8, 24. In 1968 Congress converted Fannie to a private corporation, but its charter, and therefore its function (to support the home-mortgage market, toward the end of creating a "nation of homeowners, " in President Roosevelt's words), were unchanged. See Housing and Urban Development Act of 1968, Pub. L. No. 90-448, 82 Stat. 476, 536 (codified, as amended, at 12 U.S.C. §§ 1716 et seq). No longer a government-owned corporation, it was now what is called a "Government-Sponsored Enterprise." But like Fannie's original statute (with a few changes irrelevant to the present case), the new statute made "the corporation [i.e., Fannie], including its franchise, capital, reserves, surplus, mortgages or other security holdings, and income … exempt from all taxation now or hereafter imposed by any State … or local taxing authority, except that any real property of the corporation shall be subject to State … or local taxation to the same extent as other real property is taxed." 12 U.S.C. § 1723a(c)(2).
Freddie Mac was created two years later, as a private corporation with the same tax exemption as Fannie. See 12 U.S.C. § 1452(e). For purposes of the appeals, the two companies are virtually identical. That is why, as we said at the outset, we can largely ignore Freddie, instead pretending that Fannie and Freddie are not merely Tweedledum and Tweedledee, but Tweedledumdee. (For a brief biography of Fannie, Freddie, and their relatives—like Ginnie Mae—see Office of the Inspector General, Federal Housing Finance Agency, "History of the Government Sponsored Enter- prises, " http://fhfaoig.gov/LearnMore/History, visited Dec. 19, 2013.)
Fannie traditionally followed conservative mortgage financing practices, and foreclosures by it were very few. But beginning in 1995 and accelerating throughout the early 2000s, it bought risky mortgages and got caught up in the housing bubble; and when the bubble burst in September 2008, Fannie found itself owning an immense inventory of defaulted and overvalued subprime mortgages. In fact it went broke, and since 2008 has been in conservatorship. The conservator is its regulatory agency, the Federal Housing Finance Agency—hence the agency's presence in these appeals as a party. See Office of the Inspector General, Federal Housing Finance Agency, "Conservatorship FAQs, " http://fhfaoig.gov/LearnMore/FAQ (visited Dec. 19, 2013). A conservatorship is like a receivership, except that a conservator, like a trustee in a reorganization under Chapter 11 of the Bankruptcy Code, tries to return the bankrupt party to solvency, rather than liquidating it. (Fannie and Freddie probably are not subject to the Bankruptcy Code and thus not eligible for Chapter 11 reorganization. For a thoughtful discussion, see Richard Scott Carnell, "Handling the Failure of a Government-Sponsored Enterprise, " 80 Wash. L. Rev. 565, 609–12 (2005).
The hit that Fannie took beginning in 2008 coincided with the decline in states' fiscal fortunes caused by the effect on their tax base of the financial crisis and ensuing economic depression. So at the same time that Fannie found itself for the first time making frequent sales of property that it had foreclosed on (since the owner of the mortgage usually obtains title to the mortgaged property in the event of a default), the states (including their subdivisions, such as counties) found themselves in dire need of additional tax revenues but reluctant to impose or increase taxes that would drive businesses and people to lower-tax states.
Illinois and Wisconsin, like all the other states, have a tax, called a real estate transfer tax, applicable when real property changes hands. Illinois's tax is 50 cents for every $500 of the property's total value. 35 ILCS 200/31-10. Illinois counties are allowed to piggyback on the state tax by imposing their own real estate transfer tax of 25 cents per $500 of value. 55 ILCS 5/5-1031(a). Wisconsin counties get to keep 20 percent of the revenue from the Wisconsin real estate transfer tax, which is 30 cents per $100 of value. Wis.Stat. §§ 77.22(1), 77.24. Wisconsin imposes the tax explicitly on the seller, as is normal for sale or other excise taxes. This is customary in Illinois as well, but not explicit in the statute authorizing the real estate transfer tax and so it is conceivable that Illinois might try to impose the tax on buyers of property from Fannie if it can't impose it on Fannie itself. (The indirect effect, however, might be to reduce the price that Fannie could get for property that it sold.)
Illinois and its subdivisions and many other states and their subdivisions (such as Milwaukee County) decided to impose the real estate transfer tax on Fannie's sales of fore- closed property to home buyers notwithstanding Fannie's statutory exemption from state taxation. There was no danger that taxing Fannie would drive people or businesses out of a state, and the number of foreclosures made it possible that the imposition of such a tax on Fannie would produce significant revenue for a state and its counties.
Fannie's exemption is from "all taxation" except real property taxation, and a tax on a real estate sale is a tax not on property but on the transfer of property—a well- recognized distinction. See, e.g., United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988); Fernandez v. Wiener, 326 U.S. 340, 352 (1945); Erik M. Jensen, "The Apportionment of 'Direct Taxes': Are Consumption Taxes Constitutional?, " 97 Colum. L. Rev. 2334, 2365–66 (1997). The distinction is part of the historical distinction (found in the Constitution) between "direct" and "indirect" taxes. The former term now em- braces just capitation taxes (taxes per head, such as a poll tax—"poll" being a Middle English word for "head") and taxes on real and personal property, and the latter term em- braces all other taxes, see Hylton v. United States, 3 U.S. 171, 175 (Chase, J.), 176 (Paterson, J.), 183 (Iredell, J.) (1796); Murphy v. IRS, 493 F.3d 170, 181 (D.C. Cir. 2007); Jensen, supra, at 2393–97, including therefore real estate transfer taxes.
Article I, § 9, cl. 4 of the Constitution requires that direct taxes be apportioned among the states according to population. Indirect taxes—various forms of excise tax, including sale or transfer or inheritance taxes—were thought not to re- quire apportionment because, as Hamilton argued in The Federalist No. 21 (Federalist, George W. Carey & James McClellan eds. 1990, p. 105), the market could be relied on to prevent excessive excise taxation, as excise taxes add to the price of goods and services. (The Sixteenth Amendment re- moved income taxes from the class of taxes that require apportionment.) The "direct"-"indirect" terminology relates to Hamilton's point. A sales tax is "indirect" because the tax is imposed on the seller, and he will try and usually succeed in passing on a portion, sometimes the entirety, of the tax to his customers by folding the tax into the price of the good sold. The result is that the "real" taxpayer is, at least to a large ex- tent, not the nominal taxpayer (the seller), but the nominal taxpayer's customer. Jensen, supra, at 2393–96.
The appellants argue that the statutory term "all taxation" does not include excise taxes. The appellees reply that "all" means "all" (unless explicitly qualified, as by "all except, " which is what the Fannie Mae statute does with real property taxation). That isn't always true, however; often there are implicit exceptions. If a sign reads "All vehicles must be out of the park grounds by 8 p.m., " this doesn't necessarily include police cars and other public safety vehicles. See H.L.A. Hart, "Positivism and the Separation of Law and Morals, " 71 Harv. L. Rev. 593, 606–07 (1958). But the taxation provision in the Fannie Mae statute is not comparable. It says "all taxation … except" taxes on real property, and having carved an express exception for one type of tax Congress could be ...