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The Anti-Deference Fallacy

Posted on Sep. 2, 2019
Michael Mazerov
Michael Mazerov
Peter D. Enrich
Peter D. Enrich
Dan Bucks
Dan Bucks
Darien Shanske
Darien Shanske

SALT in the Public Interest presents government and academic perspectives on state and local tax issues in a roundtable discussion format featuring former Multistate Tax Commission Executive Director Dan Bucks, Peter D. Enrich of the Northeastern University School of Law, Michael Mazerov of the Center on Budget and Policy Priorities, and Darien Shanske of the University of California, Davis, School of Law (King Hall). Tax Notes State’s commentary editor Doug Sheppard moderates the discussion.

In this installment, the four respond to recent anti-deference efforts, arguing that they are based on false premises, may lead to unintended consequences, and could undermine governments’ ability to function.

This year has seen the formation of two coalitions to address the perceived deference given to state tax agencies in tax disputes, Eversheds Sutherland (US) LLP’s Reform Administrative Deference (RAD) Coalition and McDermott Will & Emery’s Deference Coalition. While these coalitions say that tax departments often have the upper hand in tax matters both inside and outside the legal system, not everyone sees it that way.

In this installment of SALT in the Public Interest, Dan Bucks, Peter D. Enrich, Michael Mazerov, and Darien Shanske counter that the two coalitions are not only based on the false premise that courts are hesitant to question state tax agencies’ judgment, but may lead to unintended consequences and undermine governments’ ability to function. The four also ponder the motives behind these efforts, questioning both the lack of specific examples of courts’ alleged bias and the failure to disclose the members of the coalitions.

Peter D. Enrich: Let me try and start us off by setting a little bit of context about the general issue of deference in administrative law: It’s a recurrent issue that’s being debated in many contexts outside of the state and local tax context at present. At least from the perspective of many observers and practitioners on the administrative law side, the law on the topic is rather complex and in many ways ends up being quite indeterminate in any particular case. And so the debate is a somewhat marginal one, and exactly what rules one sets about deference may not end up making a huge difference in particular cases, but the fight is one that is going to have some real impact — if only on the margins. And in that respect, I think there are really some pretty deep concerns about attempts to reduce the levels of deference that are granted to tax administrators in the state and local tax context.

When you think about deference questions, you really have to ask a bunch of questions. There’s a question of how much deference, to what kinds of administrative determinations, and by whom? A lot of the focus has been on the so-called Chevron rule, which says that courts should give considerable deference to regulations formally adopted by an agency that has been delegated responsibility for administering some statutory body. And again, even there, what that means is complex, because the standard is that a court is to respect a rule if the rule is reasonable — which is a pretty low threshold — but not if it’s inconsistent with an unambiguous statute.

So a court always has paths that can lead it either way; it can go down the path of saying, “We’re going to treat the administrative rule as definitive.” But it could also say, “The rule is inconsistent with an unambiguous statute,” because the court can interpret the statute itself. And so there’s never a complete exclusion of the ability of the court to reach its own decision, and there’s always a path that lets it give some deference to the administrative agency. I think, again, most legal observers recognize that there’s an awful lot of discretion that the courts can play with in that context. But the question is: Should courts give less deference? And maybe we should focus first on the Chevron piece of deference to actual rulemaking by state tax agencies.

Dan Bucks: The larger public discussion of the issue has been an unusual combination of, on the one hand, broad sloganeering and oversimplification by advocates for change, and on the other hand, complex legalese and technicalities. So it’s a bit daunting to comment on this topic. From my experience as a tax administrator, I think the whole matter is overblown, particularly at the state level.

From what I can glean from advanced legal writings on the subject — I refer, for example, to the latest presentation that Jasper Cummings made to the Multistate Tax Commission Litigation Committee — one point observers make is that the whole federal context of the Chevron issue and the federal APA [Administrative Procedure Act] standards differ from the state APA standards and context. Thus, the automatic attempt to port the federal debate into the state situation is, in some sense, misguided.

From my experience, state courts typically do not give deference in an absolute way to agency rules by saying, “Well, the agency has a rule on this, and the rule controls and disposes of the case.” State courts don’t do that. They — at least the state courts I’ve observed — will often say that “we understand that this is the interpretation of the agency, and we have given it fair consideration, but we think they’re wrong.” Courts simply are not reticent to say when they think an agency made a mistake in its rules. And the notion that deference is a bar that is keeping judges from making their own interpretation of the law is, I think, just not correct or true in actual practice.

Enrich: Dan, I think that’s exactly right, although I think that the reason that practitioners who represent large taxpayers are making a big issue of this now is that they do legitimately recognize that some weight is given by many courts to the expertise and to the process by which tax agencies have set forth their regulations and interpretations. And that does give some weight to the tax department’s views in court, and I can certainly understand why the litigating part of the practitioner community would want to weaken that respect that’s given to the tax departments. It does make some difference; I don’t think it makes a determinative difference in most situations that I’m familiar with.

Bucks: When judges think the interpretation in a rule or any other form of guidance by an agency is wrong, they don’t have any problem at the state level of reaching that conclusion, in my view. I agree that courts respect the expertise, both technical knowledge and the equalization perspective, of tax agencies. They respect that expertise especially in the context of confidential taxes, where only the tax agency has ready access to the universe of taxpayer facts and circumstances. I think there’s a recognition that the agency’s experience in working for equal treatment across the universe of taxpayers and its practical knowledge of tax matters are of value and deserve a level of respect.

So in developing rules and giving other guidance, tax agencies are very aware of how a practice or rule will affect similarly situated taxpayers, and they try as best they can to treat the taxpayer community alike. And I think courts understand and respect that. Frankly, agency expertise and commitment to equal treatment is of value to society, and it ought to be respected. However, that respect is not so heavily weighted by courts such that it is generally determinative of cases.

Darien Shanske: I agree with all that. It’s also really interesting to hear Dan’s perspective. I want to add that though the two projects have a lot of overlap, there’s also an important difference. One project is specifically targeting subregulatory guidance and does not want that kind of guidance to get deference. I think that the argument attacking deference for subregulatory guidance is stronger, though I don’t agree with it, and I am sure that we will return to evaluate that argument.

But the other project is against deference even to full-blown regulations, and that project is self-consciously associating itself with a similar movement at the federal level. And I think that that is important to recognize. And I think that this anti-deference movement is not only more aggressive and incorrect in its contentions, but it’s also part of a larger nationalization of state and local politics, which is not a positive development. I think that it’s unfortunate.

And so I think that at the federal level, it would be a mistake to limit the ability of administrative agencies to do their job, but I think that it’s even more wrongheaded to try to force the states into the same anti-deference mold, when — per Jasper Cummings’s presentation — states already are experimenting with different ways of administering their agencies, and states are, of course, much closer to their citizens. Put another way, the argument against deference to federal agencies has a federalist component that is absent as to state agencies.

The sweeping attack on deference to regulations is really just an ideological attempt to reduce the power of governments to function. And it is hard to believe that these coalitions have had some success in getting states to hamstring their own revenue function.

Enrich: And just to be very explicit, the more radical position is the one that’s being taken by the so-called RAD Coalition, the Eversheds coalition — and it is both extreme and it is a part of a broad attack on the basic notion that government needs to be conducted through administrative agencies that need to fill in a level of detail and bring a level of expertise that legislatures cannot be expected to bring, and that courts cannot be expected to bring. That’s an understanding of government that evolved well over a century ago, and the notion of trying to roll it back and displace the role of expert administrative agencies in an area like corporate taxation does seem quite peculiar.

It’s interesting in the piece that Maria M. Todorova and others from Eversheds had in Tax Notes a couple of weeks ago,1 they articulate their reasoning, and the reasoning is that they think that state tax agencies aren’t experts or impartial — that they are acting out of what they describe as the agencies’ “mission . . . the goal of taxing agencies is to collect revenue.” And they go on and say that the agency’s interpretations of law are usually “clouded by its search for new tax revenue, [and] by prevention of refunds from the state treasury.” They have this attitude that I guess a psychologist would describe as projection: They know that their job is to minimize the tax liabilities of their clients; that’s what they’re being paid to do. And they envision the tax agencies as having the converse mission of maximizing how much they can extract from taxpayers.

When I’ve worked with state tax agencies, that simply isn’t a reasonable description of what they do. I often find myself, when I’m working with tax agencies about regulations, pushing them to be more aggressive in how they interpret their statutes to more aggressively tax — and they’re saying, “No no, we want to do this in a way that is going to be respectful of the needs of the business community, and that’s respectful of legislative intent.” It simply isn’t a fair description of state agencies that they’re acting primarily out of a revenue-maximization motivation. I think it’s truer when you get into litigation; the lawyers who represent the tax agency are trying to make sure that they win and collect the tax. But at the regulatory stage, that just doesn’t seem like a fair description of what happens.

Michael Mazerov: I think it’s worthwhile to step back and ponder why this is happening, what the motivation might be, and why it’s happening now. Spokespeople for one of the coalitions have expressed frustration with circumstances they’ve found themselves in with clients, where they assert that in the middle of either administrative proceedings or litigation, state tax agencies have issued various kinds of informal guidance to try to tip the scales in their own favor. None of us would ever defend that kind of action, but it is worth noting that they have yet to provide specific examples.

They use the metaphor of the tax agencies bringing guns to these fights while they only have knives, but I think the reality is often very much the opposite. One of the guns they have that the tax agencies don’t is an ability to make these assertions without having to provide any examples. A state tax agency may be aware of what they’re citing, but because it’s still in an administrative dispute process, the agency can’t offer its side of the story. So that’s a frustrating aspect of this debate, as is their ability to keep the members of their coalitions confidential, which, if made public, would give some sense of exactly on whose behalf they’re working and what the specific claims are about the supposed bad behavior of the tax agencies.

The other issue that I can’t help thinking is at play here is dissatisfaction that representatives of certain industries have expressed in recent years with attempts by revenue commissioners to keep up with changing business models and changing technologies. We saw this a few years ago with early versions of the proposed Digital Goods and Services Tax Fairness Act, where members of the industry were objecting to any efforts by tax agencies to extend existing tax policy to new business models and new technologies, claiming that this was completely illegitimate and could and should only be done through legislative action. Given all the issues that legislatures have to deal with, to say that a revenue department can’t try to apply existing tax policy to a new business model or a new technology, in the absence of legislative action, would bring tax administration to a standstill.

Enrich: To circle back to the question of abuse of agency role by trying to interpret statutes while they’re in the middle of litigation, coming back to Dan’s point: Courts have been pretty good in most states — there may be some exceptions; state courts are a very mixed bag — but there have certainly been many instances in which courts have been comfortable saying, “We’re not going to give much weight to an interpretation that is seeking to have retrospective effect, and that was adopted in the context of litigation long after the underlying statute was enacted.” That’s a problem that courts have ample tools to take care of already.

But even the more moderate Deference Coalition tries to extend this concern to an attack on all subregulatory guidance — whereas, boy, I would think that an awful lot of taxpayers would be unhappy if letter rulings and technical advisories and things like that couldn’t be relied upon. Practitioners value predictability and certainty, and if you’re not going to give some respect to an agency’s relatively informal forms of explanations of how they’re applying statutes, that’s not going to help anybody.

Bucks: Peter, I think you’re absolutely right. I also think that Michael earlier had an excellent point about the tension in tax administration caused by rapid change in the economy and the question whether the laws as written apply or don’t apply to the emerging changes, and how all that gets decided. That’s a big topic that Michael raised that’s deserving of a lot of conversation. And I agree with him that it may be affecting this particular debate as well.

But to go to Peter’s point regarding the issue of taxpayer guidance beyond rules, taxpayers want to have answers from tax agencies as to how something is treated. And I’ve heard from other tax administrators that taxpayers prefer having guidance to not having it.

Also, 15 to 20 years ago, there was an earlier trend of legislation around the country to adopt taxpayer bills of rights. That was a good trend; I think tax administration was improved by those taxpayer bill of rights laws. One feature often in those taxpayer bills of rights was one that says that answers to questions given by a tax agency are legally binding on the agency. The legislature wanted to make clear that if agency staff advised a taxpayer, that thus and so was the proper treatment, that the agency didn’t turn around and change its mind later.

So the legislature was saying, “Agency answers to taxpayer questions, that guidance, is legally binding.” Now the anti-deference movement comes along and says, “No, that guidance has no meaning whatsoever and should be just tossed aside.” Which way is it?

I think there’s a real practical problem here in terms of people not thinking through where the elimination of deference for guidance leads in terms of the practical desire of many taxpayers to know what the treatment is of particular items or particular types of income or procedures, etc.

Enrich: And I suspect we all agree that that kind of guidance should have far less effect if it isn’t publicly available, and that it should have far less effect if it’s only issued in the course of audit or in response to a particular dispute that’s ongoing. But when it’s decided in advance, when it’s public, certainly when it’s been subject to some degree of public process, the taxpayer community should rely on it and should want to rely on it.

Bucks: Here’s the practical rule that I gave to the agencies I was responsible for: If you get a question the first time, answer it to the taxpayer, note what it is, and provide the answer. But keep track of what you did, because it’s binding. If you get the question a second time, you better start thinking about whether or not there’s something here that will require a rule. If you get it the third time, you better send a draft rule up the line within the agency to get it adopted. There are always new and unique situations and one-off circumstances that are not going to have to require the kind of effort I’m talking about. But I had this rule of three: If you encountered the issue for the third time, you’d better be writing it in a rule. And we did our best to try to do something of that order in terms of practically notifying the public of the treatment of a particular issue.

Enrich: Dan, to what extent do you think your peers in other states follow a similar kind of protocol?

Bucks: I can’t speak for everyone, and I don’t know the answer for this specific kind of protocol. I do think there is a strong public service ethic within tax agencies and a strong commitment to equal treatment of taxpayers. And I think there has also been a heightened awareness of the need for transparency in recent decades. More progress is made in some places than others, but I think those three things — a public service ethic, an equalization/equal treatment commitment, and an awareness of the need for transparency — all move agency practice in the direction of the type of protocol I was describing. I can’t speak for every agency and every circumstance, but I think these perspectives are widely held among tax agencies.

On the matter of formally adopted rules being given no deference, I looked at this draft bill that has been introduced in Georgia, and it says:

All questions of law decided by a court or the Georgia Tax Tribunal pursuant to this subsection, including interpretations of constitutional, statutory, and regulatory provisions, shall be made without deference to any rule, determination, or interpretation, whether written or unwritten, that may have been made on the matter by the department.2

What does that say? It says that all of a revenue agency’s work to draft rules, to fill in blanks, to provide guidance to taxpayers — all the responses to questions, all of the instructions carefully written and disclosed to the public as to how agency staff will treat specific matters — all of that kind of work is nothing more than junk. It’s of no value to a tax case or to society.

Now, I understand that advocates of this legislation might say this language applies narrowly only to interpretations of law. Well, fact and law intermingle, and I’ve seen cases in which good attorneys are able to turn matters of fact into matters of law. So this type of proposed legislation can have wide applicability to rules and guidance that interpret how laws apply to given factual situations. With law and facts intermingled, this kind of anti-deference language can be broadly applied.

Returning to the main point here, when you officially establish by law that something that an agency does is of no value, it’s junk, it’s garbage, it has no weight — guess what you get? You get fewer rules, you get less transparency, you get less guidance, you get less service to the public because it is declared to be of no value and thus not worthy of public expenditures. This proposed law is also a dismissal of all the expertise and work of the tax agencies that have value to society — most importantly, agency work to ensure that tax laws are equitably applied. And so I think that the anti-deference movement has serious potential unintended consequences into discouraging agencies from in fact writing rules, and providing guidance as a matter of service to the taxpayers. It discourages agencies from doing all the other things that they have done over the last 30-40 years to improve their taxpayer service, to improve equal treatment, and to improve transparency. That’s my reaction to this whole business.

Mazerov: I’ve tried to make that point regarding the position of one of the two coalitions, which doesn’t go as far as the Georgia bill. It’s the position that “we’re willing to grant deference to a regulation that’s gone through a formal APA process, but no deference should be granted to anything that’s subregulatory guidance.” With state revenue departments having limited resources, if no deference is going to be given to subregulatory guidance, just as a practical matter you’re creating incentives to only do regulations. I think it’s the same issue that you’re raising, Dan, which is that that would be an outcome one would think would not be in taxpayers’ interest in many cases.

It’s also ironic that with so much drumbeating over the years by conservatives and the corporate community about activist judges and activist courts, when it comes to hamstringing the administration of taxes, they’re quite willing to give greater power to the courts.

Enrich: Just to go back briefly to Michael’s first point about deterring agencies from doing subregulatory guidance: They’re not just going to put their effort more into regulation; they’re going to put their efforts more into the audit side, and they’re going to do more case-by-case determination where the taxpayer didn’t have prior guidance — and where the agency is going to be more inclined to be making its decisions on a case-by-case basis in a way that favors neither consistency nor transparency nor fairness to the taxpayer.

Bucks: That’s stated very well, Peter. That’s what I was trying to say. There’s been a movement in the past several decades for greater transparency in tax administration, ensuring consistency and equal treatment, and the anti-deference laws will in fact — in my judgment — work contrary to the good work that has been done on those subjects in the last decade and that would otherwise continue to be done in the future. The anti-deference laws are a step in the wrong direction.

Shanske: It seems worthwhile to note that it would be one thing to argue against deference if the tax law were simple, which it is not. Or perhaps it would be another matter if the large businesses I presume are behind these coalitions were generally working to make the tax system simpler or perhaps calling for their members to declare a cease-fire in looking for more bespoke tax breaks. But that is not the case. I don’t think any member of these coalitions complained about the hasty and sloppy way the Tax Cuts and Jobs Act was passed, with the ensuing problems this presented to the states. I really doubt any of these businesses are forswearing trying to get new particularized tax credits passed or deciding not to employ large accounting firms to construct 50-state matrices in order to identify savings opportunities.

And of course these firms are entitled to do all of this, but they are putting so much pressure on this very complicated system that they are making more complicated, and then discouraging the public development and presentation of expertise meant to cope with the complexity. This approach is pretty aggressive and indeed smacks of chutzpah,3 and I would agree that it is also likely to have unintended consequences.

Regulators do important work, and I think that these coalitions of businesses and leading practitioners may rue the day that they got swept up in a highly ideological national movement that undermines professional tax administration because of a dislike for government generally.

Enrich: And all of us would rue the day that legislatures needed to spell out tax details at a higher degree of specificity than they presently do, which would be just a horrific mess.

Bucks: Let me give an example of this from actual practice. In Montana, the Department of Revenue values all of the property in the state for tax purposes. There’s not a local assessment process; there’s a statewide assessment process. For residential property, the Legislature requires that the department value properties according to their market value. They then specify mechanisms for gathering information to do that, and parameters on the treatment of that information. And there’s a little other guidance in there. Then they say, “Now you develop an appraisal plan by rule as to how you’re going to accomplish this.” The Legislature directs that.

The Montana DOR develops a very sophisticated appraisal process that is quite comprehensive as to how it values residential property, how it evaluates information, how it establishes neighborhoods within the entire state to constitute logical market areas, and then employs a statistical process for accomplishing market valuation. In recent decades, the agency has done a tremendous job of achieving market-value results at a high degree of accuracy and consistency — as subsequent post-appraisal studies have indicated.

Now, the appraisal plan and the specific procedures for valuing property are adopted as rules per the direction of the Legislature. The notion that something like that should be given no deference in a court case is just ridiculous. I mean, if there’s going to be a challenge, what is the judge supposed to do if language like the Georgia proposal were applicable in this case? Say, “Well, I can’t rely upon the department’s appraisal process. I’m directed by the statute to give it no weight”? What is a judge going to do, set up an alternative appraisal process? Sit down to look and eyeball what a piece of property is worth in the specific case? As Darien noted, the world is a complicated place, and legislatures rely on agencies to fill in the blanks. And that’s a perfect case of that.

In our complicated world, I don’t know how you operate a tax system in a practical, workable way with an extreme, anti-deference kind of standard. You just erode whole bodies of settled practice, and is that really what we want to do? Does that make sense?

Enrich: Sounds exactly right to me — with the one caveat that goes back, Dan, to what you said at the very beginning: Courts are always going to have enough flexibility that even if there’s a fairly clear statute (or in Florida a constitutional provision that says you’re not supposed to grant deference), they are going to find ways to respect the expertise that’s been exercised by the agencies when they’re administering a complex statutory scheme. Will they do it a little bit less? Very likely. Will they stop doing it altogether? That seems kind of improbable to me.

Bucks: I don’t think state courts give deference in ways that grant a tax agency a kind of magic, powerful force that enables agencies to prevail in cases before them. It just doesn’t happen that way. Judges, when they think the agency has interpreted something wrong, have no reticence whatsoever to tell the agency they’re wrong and grant the plaintiffs the relief they seek. Based on extensive experience with litigation and having seen agency positions both sustained or overturned, I think judges are not at all restrained by some supposed magic deference wand wielded by tax agencies.

FOOTNOTES

1 Maria M. Todorova, Eric S. Tresh, and Justin T. Brown, “It’s Time to Balance the Scales: Chevron Deference,” Tax Notes State, July 8, 2019, p. 103.

3 According to one observer, “chutzpah is that quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.” See Robinson Meyer, “The Amazing Rise of Chutzpah, in 1 Chart (Actually, in 2),” The Atlantic (Jan. 6, 2014).

END FOOTNOTES

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