Taxation – Environmental – Carbon Charge – County Levy – Tax Injunction Act

GenOn Mid-Atlantic LLC v. Montgomery County, Md. (Lawyers Weekly No. 11-01-0641, 9 pp.) (Wilkinson, J.) No. 10-1882, June 20, 2011; USDC at Greenbelt, Md. (Messitte, J.) 4th Cir. Click here for the full-text opinion.

Holding: A Maryland county’s levy on a single “taxpayer,” an electric company, for its carbon dioxide emissions was not a “tax” that meant the district court could not hear the electric company’s challenge to the levy under the Tax Injunction Act; the 4th Circuit says that because the carbon charge was levied on a single “taxpayer” and formed part of a wide-ranging regulatory program, the district court had jurisdiction over the company’s claims.

The Montgomery County Council enacted Expedited Bill 29-10 on May 19, 2010, to impose a levy on large stationary emitters of carbon dioxide within the county. The bill imposes an “excise tax” of $5 per ton of carbon dioxide emitted, but only on emitters that end up exceeding 1 million tons of carbon dioxide in a year. For those large emitters, the $5 per ton charge applies to every ton emitted. The revenue generated by the levy is to be deposited in the county’s general fund, with 50 percent earmarked for funding greenhouse gas reduction programs such as mass transit and 50 percent available for the county’s general use. The county projects that the levy will raise annual revenue between $11.7 and $17.6 million.

Appellant GenOn Mid-Atlantic LLC operates an electricity plant in the county that emits carbon dioxide. As the only entity in the county expected to exceed 1 million tons of carbon dioxide emissions annually, GenOn is the only entity likely to be subject to the $5/ton levy on its entire volume of emissions. The county determined GenOn would not be able to pass the carbon-charge cost on to its county customers because its power is sold via competitive auction. GenOn sought to enjoin enforcement of the levy as a violation of the U.S. and Maryland Constitutions. The district court concluded the levy was more like a tax for purposes of the Tax Injunction Act, and dismissed the suit. We reverse.

To determine whether a particular charge is a fee or a tax for purposes of the Tax Injunction Act, this court has looked to three factors for guidance: 1) what entity imposes the charge; 2) what population is subject to the charge; and 3) what purposes are served by the use of the monies obtained by the charge.

The county claims the carbon charge is a tax under this three-part inquiry for two primary reasons. Its initial argument is that the process by which Bill 29-10 was enacted was the process by which taxes are typically enacted. The county also argues that the levy is a tax because it is expected to raise significant revenue. While Bill 29-10 does bear some indicia of a tax, we can readily conclude it is not a tax provision. The two factors cited by the county cannot be used to disguise what is in substance a punitive and regulatory matter.

The chief problem with the carbon charge is that the burden falls on GenOn alone. The fact that this charge affects the narrowest possible class is compelling evidence that it is a punitive fee rather than a tax. Our conclusion that the bill imposes a punitive fee is strengthened by the fact that GenOn will likely be unable to pass the cost of the charge on to its customers.

The charge also falls outside the ambit of the Tax Injunction Act because of its plainly regulatory purpose. It is clear the county adopted the bill to advance its program of reducing green house gas emissions. The bill’s place in the county’s “programmatic efforts” is two-fold: it creates disincentives for GenOn to continue polluting and provides funds for others to reduce their carbon dioxide emissions. These may be good and laudable goals. But where an assessment of this type forms such a significant “part of a regulatory program,” it is not the sort of mere revenue-raising measure that the Tax Injunction Act leaves solely to the jurisdiction of state courts.

The implications of allowing localities to impose financial exactions exclusively upon single entities of national reach with no accountability in federal court are profound, and we decline to foreclose those federal claims with a jurisdictional bar.

Reversed and remanded for consideration of GenOn’s claims.