Hillary Schlueter, J.D. candidate, The University of Iowa College of Law, 2006; B.A., magna cum laude, University of Northern Iowa, 2003. Special thanks to my family and friends for their love, support, and inspiration throughout the years-I would not be who I am today without all of you. Thanks also to the staff of The Journal of Gender, Race & Justice.
The Iowa Supreme Court held that an Iowa tax statute imposing different tax rates on riverboat slot machines and slot machines at racetracks was unconstitutional under the Iowa Constitution¥s equal protection clause.1
The Iowa Legislature enacted the differential tax rate in 1994 to aid the state¥s riverboats and racetracks that were suffering economically.2 Simultaneously, the Legislature granted racetracks the right to operate slot machines on their premises.3 A condition placed on this right, however, was the imposition of a higher tax rate on racetracks than on riverboats.4 The unfair tax outraged racing associations, who in turn challenged the tax rate on equal protection grounds.5
The Iowa Supreme Court ultimately agreed with the racing associations, finding that the tax violated the state equal protection clause because the state had no legitimate purpose for taxing the same slot machines differently.6 In finding the tax unconstitutional, the Iowa Supreme Court effectively replaced its judgment for that of the Legislature. This means that the Iowa Supreme Court has brought about the return of Lochnerizing, which, in today¥s society, is an intolerable technique for judicial control of social and economic legislation.
The first part of this Note will probe the applicability of the rational Page 714 basis test to the Iowa Code section, the plausibility of the Legislature¥s policy making, and the Legislature¥s reasonableness in making the tax classifications. Part II of this Note will analyze the Iowa Supreme Court¥s use of Lochnerizing to rule that the differential tax rates on slot machines in racetracks and riverboats violate the state equal protection clause. Finally, this Note will delve into the aftershocks that were felt statewide following the Iowa Supreme Court¥s ruling that the statute was unconstitutional. Such aftershocks might include ramifications for other Iowa taxes that could also be challenged on equal protection grounds. To this end, the Note will conclude with some predictions of what those ramifications might be.
Gambling first became permissible in Iowa with the legalization of wagering at horse and dog tracks in 1983.7 Iowa, capitalizing on the state¥s riverboat heritage, authorized gambling on riverboats in order to attract economic development to river towns in 1989.8 By 1994, however, both the riverboats and racetracks were struggling economically.9 The Iowa Legislature enacted Iowa Code section 99F.11, which removed the wager and loss limits on riverboats, authorized the use of slot machines at racetracks, and adopted the at-issue tax rate on slot machines at racetracks to aid the riverboats and racetracks.10 Beginning in 1997, a tax rate of 22% was set for adjusted gross receipts over $3 million from gambling at racetracks, with the rate set to increase by 2% each year until it reaches 36%.11 The riverboats, however, are taxed at a constant rate of 22% on adjusted gross receipts over $3 million.12 The racetracks were being taxed at a disproportionate rate compared to the riverboats, but the addition of slot machines dramatically boosted the racetracks¥ revenue, producing $5 billion by 1999.13
The frustrated and overtaxed racing associations that represent the racetracks eventually brought suit to have the statute declared unconstitutional under the state and federal equal protection clauses.14 The Iowa Supreme Court initially held that Iowa Code section 99F.11 (which Page 715 created the differential tax rates on slot machines) violated the state and federal equal protection clauses because riverboats and racetracks are members of the same class and no rational basis existed for the Legislature to tax them differently.15 Despite the Legislature¥s asserted interests in the differential rates, the Iowa Supreme Court refused to consider any of the reasons as a rational basis for the statute.16 The United States Supreme Court found that the Iowa Code section did not violate the federal Equal Protection Clause because a rational legislature could have concluded that the classification was reasonably related to its goal so as not to render the classification arbitrary or irrational.17 On remand, the Iowa Supreme Court again found that the Iowa Code section violated the state equal protection clause.18 This decision was based on two factors: the gambling revenue taxed was identical, and there was no legitimate purpose for taxing gambling revenue differently based on its location at either a racetrack or on a riverboat.19
As a result of the Iowa Supreme Court holding Iowa Code section 99F.11 unconstitutional, the state Legislature needed to develop a quick solution to avoid (1) owing the racetracks over $112 million in tax refunds, and (2) losing over $138 million in tax revenue from 2002 to 2005 as a result of lowering the tax rate for racetracks.20 The Legislature enacted House File 2302 as a compromise with the racetracks to avoid having to repay the overpaid taxes.21 With House File 2302, the Legislature set out to equalize the tax rates on riverboats and racetracks. House File 2302 established a wagering tax of 22% on boats, racetracks with a boat in a county with no table games, and racetracks with table games with adjusted gross receipts of $100 million or less.22 The Act established a 24% wagering tax for racetracks in counties not having a riverboat and for racetracks with table games with adjusted gross receipts exceeding $100 million.23 The new act also permitted racetracks to become eligible for table games licenses, Page 716 which were previously granted only to riverboats.24
While the Iowa racetracks invoked both the federal and state equal protection clauses, the differential tax rate should have been considered under the standards set forth by the federal clause only. The federal Equal Protection Clause prohibits a state from denying "any person within its jurisdiction the equal protection of the laws."25 The Iowa equal protection clause prohibits laws that "grant to any citizen, or class of citizens, privileges or immunities, which upon the same terms shall not equally belong to all citizens."26 As applied to tax classifications, the Iowa Supreme Court held that, in general, if a statute does not offend the Iowa equal protection clause, then it is "inoffensive" to the federal Equal Protection Clause, and vice versa.27 In Klein v. Iowa Department of Revenue and Finance, the Iowa Supreme Court held that if the state statute providing for tax categorization does not offend the federal Equal Protection Clause, it does not offend the similar provision in Iowa¥s constitution.28 The Iowa Supreme Court also held that the state equal protection clause provides the same protection against excessive tax assessments as the federal Equal Protection Clause.29
Iowa courts have previously held that they will apply the same analysis in considering the state equal protection clause as they would in considering the federal clause.30 Additionally, the U.S. Supreme Court may reverse the Iowa Supreme Court decision using federal law when there is no adequate and independent state ground for the state court holding.31 Unless the state Page 717 court holding contains a plain statement that its holding rests on independent state grounds, the U.S. Supreme Court will assume that the state court decided the case based on its belief of what federal law required.32
The Iowa courts have repeatedly held that the federal and state equal protection clauses are treated identically in "scope, import, and purpose," so no separate and independent state grounds exist to support the Iowa Supreme Court decision.33 The U.S. Supreme Court can review and reverse the decision below for two reasons: (1) the Iowa court holding relied heavily upon federal grounds, and (2) the Iowa court did not expressly state that it used a separate state law interpretation in its holding.34 The U.S. Supreme Court therefore had jurisdiction to review the Iowa Supreme Court decision because it has always considered a state court decision that rests upon federal grounds as sufficient to support jurisdiction.35
The U.S. Supreme Court found that the Iowa Code section did not violate the federal Equal Protection Clause.36 The Court reasoned that a rational legislature could have concluded the classification was reasonably related to the state¥s goal of aiding the racetracks and...