The Literalist Response to the Republicans' Attack on Blue States
by Neil H. Buchanan
Two days ago, I wrote in amazement about the simplemindedly literalist arguments that Donald Trump's defenders have been pushing (with straight faces) to justify his claims that he can pardon anyone, including himself. I then offered two theories that were no crazier than those that Trump's minions have been pushing, including a move that could allow Trump to prevent his own impeachment (and then pardon himself for doing so).
I was somewhat tempted not to say anything about those cockamamie theories, because I did not want to give Trump's loyalists any ideas. I then realized that, even if they were to read what I wrote here on Dorf on Law (a far-fetched idea, at best), they have repeatedly proved themselves capable of coming up with even more off-the-wall theories on their own than I could ever imagine. My column was thus an exercise in "fun" in the sense that it is somehow amusing to think about how people can convince themselves to support autocratic power grabs.
My original idea when I began writing that column was not to focus entirely on the self-pardon arguments. I also intended to draw an unexpected connection between those arguments and the literalist arguments that have recently been offered in response to the Republicans' attempts to punish blue states by limiting the state-and-local tax (SALT) deduction. I wrote the following paragraph (where "it" is the Trump self-pardoning theory):
The standard response to literalist arguments is essentially to say that nothing can be understood without context. The Constitution's Pardon Clause does not explicitly limit the president's power, so Trump's people say that there can be no limits. Others say that there have to be limits, else the rest of the document means nothing. Only those who are truly looking for an excuse to give Trump more power would be willing to ignore those limits.
Such arguments can be found in all areas of law, but literalist arguments are especially common in tax law. "I did not earn income, because I wasn't paid a salary. Instead, I was given a loan, and then the person who made the loan said that I didn't have to repay." Thus was born discharge-of-indebtedness (DOI) income. The idea in tax is that substance dominates form, so calling it a loan that was never repaid does not make it non-income.
Often, the tax code is changed in direct response to such attempted evasion. (For example, DOI is now explictly listed in the section defining gross income.) We also have a whole family of doctrines to cover the more exotic work-arounds that Congress has not yet shut down explicitly: the Economic Substance Doctrine, the Step Transaction Doctrine, the Business Purpose Doctrine, the Sham Transaction Doctrine, and so on. The common thread is that they are all designed to prevent taxpayers from engaging in games to avoid taxes simply by coming up with clever -- but meaningless -- ways to recharacterize what they are doing.
The response to such game-playing, in modern parlance, essentially boils down to saying: "I call BS!" When such a tax scam is laid out, a reasonable person would say (just as she would say about self-pardoning): "Oh, come on. That's not what that means!" Or perhaps it is best captured by a quip attributed to Abraham Lincoln: "How many legs does a dog have if you call a tail a leg? Four, because calling a tail a leg does not make it a leg."
How does this all play out in the context of the new limitation on the SALT deduction? Earlier this year, I discussed the economic and constitutional aspects of the Republicans' gambit, agreeing with Professor Dorf that it is unconstitutional but that they will probably not be stopped by the courts. My focus here is on the arguments that have arisen over whether blue states' responses to the SALT limitation amount to nothing more than rank literalism.
We first need to understand what those states are doing. Some are doing nothing, but California and a few other states have been working on various ways to recharacterize some or all of their citizens' tax payments as charitable contributions. In the purest form, the state would say that citizens can choose not to pay their taxes so long as they instead "donate" the same amount of money to a charity that the state will set up to collect the money and then give it to the state.
Republicans, of course, are saying: "I call BS!" This is simply, in their view, calling a tail a leg as a way for Democrats to undo the will of the Republicans in Congress who cheated the Democrats fair and square. And it is certainly easy to see how this work-around can be challenged as a change in form without a change in substance.
So what is the Democrats' response? Basically, they are saying that the tax code allows charitable deductions, so what they are doing is allowed by the code. But does the relevant section allowing deductions for charitable contributions not disallow deductions for "quid pro quo" donations, that is, for payments that directly benefit the donor (and thus are not truly charitable)?
Yes, but that is not the end of the story, because conservatives have been quite excited about allowing state tax credits for private school tuition, especially for religious schools. The Supreme Court in 2011 rejected a challenge to the state of Arizona's tax credit program by finding 5-4 that challengers to the tax credit program lacked standing. Although the holding was based on standing, however, Justice Kennedy wrote for the majority that tax credits are not equivalent in substance to collecting and spending tax money.
Kennedy claimed that "[a]warding some citizens a tax credit allows other citizens to retain control over their own funds in accordance with their own consciences." He clearly does not understand the contingent nature of income, and he makes the blatant error of saying that treating tax credits as the equivalent of collecting and refunding money "assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands."
Calling a tax credit the logical equivalent of collecting and then refunding money does not make the money the property of the government, because it only says that a government policy can achieve the same substantial result in two different forms. In dissent, Justice Kagan wrote: "Taxpayers experience the same injury for standing purposes whether government subsidization of religion takes the form of a cash grant or a tax measure." Parents who send their children to private schools are allowed to pay less in taxes, which means that the state is receiving less money and those schools are receiving more (while the parents themselves pay the same total sum of money either way).
Now, of course, it is liberals who want to say that tax credits are different. "If you're allowed to give money to a religious school and call it a credit, I can give money to my state and local governments and call it a credit. In both cases, we are getting what we want, but we are able to do so in tax-advantaged ways." One need not think that the literalist argument that Kennedy promulgated is correct in the first instance to think that the precedent, once it exists, can be used by anyone.
More to the point, Congress is presumed to know what it leaves in place as well as what it changes. Code section 170, which authorizes the deduction for charitable contributions, includes a list of recipients that qualify for the deduction, the first category of which (section 170(c)(1)) includes a "State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes."
So when Congress limited the SALT deduction, it did so while leaving in place the provision that says that states and localities count as charities for purposes of the charitable deduction. Apparently, then, this is yet another area where Congress has decided to treat a difference of form as having legal meaning. (Business taxation is rife with such distinctions, of course, because differences in businesses are entirely matters of form. We even call one way of doing business "the corporate form.")
What about the last part of that provision, "but only if the contribution or gift is made for exclusively public purposes"? If taxes are used for public purposes, then paying the substantial equivalent of taxes would also be for public purposes. When I pay my taxes, the money is used to pay for roads, schools, Medicaid, law enforcement, and so on. California and other states would do the same with the charitable contributions.
But does a taxpayer not receive the benefit of not having to pay taxes? It is not a benefit if she ends up paying the same amount of money, because she is no better off than she would have been had she paid the money in the form of taxes. (The federal tax benefit itself is axiomatically not included in this part of the analysis, because including it would make the logic circular.)
Moreover, there is apparently no problem at all if a person's donation to, say, a soup kitchen allows the state not to spend that amount of money on food stamps. We are once again faced with the fetishization of the public/private distinction, where the substance of the transaction is that the citizen pays money and the state either spends the money directly or instead benefits when a private organization spends the money in a way that allows the state not to spend it.
We are thus left with a Congress that has said that payments to states are only deductible up to a certain amount if they are called taxes but can be deducted in full if they are called charitable contributions. It is literally true that allowing this would give a green light to states that are willing to go to the bother of calling a tail a leg, but this is what Congress has wrought.
Of course, Congress will not fix this, because doing so would require them to take a vote specifically on this provision, which would amount to imposing a "tax increase," which is anathema to Republicans. Even though they would be targeting their political enemies, doing so without being able to roll it into a much more complicated mess of a bill would expose the bad optics of their political hit job. Live by the form-over-substance distinction, die by the form-over-substance distinction.
Two days ago, I wrote in amazement about the simplemindedly literalist arguments that Donald Trump's defenders have been pushing (with straight faces) to justify his claims that he can pardon anyone, including himself. I then offered two theories that were no crazier than those that Trump's minions have been pushing, including a move that could allow Trump to prevent his own impeachment (and then pardon himself for doing so).
I was somewhat tempted not to say anything about those cockamamie theories, because I did not want to give Trump's loyalists any ideas. I then realized that, even if they were to read what I wrote here on Dorf on Law (a far-fetched idea, at best), they have repeatedly proved themselves capable of coming up with even more off-the-wall theories on their own than I could ever imagine. My column was thus an exercise in "fun" in the sense that it is somehow amusing to think about how people can convince themselves to support autocratic power grabs.
My original idea when I began writing that column was not to focus entirely on the self-pardon arguments. I also intended to draw an unexpected connection between those arguments and the literalist arguments that have recently been offered in response to the Republicans' attempts to punish blue states by limiting the state-and-local tax (SALT) deduction. I wrote the following paragraph (where "it" is the Trump self-pardoning theory):
"It is so demonstrably wrong that it is not even worth a full column to debunk the argument, so I am going to use this space to draw some parallels between the literalism of the Trump-can-do-anything-he-wants-with-the-pardon-power claim and the form-over-substance claims that are now being made in the context of some blue states' attempts to sidestep the limit on state-and-local tax deductions. Trust me, the analogy is not as odd as it might sound -- and the tax stuff is not boring (even though it is tax stuff)."I might be about to prove that I was wrong about the tax stuff not being boring, but I already proved myself wrong in thinking that there was not a full column's worth of material in the self-pardoning discussion (which is why I deleted the paragraph above). My bad. Here, I will take up the literalism argument in the tax context, showing that no matter how much contempt I might have for the self-pardoning argument, there are times when it is not as easy to dismiss literalism as it might seem.
The standard response to literalist arguments is essentially to say that nothing can be understood without context. The Constitution's Pardon Clause does not explicitly limit the president's power, so Trump's people say that there can be no limits. Others say that there have to be limits, else the rest of the document means nothing. Only those who are truly looking for an excuse to give Trump more power would be willing to ignore those limits.
Such arguments can be found in all areas of law, but literalist arguments are especially common in tax law. "I did not earn income, because I wasn't paid a salary. Instead, I was given a loan, and then the person who made the loan said that I didn't have to repay." Thus was born discharge-of-indebtedness (DOI) income. The idea in tax is that substance dominates form, so calling it a loan that was never repaid does not make it non-income.
Often, the tax code is changed in direct response to such attempted evasion. (For example, DOI is now explictly listed in the section defining gross income.) We also have a whole family of doctrines to cover the more exotic work-arounds that Congress has not yet shut down explicitly: the Economic Substance Doctrine, the Step Transaction Doctrine, the Business Purpose Doctrine, the Sham Transaction Doctrine, and so on. The common thread is that they are all designed to prevent taxpayers from engaging in games to avoid taxes simply by coming up with clever -- but meaningless -- ways to recharacterize what they are doing.
The response to such game-playing, in modern parlance, essentially boils down to saying: "I call BS!" When such a tax scam is laid out, a reasonable person would say (just as she would say about self-pardoning): "Oh, come on. That's not what that means!" Or perhaps it is best captured by a quip attributed to Abraham Lincoln: "How many legs does a dog have if you call a tail a leg? Four, because calling a tail a leg does not make it a leg."
How does this all play out in the context of the new limitation on the SALT deduction? Earlier this year, I discussed the economic and constitutional aspects of the Republicans' gambit, agreeing with Professor Dorf that it is unconstitutional but that they will probably not be stopped by the courts. My focus here is on the arguments that have arisen over whether blue states' responses to the SALT limitation amount to nothing more than rank literalism.
We first need to understand what those states are doing. Some are doing nothing, but California and a few other states have been working on various ways to recharacterize some or all of their citizens' tax payments as charitable contributions. In the purest form, the state would say that citizens can choose not to pay their taxes so long as they instead "donate" the same amount of money to a charity that the state will set up to collect the money and then give it to the state.
Republicans, of course, are saying: "I call BS!" This is simply, in their view, calling a tail a leg as a way for Democrats to undo the will of the Republicans in Congress who cheated the Democrats fair and square. And it is certainly easy to see how this work-around can be challenged as a change in form without a change in substance.
So what is the Democrats' response? Basically, they are saying that the tax code allows charitable deductions, so what they are doing is allowed by the code. But does the relevant section allowing deductions for charitable contributions not disallow deductions for "quid pro quo" donations, that is, for payments that directly benefit the donor (and thus are not truly charitable)?
Yes, but that is not the end of the story, because conservatives have been quite excited about allowing state tax credits for private school tuition, especially for religious schools. The Supreme Court in 2011 rejected a challenge to the state of Arizona's tax credit program by finding 5-4 that challengers to the tax credit program lacked standing. Although the holding was based on standing, however, Justice Kennedy wrote for the majority that tax credits are not equivalent in substance to collecting and spending tax money.
Kennedy claimed that "[a]warding some citizens a tax credit allows other citizens to retain control over their own funds in accordance with their own consciences." He clearly does not understand the contingent nature of income, and he makes the blatant error of saying that treating tax credits as the equivalent of collecting and refunding money "assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands."
Calling a tax credit the logical equivalent of collecting and then refunding money does not make the money the property of the government, because it only says that a government policy can achieve the same substantial result in two different forms. In dissent, Justice Kagan wrote: "Taxpayers experience the same injury for standing purposes whether government subsidization of religion takes the form of a cash grant or a tax measure." Parents who send their children to private schools are allowed to pay less in taxes, which means that the state is receiving less money and those schools are receiving more (while the parents themselves pay the same total sum of money either way).
Now, of course, it is liberals who want to say that tax credits are different. "If you're allowed to give money to a religious school and call it a credit, I can give money to my state and local governments and call it a credit. In both cases, we are getting what we want, but we are able to do so in tax-advantaged ways." One need not think that the literalist argument that Kennedy promulgated is correct in the first instance to think that the precedent, once it exists, can be used by anyone.
More to the point, Congress is presumed to know what it leaves in place as well as what it changes. Code section 170, which authorizes the deduction for charitable contributions, includes a list of recipients that qualify for the deduction, the first category of which (section 170(c)(1)) includes a "State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes."
So when Congress limited the SALT deduction, it did so while leaving in place the provision that says that states and localities count as charities for purposes of the charitable deduction. Apparently, then, this is yet another area where Congress has decided to treat a difference of form as having legal meaning. (Business taxation is rife with such distinctions, of course, because differences in businesses are entirely matters of form. We even call one way of doing business "the corporate form.")
What about the last part of that provision, "but only if the contribution or gift is made for exclusively public purposes"? If taxes are used for public purposes, then paying the substantial equivalent of taxes would also be for public purposes. When I pay my taxes, the money is used to pay for roads, schools, Medicaid, law enforcement, and so on. California and other states would do the same with the charitable contributions.
But does a taxpayer not receive the benefit of not having to pay taxes? It is not a benefit if she ends up paying the same amount of money, because she is no better off than she would have been had she paid the money in the form of taxes. (The federal tax benefit itself is axiomatically not included in this part of the analysis, because including it would make the logic circular.)
Moreover, there is apparently no problem at all if a person's donation to, say, a soup kitchen allows the state not to spend that amount of money on food stamps. We are once again faced with the fetishization of the public/private distinction, where the substance of the transaction is that the citizen pays money and the state either spends the money directly or instead benefits when a private organization spends the money in a way that allows the state not to spend it.
We are thus left with a Congress that has said that payments to states are only deductible up to a certain amount if they are called taxes but can be deducted in full if they are called charitable contributions. It is literally true that allowing this would give a green light to states that are willing to go to the bother of calling a tail a leg, but this is what Congress has wrought.
Of course, Congress will not fix this, because doing so would require them to take a vote specifically on this provision, which would amount to imposing a "tax increase," which is anathema to Republicans. Even though they would be targeting their political enemies, doing so without being able to roll it into a much more complicated mess of a bill would expose the bad optics of their political hit job. Live by the form-over-substance distinction, die by the form-over-substance distinction.