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The Demise of the Pike Balancing Test: Department of Revenue of Kentucky v. Davis

Dan Schweitzer, Supreme Court Counsel

When states seek to enforce consumer protection and other laws against businesses, they frequently are met with the defense that the state law violates the dormant Commerce Clause. And because Commerce Clause doctrine is notoriously muddled, the defense can rarely be taken lightly. Fortunately, the United States Supreme Court has issued decisions in each of the past two Terms ― most recently, Department of Revenue of Kentucky v. Davis, 128 S. Ct. 1801 (2008) ― that should make it easier for states to prevail against dormant Commerce Clause challenges. In particular, the Court has gone out of its way to criticize the so-called Pike balancing test, which, when applied with gusto, subjects state laws to a judicial cost-benefit analysis. Attorneys General offices should be quick to point lower courts to these Supreme Court opinions.

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The Court’s ruling in Department of Revenue of Kentucky v. Davis garnered a significant amount of attention because the case threatened to disrupt the national bond market. At issue was whether Kentucky violates the dormant Commerce Clause by exempting from its income tax the interest earned on bonds issued by it or its political subdivisions, but not exempting interest earned on bonds issued by other states or their subdivisions. More than 40 states have similar tax systems, and an entire bond market ― single-state funds ― is premised on the tax differential. Had the Court struck down the Kentucky tax exemption, the consequences would have been dramatic.

My purpose here, however, is to focus on the Court’s application of dormant Commerce Clause doctrine. The primary argument the Davises put forth against the Kentucky tax was that it discriminates against interstate commerce because it treats in-state activities more favorably than out-of-state activities. The Court rejected that argument on the strength of its decision in United Haulers Association v. Oneida-Herkimer Solid Waste Management Authority, 127 S. Ct. 1786, 1795 (2007), where it held that a state law that “favors a traditional government function” ― but does not favor local private entities ― “does not discriminate against interstate commerce for purposes of the dormant Commerce Clause.” The twin rulings in United Haulers and Davis, with respect to discrimination, establish a new dormant Commerce Clause rule that shields government-run operations. They therefore constitute major victories for the states. But that rule does not apply to state and local regulation and taxation of private businesses. Another part of the Court’s ruling in Davis (and United Haulers) does just that.

Present dormant Commerce Clause doctrine has two prongs. The first is the aforementioned anti-discrimination prong. The other prong is called “Pike balancing,” after the Court’s decision in Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). Under Pike, even a nondiscriminatory measure can violate the dormant Commerce Clause if “the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.” As I have previously written, “[t]he potential mischievousness of this test is self-evident. Once a judge begins weighing the benefits and costs of state laws to determine their validity, we have moved well beyond rational-basis review. This is why it is critical for courts not to give wide berth to the Pike balancing test.” The Roberts Court appears to agree.

The Roberts Court struck its first blow against Pike balancing in United Haulers. In the final paragraph of the opinion, Chief Justice Roberts wrote:

There is a common thread to [the plaintiff’s] arguments: They are invitations to rigorously scrutinize economic legislation passed under the auspices of the police power. There was a time when this Court presumed to make such binding judgments for society, under the guise of interpreting the Due Process Clause. See Lochner v. New York , 198 U.S. 45 (1905). We should not seek to reclaim that ground for judicial supremacy under the banner of the dormant Commerce Clause.

United Haulers, 127 S. Ct. at 1798. (Although only four Justices joined this portion of the opinion, it controls because it is the narrowest ground for the Court’s holding. See Marks v. United States, 430 U.S. 188, 193 (1977). The other two Justices who concurred in the result, Justices Scalia and Thomas, did so based on their belief that the Pike test should be discarded altogether because it improperly asks courts to weigh policy considerations.).

The final portion of the Court’s opinion in Davis expounded upon that point at greater length. The Court held that “the Judicial Branch is not institutionally suited to draw reliable conclusions of the kind that would be necessary for the Davises to satisfy a Pike burden.” 128 S. Ct. at 1817. After spelling out the harms allegedly caused by the differential tax scheme, the Court stated:

Even if each of these drawbacks does to some degree eventuate from the system, it must be apparent to anyone that weighing or quantifying them for a cost-benefit analysis would be a very subtle exercise. . . .
What is most significant about these cost-benefit questions is not even the difficulty of answering them or the inevitable uncertainty of the predictions that might be made in trying to come up with answers, but the unsuitability of the judicial process and judicial forums for making whatever predictions and reaching whatever answers are possible at all.

Id. at 1818. The Court then pointed to the institutional advantages Congress has in assessing these issues. The Court concluded that “the rule in Pike was never intended to authorize a court to expose the States to the uncertainties of the economic experimentation the Davises request.” Id. at 1819.

All told, the Court in Davis and United Haulers sent a message to the lower courts: Pike balancing should not serve as a basis for subjecting state economic regulation to heightened scrutiny. For more than 60 years, state economic regulation has been subjected to deferential rational-basis review. Pike is not an end-run around that principal. State attorneys should not hesitate to deliver that message.

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