Metropolitan Life Ins. Co. v. Ward
470 U.S. 869 (1985)

Annotate this Case

U.S. Supreme Court

Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869 (1985)

Metropolitan Life Ins. Co. v. Ward

No. 83-1274

Argued October 31, 1984

Decided March 26, 1985

470 U.S. 869

APPEAL FROM THE SUPREME COURT OF ALABAMA

Syllabus

An Alabama statute imposes a substantially lower gross premiums tax rate on domestic insurance companies than on out-of-state (foreign) insurance companies. The statute permits foreign companies to reduce but not to eliminate the differential by investing in Alabama assets and securities. Appellant foreign insurance companies filed claims for refunds of taxes paid, contending that the statute, as applied to them, violated the Equal Protection Clause. The State Commissioner of Insurance denied the claims. On consolidated appeals to a county Circuit Court, in which several domestic companies intervened, the statute was upheld on summary judgment. The court ruled that the statute did not violate the Equal Protection Clause because, in addition to raising revenue, it served the legitimate state purposes of encouraging the formation of new insurance companies in Alabama and capital investment by foreign insurance companies in Alabama assets and securities, and that the distinction between foreign and domestic companies was rationally related to those purposes. The Alabama Court of Civil Appeals affirmed the finding as to legitimate state purposes, but remanded for an evidentiary hearing on the issue of rational relationship. On certiorari to the Alabama Supreme Court, appellants waived their rights to such an evidentiary hearing, and the court entered judgment for the State and the intervenors on appellants' equal protection challenge to the statute.

Held: The Alabama domestic preference tax statute violates the Equal Protection Clause as applied to appellants. Pp. 470 U. S. 874-883.

(a) Under the circumstances of this case, promotion of domestic business by discriminating against nonresidents is not a legitimate state purpose. Western & Southern Life Ins. Co. v. State Board of Equalization of California,451 U. S. 648, distinguished. Alabama's aim to promote domestic industry is purely and completely discriminatory, designed only to favor domestic industry within the State, no matter what the cost to foreign corporations also seeking to do business there. Alabama's purpose constitutes the very sort of parochial discrimination that the Equal Protection Clause was intended to prevent. A State may not constitutionally favor its own residents by taxing foreign corporations at a higher rate solely because of their residence. Although the McCarran-Ferguson Act exempts the insurance industry from Commerce Clause

Page 470 U. S. 870

restrictions, it does not purport to limit the applicability of the Equal Protection Clause. Equal protection restraints are applicable even though the effect of the discrimination is similar to the type of burden with which the Commerce Clause also would be concerned. Pp. 470 U. S. 876-882.

(b) Nor is the encouragement of the investment in Alabama assets and securities a legitimate state purpose. Domestic insurers remain entitled to the more favorable tax rate regardless of whether they invest in Alabama assets. Moreover, since the investment incentive provision does not enable foreign insurers to eliminate the statute's discriminatory effect, it does not cure, but reaffirms, the impermissible classification based solely on residence. Pp. 470 U. S. 882-883.

447 So.2d 142, reversed and remanded.

POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, BLACKMUN, and STEVENS, JJ., joined. O'CONNOR, J., filed a dissenting opinion, in which BRENNAN, MARSHALL, and REHNQUIST, JJ., joined, post p. 470 U. S. 883.

Page 470 U. S. 871

JUSTICE POWELL delivered the opinion of the Court.

This case presents the question whether Alabama's domestic preference tax statute, Ala.Code §§ 27-4-4 and 27-4-5 (1975), that taxes out-of-state insurance companies at a higher rate than domestic insurance companies, violates the Equal Protection Clause.

I

Since 1955, [Footnote 1] the State of Alabama has granted a preference to its domestic insurance companies by imposing a substantially lower gross premiums tax rate on them than on out-of-state (foreign) companies. [Footnote 2] Under the current statutory provisions, foreign life insurance companies pay a tax on their gross premiums received from business conducted in Alabama at a rate of three percent, and foreign companies selling other types of insurance pay at a rate of four percent. Ala.Code § 27-4-4(a) (1975). All domestic insurance companies, in contrast, pay at a rate of only one percent on all types of insurance premiums. § 27-4-5(a). [Footnote 3] As a result, a foreign

Page 470 U. S. 872

insurance company doing the same type and volume of business in Alabama as a domestic company generally will pay three to four times as much in gross premiums taxes as its domestic competitor.

Alabama's domestic preference tax statute does provide that foreign companies may reduce the differential in gross premiums taxes by investing prescribed percentages of their worldwide assets in specified Alabama assets and securities. § 27-4-4(b). By investing 10 percent or more of its total assets in Alabama investments, for example, a foreign life insurer may reduce its gross premiums tax rate from 3 to 2 percent. Similarly, a foreign property and casualty insurer may reduce its tax rate from four to three percent. Smaller tax reductions are available based on investment of smaller percentages of a company's assets. Ibid. Regardless of how much of its total assets a foreign company places in Alabama investments, it can never reduce its gross premiums tax rate to the same level paid by comparable domestic companies. These are entitled to the one-percent tax rate even if they have no investments in the State. Thus, the investment provision permits foreign insurance companies to reduce, but never to eliminate, the discrimination inherent in the domestic preference tax statute.

Appellants, a group of insurance companies incorporated outside of the State of Alabama, filed claims with the Alabama Department of Insurance in 1981, contending that the domestic preference tax statute, as applied to them, violated the Equal Protection Clause. They sought refunds of taxes paid for the tax years 1977 through 1980. The Commissioner of Insurance denied all of their claims on July 8, 1981.

Page 470 U. S. 873

Appellants appealed to the Circuit Court for Montgomery County, seeking a judgment declaring the statute to be unconstitutional and requiring the Commissioner to make the appropriate refunds. Several domestic companies intervened, and the court consolidated all of the appeals, selecting two claims as lead cases [Footnote 4] to be tried and binding on all claimants. On cross-motions for summary judgment, the court ruled on May 17, 1982, that the statute was constitutional. Relying on this Court's opinion in Western & Southern Life Ins. Co. v. State Board of Equalization of California,451 U. S. 648 (1981), the court ruled that the Alabama statute did not violate the Equal Protection Clause because it served

"at least two purposes, in addition to raising revenue: (1) encouraging the formation of new insurance companies in Alabama, and (2) encouraging capital investment by foreign insurance companies in the Alabama assets and governmental securities set forth in the statute."

App. to Juris. Statement 20a-21a. The court also found that the distinction the statute created between foreign and domestic companies was rationally related to those two purposes, and that the Alabama Legislature reasonably could have believed that the classification would have promoted those purposes. Id. at 21a.

After their motion for a new trial was denied, appellants appealed to the Court of Civil Appeals. It affirmed the Circuit Court's rulings as to the existence of the two legitimate state purposes, but remanded for an evidentiary hearing on the issue of rational relationship, concluding that summary judgment was inappropriate on that question because the evidence was in conflict. 437 So.2d 535 (1983). Appellants petitioned the Supreme Court of Alabama for certiorari on the affirmance of the legitimate state purpose issue, and the State and the intervenors petitioned for review of

Page 470 U. S. 874

the remand order. Appellants then waived their right to an evidentiary hearing on the issue whether the statute's classification bore a rational relationship to the two purposes found by the Circuit Court to be legitimate, and they requested a final determination of the legal issues with respect to their equal protection challenge to the statute. The Supreme Court denied certiorari on all claims. Appellants again waived their rights to an evidentiary hearing on the rational relationship issue and filed a joint motion with the other parties seeking rehearing and entry of a final judgment. The motion was granted, and judgment was entered for the State and the intervenors. 447 So.2d 142 (1983). This appeal followed, and we noted probable jurisdiction. 466 U.S. 935 (1984). We now reverse.

III

Prior to our decision in Western & Southern Life Ins. Co. v. State Board of Equalization of California, supra, the jurisprudence of the applicability of the Equal Protection Clause to discriminatory tax statutes had a somewhat checkered history. Lincoln National Life Ins. Co. v. Read,325 U. S. 673 (1945), held that so-called "privilege" taxes, required to be paid by a foreign corporation before it would be permitted to do business within a State, were immune from equal protection challenge. That case stood in stark contrast, however, to the Court's prior decisions in Southern R. Co. v. Greene,216 U. S. 400 (1910), and Hanover Fire Ins. Co. v. Harding,272 U. S. 494 (1926), as well as to later decisions, in which the Court had recognized that the Equal Protection Clause placed limits on other forms of discriminatory taxation imposed on out-of-state corporations solely because of their residence. See, e.g., WHYY, Inc. v. Glassboro,393 U. S. 117 (1968); Allied Stores of Ohio, Inc. v. Bowers,358 U. S. 522 (1959); Wheeling Steel Corp. v. Glander,337 U. S. 562 (1949).

In Western & Southern, supra, we reviewed all of these cases for the purpose of deciding whether to permit an equal

Page 470 U. S. 875

protection challenge to a California statute imposing a retaliatory tax on foreign insurance companies doing business within the State, when the home States of those companies imposed a similar tax on California insurers entering their borders. We concluded that Lincoln was no more than "a surprising throwback" to the days before enactment of the Fourteenth Amendment and in which incorporation of a domestic corporation or entry of a foreign one had been granted only as a matter of privilege by the State in its unfettered discretion. 451 U.S. at 451 U. S. 665. We therefore rejected the longstanding but "anachronis[tic]" rule of Lincoln, and explicitly held that the Equal Protection Clause imposes limits upon a State's power to condition the right of a foreign corporation to do business within its borders. 451 U.S. at 451 U. S. 667. We held that

"[w]e consider it now established that, whatever the extent of a State's authority to exclude foreign corporations from doing business within its boundaries, that authority does not justify imposition of more onerous taxes or other burdens on foreign corporations than those imposed on domestic corporations, unless the discrimination between foreign and domestic corporations bears a rational relation to a legitimate state purpose."

Id. at 451 U. S. 667-668.

Because appellants waived their right to an evidentiary hearing on the issue whether the classification in the Alabama domestic preference tax statute bears a rational relation to the two purposes upheld by the Circuit Court, the only question before us is whether those purposes are legitimate. [Footnote 5]

Page 470 U. S. 876

A

(1)

The first of the purposes found by the trial court to be a legitimate reason for the statute's classification between foreign and domestic corporations is that it encourages the formation of new domestic insurance companies in Alabama. The State, agreeing with the Court of Civil Appeals, contends that this Court has long held that the promotion of domestic industry, in and of itself, is a legitimate state purpose that will survive equal protection scrutiny. In so contending, it relies on a series of cases, including Western & Southern, that are said to have upheld discriminatory taxes. See Bacchus Imports, Ltd. v. Dias,468 U. S. 263 (1984); Pike v. Bruce Church, Inc.,397 U. S. 137 (1970); Allied Stores of Ohio, Inc. v. Bowers, supra; Parker v. Brown,317 U. S. 341 (1943); Carmichael v. Southern Coal & Coke Co.,301 U. S. 495 (1937); Board of Education v. Illinois,203 U. S. 553 (1906).

The cases cited lend little or no support to the State's contention. In Western & Southern, the case principally relied upon, we did not hold as a general rule that promotion of domestic industry is a legitimate state purpose under equal protection analysis. [Footnote 6] Rather, we held that California's purpose

Page 470 U. S. 877

in enacting the retaliatory tax -- to promote the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes -- was a legitimate one. 451 U.S. at 451 U. S. 668. In contrast, Alabama asks us to approve its purpose of promoting the business of its domestic insurers in Alabama by penalizing foreign insurers who also want to do business in the State. Alabama has made no attempt, as California did, to influence the policies of

Page 470 U. S. 878

other States in order to enhance its domestic companies' ability to operate interstate; rather, it has erected barriers to foreign companies who wish to do interstate business in order to improve its domestic insurers' ability to compete at home.

The crucial distinction between the two cases lies in the fact that Alabama's aim to promote domestic industry is purely and completely discriminatory, designed only to favor domestic industry within the State, no matter what the cost to foreign corporations also seeking to do business there. Alabama's purpose, contrary to California's, constitutes the very sort of parochial discrimination that the Equal Protection Clause was intended to prevent. As JUSTICE BRENNAN, joined by Justice Harlan, observed in his concurrence in Allied Stores of Ohio, Inc. v. Bowers,358 U. S. 522 (1959), this Court always has held that the Equal Protection Clause forbids a State to discriminate in favor of its own residents solely by burdening "the residents of other state members of our federation." Id. at 358 U. S. 533. Unlike the retaliatory tax involved in Western & Southern, which only burdens residents of a State that imposes its own discriminatory tax on outsiders, the domestic preference tax gives the "home team" an advantage by burdening all foreign corporations seeking to do business within the State, no matter what they or their States do.

The validity of the view that a State may not constitutionally favor its own residents by taxing foreign corporations at a higher rate solely because of their residence is confirmed by a long line of this Court's cases so holding. WHYY, Inc. v. Glassboro, 393 U.S. at 393 U. S. 119-120; Wheeling Steel Corp. v. Glander, 337 U.S. at 337 U. S. 571; Hanover Fire Ins. Co. v. Harding, 272 U.S. at 272 U. S. 511; Southern R. Co. v. Greene, 216 U.S. at 216 U. S. 417. See Reserve Life Ins. Co. v. Bowers,380 U. S. 258 (1965) (per curiam). As the Court stated in Hanover Fire Ins. Co. with respect to general tax burdens on business, "the foreign corporation stands equal, and is to be classified with domestic corporations of the same kind."

Page 470 U. S. 879

272 U.S. at 272 U. S. 511. In all of these cases, the discriminatory tax was imposed by the State on foreign corporations doing business within the State solely because of their residence, presumably to promote domestic industry within the State. [Footnote 7] In relying on these cases and rejecting Lincoln in Western & Southern, we reaffirmed the continuing viability of the Equal Protection Clause as a means of challenging a statute that seeks to benefit domestic industry within the State only by grossly discriminating against foreign competitors.

The State contends that Allied Stores of Ohio, Inc. v. Bowers, supra, shows that this principle has not always held true. In that case, a domestic merchandiser challenged on equal protection grounds an Ohio statute that exempted foreign corporations from a tax on the value of merchandise held for storage within the State. The Court upheld the tax, finding that the purpose of encouraging foreign companies to build warehouses within Ohio was a legitimate state purpose. The State contends that this case shows that promotion of domestic business is a legitimate state purpose under equal protection analysis.

We disagree with the State's interpretation of Allied Stores, and find that the case is not inconsistent with the other cases on which we rely. We agree with the holding of Allied Stores that a State's goal of bringing in new business is legitimate, and often admirable. Allied Stores does not, however, hold that promotion of domestic business by discriminating against foreign corporations is legitimate. The case involves instead a statute that encourages nonresidents -- who are not competitors of residents -- to build warehouses within the State. The discriminatory tax involved did not favor residents by burdening outsiders; rather, it granted the

Page 470 U. S. 880

nonresident businesses an exemption that residents did not share. Since the foreign and domestic companies involved were not competing to provide warehousing services, granting the former an exemption did not even directly affect adversely the domestic companies subject to the tax. On its facts, then, Allied Stores is not inconsistent with our holding here that promotion of domestic business within a State, by discriminating against foreign corporations that wish to compete by doing business there, is not a legitimate state purpose. See 358 U.S. at 358 U. S. 532-533 (BRENNAN, J., concurring).

(2)

The State argues nonetheless that it is impermissible to view a discriminatory tax such as the one at issue here as violative of the Equal Protection Clause. This approach, it contends, amounts to no more than "Commerce Clause rhetoric in equal protection clothing." Brief for Appellee Ward 22. The State maintains that, because Congress, in enacting the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, intended to authorize States to impose taxes that burden interstate commerce in the insurance field, the tax at issue here must stand. Our concerns are much more fundamental than as characterized by the State. Although the McCarran-Ferguson Act exempts the insurance industry from Commerce Clause restrictions, it does not purport to limit in any way the applicability of the Equal Protection Clause. As noted above, our opinion in Western & Southern expressly reaffirmed the viability of equal protection restraints on discriminatory taxes in the insurance context. [Footnote 8]

Page 470 U. S. 881

Moreover, the State's view ignores the differences between Commerce Clause and equal protection analysis, and the consequent different purposes those two constitutional provisions serve. Under Commerce Clause analysis, the State's interest, if legitimate, is weighed against the burden the state law would impose on interstate commerce. In the equal protection context, however, if the State's purpose is found to be legitimate, the state law stands as long as the burden it imposes is found to be rationally related to that purpose, a relationship that is not difficult to establish. See Western & Southern, 451 U.S. at 451 U. S. 674 (if purpose is legitimate, equal protection challenge may not prevail so long as the question of rational relationship is "at least debatable'" (quoting United States v. Carolene Products Co.,304 U. S. 144, 304 U. S. 154 (1938))).

The two constitutional provisions perform different functions in the analysis of the permissible scope of a State's power -- one protects interstate commerce, and the other protects persons [Footnote 9] from unconstitutional discrimination by the States. See Bethlehem Motors Corp. v. Flynt,256 U. S. 421, 256 U. S. 423-424 (1921). The effect of the statute at issue here is to place a discriminatory tax burden on foreign insurers who desire to do business within the State, thereby also incidentally placing a burden on interstate commerce. Equal protection restraints are applicable even though the effect of the discrimination in this case is similar to the type of burden with which the Commerce Clause also would be concerned. We reaffirmed the importance of the Equal Protection Clause in the insurance context in Western & Southern, and see no reason now for reassessing that view.

Page 470 U. S. 882

In whatever light the State's position is cast, acceptance of its contention that promotion of domestic industry is always a legitimate state purpose under equal protection analysis would eviscerate the Equal Protection Clause in this context. A State's natural inclination frequently would be to prefer domestic business over foreign. If we accept the State's view here, then any discriminatory tax would be valid if the State could show it reasonably was intended to benefit domestic business. [Footnote 10] A discriminatory tax would stand or fall depending primarily on how a State framed its purpose -- as benefiting one group or as harming another. This is a distinction without a difference, and one that we rejected last Term in an analogous context arising under the Commerce Clause. Bacchus Imports, Ltd. v. Dias, 468 U.S. at 468 U. S. 273. Seen 6, supra. We hold that, under the circumstances of this case, promotion of domestic business by discriminating against nonresident competitors is not a legitimate state purpose.

B

The second purpose found by the courts below to be legitimate was the encouragement of capital investment in the Alabama assets and governmental securities specified in the statute. We do not agree that this is a legitimate state purpose when furthered by discrimination. Domestic insurers remain entitled to the more favorable rate of tax regardless of whether they invest in Alabama assets. Moreover, the investment incentive provision of the Alabama statute does not enable foreign insurance companies to eliminate the discriminatory effect of the statute. No matter how much of

Page 470 U. S. 883

their assets they invest in Alabama, foreign insurance companies are still required to pay a higher gross premiums tax than domestic companies. The State's investment incentive provision therefore does not cure, but reaffirms, the statute's impermissible classification based solely on residence. We hold that encouraging investment in Alabama assets and securities in this plainly discriminatory manner serves no legitimate state purpose.

IV

We conclude that neither of the two purposes furthered by the Alabama domestic preference tax statute and addressed by the Circuit Court for Montgomery County, see supra at 470 U. S. 873, is legitimate under the Equal Protection Clause to justify the imposition of the discriminatory tax at issue here. The judgment of the Alabama Supreme Court accordingly is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.

It is so ordered.

[Footnote 1]

The origins of Alabama's domestic preference tax statute date back to 1849, when the first tax on premiums earned by insurance companies doing business in the State was limited to companies not chartered by the State. Act No. 1, 1849 Ala. Acts 5. A domestic preference tax was imposed on and off throughout the years until 1945, when the State restored equality in taxation of insurance companies in response to this Court's decision in United States v. South-Eastern Underwriters Assn.,322 U. S. 533 (1944). Act No. 156, 1945 Ala. Acts 196-197. In 1955, the tax was reinstated, Act No. 77, 1955 Ala. Acts 193 (2d Spec. Sess.), and with minor amendments, has remained in effect until the present.

[Footnote 2]

For domestic preference tax purposes, Alabama defines a domestic insurer as a company that both is incorporated in Alabama and has its principal office and chief place of business within the State. Ala.Code § 27-4-1(3) (1975). A corporation that does not meet both of these criteria is characterized as a foreign insurer. § 27-4-1(2).

[Footnote 3]

There are two exceptions to these general rules concerning the rates of taxation of insurance companies. For annuities, the tax rate is one percent for both foreign and domestic insurers, Ala.Code § 27-4-4(a) (1975), and for wet marine and transportation insurance, the rate is three-quarters of one percent for both foreign and domestic insurance companies, § 27-4-6(a).

[Footnote 4]

Metropolitan Life Insurance Co., a New York corporation, was chosen to represent the life insurance claimants, and Prudential Property and Casualty Co., a New Jersey corporation, was chosen as representative of the nonlife claimants. See App. 314-315.

[Footnote 5]

The State and the intervenors advanced some 15 additional purposes in support of the Alabama statute. As neither the Circuit Court nor the Court of Civil Appeals ruled on the legitimacy of those purposes, that question is not before us, and we express no view as to it. On remand, the State will be free to advance again its arguments relating to the legitimacy of those purposes.

As the dissent finds our failure to resolve whether Alabama may continue to collect its tax "baffling," post at 470 U. S. 887, we reemphasize the procedural posture of the case: it arose on a motion for summary judgment. The Court of Civil Appeals upheld the Circuit Court's ruling that the two purposes identified by it were legitimate, but the appellate court remanded on the issue of rational relationship as to those purposes because it found the evidence in conflict. In order to obtain an expedited ruling, appellants waived their right to an evidentiary hearing only as to the purposes "which the lower courts have determined to be legitimate." 447 So.2d 142, 143 (Ala.1983). Thus, for this Court to resolve whether Alabama may continue to collect the tax, it would have to decide de novo whether any of the other purposes was legitimate, and also whether the statute's classification bore a rational relationship to any of these purposes -- all this, on a record that the Court of Civil Appeals deemed inadequate.

[Footnote 6]

We find the other cases on which the State relies also to be inapposite to this inquiry. Bacchus Imports, Pike, and Parker discussed whether promotion of local industry is a valid state purpose under the Commerce Clause. The Commerce Clause, unlike the Equal Protection Clause, is integrally concerned with whether a state purpose implicates local or national interests. The Equal Protection Clause, in contrast, is concerned with whether a state purpose is impermissibly discriminatory; whether the discrimination involves local or other interests is not central to the inquiry to be made. Thus, the fact that promotion of local industry is a legitimate state interest in the Commerce Clause context says nothing about its validity under equal protection analysis. See infra at 470 U. S. 880-881.

Moreover, neither Bacchus nor Pike ruled that a State's ability to promote domestic industry was unlimited, even under the Commerce Clause. Thus, in Bacchus, although we observed as a general matter that "a State may enact laws pursuant to its police powers that have the purpose and effect of encouraging domestic industry," 468 U.S. at 468 U. S. 271, we held that, in so doing, a State may not constitutionally impose a discriminatory burden upon the business of other States, merely to protect and promote local business, id. at 468 U. S. 272-273. Accord, Armco Inc. v. Hardesty,467 U. S. 638, 467 U. S. 642 (1984). Likewise, in Pike, the Court held that the state statute promoting a legitimate local interest must "regulat[e] evenhandedly." 397 U.S. at 397 U. S. 142.

Other cases cited by the State are simply irrelevant to the legitimacy of promoting local business at all. Carmichael relates primarily to the validity of a state unemployment compensation scheme, and Board of Education deals with the State's ability to regulate matters relating to probate. Bowers is the only one of the State's cases that involves the validity under the Equal Protection Clause of a tax that discriminates on the basis of residence of domestic versus foreign corporations. That case does little, however, to support the State's contention that promotion of domestic business is a legitimate state purpose. It was concerned with encouraging nonresidents -- who are not competitors of residents -- to build warehouses within the State. See infra at 470 U. S. 879-880.

[Footnote 7]

Although the promotion of domestic business was not a purpose advanced by the States in support of their taxes in these cases, such promotion is logically the primary reason for enacting discriminatory taxes such as those at issue there.

[Footnote 8]

In fact, as we noted in Western & Southern, the legislative history of the McCarran-Ferguson Act reveals that the Act was Congress' response only to United States v. South-Eastern Underwriters Assn.,322 U. S. 533 (1944), and that Congress did not intend thereby to give the States any power to tax or regulate the insurance industry other than what they had previously possessed. Thus Congress expressly left undisturbed this Court's decisions holding that the Equal Protection Clause places limits on a State's ability to tax out-of-state corporations. See 451 U.S. at 451 U. S. 655, n. 6.

[Footnote 9]

It is well established that a corporation is a "person" within the meaning of the Fourteenth Amendment. E.g., Western & Southern, 451 U.S. at 451 U. S. 660, n. 12.

[Footnote 10]

Indeed, under the State's analysis, any discrimination subject to the rational relation level of scrutiny could be justified simply on the ground that it favored one group at the expense of another. This case does not involve or question, as the dissent suggests, post at 470 U. S. 900-901, the broad authority of a State to promote and regulate its own economy. We hold only that such regulation may not be accomplished by imposing discriminatorily higher taxes on nonresident corporations solely because they are nonresidents.

JUSTICE O'CONNOR, with whom JUSTICE BRENNAN, JUSTICE MARSHALL, and JUSTICE REHNQUIST join, dissenting.

This case presents a simple question: is it legitimate for a State to use its taxing power to promote a domestic insurance industry and to encourage capital investment within its borders? In a holding that can only be characterized as astonishing, the Court determines that these purposes are illegitimate. This holding is unsupported by precedent and subtly distorts the constitutional balance, threatening the freedom of both state and federal legislative bodies to fashion appropriate classifications in economic legislation. Because I disagree with both the Court's method of analysis and its conclusion, I respectfully dissent.

I

Alabama's legislature has chosen to impose a higher tax on out-of-state insurance companies and insurance companies incorporated in Alabama that do not maintain their principal

Page 470 U. S. 884

place of business or invest assets within the State. Ala.Code § 27-4-4 et seq. (1975). This tax seeks to promote both a domestic insurance industry and capital investment in Alabama. App. to Juris. Statement 20a-21a. Metropolitan Life Insurance Company, joined by many other out-of-state insurers, alleges that this discrimination violates its rights under the Equal Protection Clause of the Fourteenth Amendment, which provides that a State shall not "deny to any person within its jurisdiction the equal protection of the laws." Appellants rely on the Equal Protection Clause because, as corporations, they are not "citizens" protected by the Privileges and Immunities Clauses of the Constitution. Hemphill v. Orloff,277 U. S. 537, 277 U. S. 548-550 (1928). Similarly, they cannot claim Commerce Clause protection because Congress, in the McCarran-Ferguson Act, 59 Stat. 33, as amended, 15 U.S.C. § 1011 et seq., explicitly suspended Commerce Clause restraints on state taxation of insurance, and placed insurance regulation firmly within the purview of the several States. Western & Southern Life Ins. Co. v. State Board of Equalization of California,451 U. S. 648, 451 U. S. 655 (1981).

Our precedents impose a heavy burden on those who challenge local economic regulation solely on Equal Protection Clause grounds. In this context, our long-established jurisprudence requires us to defer to a legislature's judgment if the classification is rationally related to a legitimate state purpose. Yet the Court evades this careful framework for analysis, melding the proper two-step inquiry regarding the State's purpose and the classification's relationship to that purpose into a single unarticulated judgment. This tactic enables the Court to characterize state goals that have been legitimated by Congress itself as improper solely because it disagrees with the concededly rational means of differential taxation selected by the legislature. This unorthodox approach leads to further error. The Court gives only the most cursory attention to the factual and legal bases supporting the State's purposes, and ignores both precedent

Page 470 U. S. 885

and significant evidence in the record establishing their legitimacy. Most troubling, the Court discovers in the Equal Protection Clause an implied prohibition against classifications whose purpose is to give the "home team" an advantage over interstate competitors even where Congress has authorized such advantages. Ante at 470 U. S. 878.

The Court overlooks the unequivocal language of our prior decisions.

"Unless a classification trammels fundamental personal rights or is drawn upon inherently suspect distinctions such as race, religion, or alienage, our decisions presume the constitutionality of the statutory discriminations, and require only that the classification challenged be rationally related to a legitimate state interest."

New Orleans v. Dukes,427 U. S. 297, 427 U. S. 303 (1976). See, e.g., Lehnhasen v. Lake Shore Auto Parts Co.,410 U. S. 356 (1973). Judicial deference is strongest where a tax classification is alleged to infringe the right to equal protection. "[I]n taxation, even more than in other fields, legislatures possess the greatest freedom in classification." Madden v. Kentucky,309 U. S. 83, 309 U. S. 88 (1940).

"Where the public interest is served, one business may be left untaxed and another taxed, in order to promote the one or to restrict or suppress the other."

Carmichael v. Southern Coal & Coke Co.,301 U. S. 495, 301 U. S. 512 (1937) (citations omitted). As the Court emphatically noted in Allied Stores of Ohio, Inc. v. Bowers,358 U. S. 522, 358 U. S. 528 (1959) (citations omitted):

"[I]t has repeatedly been held, and appears to be entirely settled, that a statute which encourages the location within the State of needed and useful industries by exempting them, though not also others, from its taxes is not arbitrary, and does not violate the Equal Protection Clause of the Fourteenth Amendment. Similarly, it has long been settled that a classification, though discriminatory, is not arbitrary or violative of the Equal Protection Clause of the Fourteenth Amendment if any

Page 470 U. S. 886

state of facts reasonably can be conceived that would sustain it."

See also Western & Southern Life Ins. Co. v. State Board of Equalization of California, supra, at 451 U. S. 674; Minnesota v. Clover Leaf Creamery Co.,449 U. S. 456, 449 U. S. 464 (1981).

Appellants waived their right to an evidentiary hearing and conceded that Alabama's classification was rationally related to its purposes of encouraging the formation of domestic insurance companies and bringing needed services and capital to the State. Thus the only issue in dispute is the legitimacy of these purposes. Yet it is obviously legitimate for a State to seek to promote local business and attract capital investment, and surely those purposes animate a wide range of legislation in all 50 States.

The majority evades the obvious by refusing to acknowledge the factual background bearing on the legitimacy of the State's purpose or to address the many collateral public benefits advanced by Alabama. Instead, the Court dismisses appellees' arguments by merely stating that they were not ruled on by the courts below. Ante at 470 U. S. 875-876, n. 5. In point of fact, the full range of purposes documented before this Court was also argued and documented before the Alabama Circuit Court. See Record, Vols. 6-8. That court found

"at least two purposes, in addition to raising revenue: (1) encouraging the formation of new insurance companies in Alabama, and (2) encouraging capital investment by foreign insurance companies in the Alabama assets and governmental securities set forth in the statute."

App. to Juris. Statement 20a-21a (emphasis added). As appellants concede, these purposes are simply a step in achieving the

"larger set of purposes [whose] premise . . . is that domestic insurance companies, on the whole, benefit the state in ways which foreign companies do not."

Brief for Appellants 31.

In any event, it is settled law that the appellee may assert any argument in support of the judgment in his favor, regardless of whether it was relied upon by the court below.

Page 470 U. S. 887

Dandridge v. Williams,397 U. S. 471, 397 U. S. 475, n. 6 (1970). The Court's failure actually to resolve whether Alabama may continue to collect its tax, see ante at 470 U. S. 882, n. 10, is all the more baffling, since appellants took the exceptional step of conceding the factual issues to assure a speedy resolution of numerous pending lawsuits disruptive of industry stability. See Brief for State of Alaska et al. as Amici Curiae 1-2. Our precedents do not condone such a miserly approach to review of statutes adjusting economic burdens. See, e.g., Allied Stores of Ohio, Inc. v. Bowers, supra, at 358 U. S. 528-529; McGowan v. Maryland,366 U. S. 420, 366 U. S. 425 (1961); United States v. Carolene Products Co.,304 U. S. 144, 304 U. S. 152-153 (1938); Borden's Farm Products Co. v. Baldwin,293 U. S. 194, 293 U. S. 209 (1934). The Court has consistently reviewed the validity of such statutes based on whatever "may reasonably have been the purpose and policy of the State Legislature, in adopting the proviso." Allied Stores of Ohio, Inc. v. Bowers, supra, at 358 U. S. 528-529. It is to that inquiry that I now turn.

Appellees claim that Alabama's insurance tax, in addition to raising revenue and promoting investment, promotes the formation of new domestic insurance companies and enables them to compete with the many large multistate insurers that currently occupy some 75% to 85% of the Alabama insurance market. App. 80. Economic studies submitted by the State document differences between the two classes of insurers that are directly relevant to the wellbeing of Alabama's citizens. See id. at 46-129. Foreign insurers typically concentrate on affluent, high volume, urban markets and offer standardized national policies. In contrast, domestic insurers such as intervenors American Educators Life Insurance Company and Booker T. Washington Life Insurance Company are more likely to serve Alabama's rural areas, and to write low-cost industrial and burial policies not offered by the larger national companies. [Footnote 2/1] Additionally, appellees argue

Page 470 U. S. 888

persuasively that Alabama can more readily regulate domestic insurers and more effectively safeguard their solvency than that of insurers domiciled and having their principal places of business in other States.

Ignoring these policy considerations, the Court insists that Alabama seeks only to benefit local business, a purpose the Court labels invidious. Yet if the classification chosen by the State can be shown actually to promote the public welfare, this is strong evidence of a legitimate state purpose. See Note, Taxing Out-of-State Corporations After Western & Southern: An Equal Protection Analysis, 34 Stan.L.Rev. 877, 896 (1982). In this regard, Justice Frankfurter wisely observed:

"[T]he great divide in the [equal protection] decisions lies in the difference between emphasizing the actualities or the abstractions of legislation."

". . . To recognize marked differences that exist in fact is living law; to disregard practical differences and concentrate on some abstract identities is lifeless logic."

Morey v. Doud,354 U. S. 457, 354 U. S. 472 (1957) (dissenting). A thoughtful look at the "actualities of [this] legislation" compels the conclusion that the State's goals are legitimate by any test.

II

The policy of favoring local concerns in state regulation and taxation of insurance, which the majority condemns as illegitimate, is not merely a recent invention of the States. The States initiated regulation of the business of insurance as early as 1851. See Report of the Comptroller General,

Page 470 U. S. 889

Issues and Needed Improvements in State Regulation of the Insurance Business, GAO Report B-192813, p. 5 (Oct. 9, 1979) (GAO Report). In 1944, however, this Court overruled a long line of cases holding that the business of insurance was an intrastate activity beyond the scope of the Commerce Clause. United States v. South-Eastern Underwriters Assn.,322 U. S. 533.

"The decision provoked widespread concern that the States would no longer be able to engage in taxation and effective regulation of the insurance industry. Congress moved quickly, enacting the McCarran-Ferguson Act within a year of the decision in South-Eastern Underwriters."

St. Paul Fire & Marine Insurance Co. v. Barry,438 U. S. 531, 438 U. S. 539 (1978). See H.R.Rep. No. 143, 79th Cong., 1st Sess., 2 (1945); 91 Cong.Rec. 479-480 (1945) (remarks of Sen. Ferguson); id. at 487 (remarks of Sen. Ellender).

The drafters of the Act were sensitive to the same concerns Alabama now vainly seeks to bring to this Court's attention: the greater responsiveness of local insurance companies to local conditions, the different insurance needs of rural and industrial States, the special advantages and constraints of state-by-state regulation, and the importance of insurance license fees and taxes as a major source of state revenues. See, e.g., Hearings on S. 1362 before the Senate Subcommittee on the Judiciary, 78th Cong., 1st Sess., 3, 10, 16-17 (1943) (letter of Gov. Sharpe of South Dakota stressing role of domestic insurers that provide "poor man" and rural policies adapted to farming concerns); 90 Cong.Rec. 6564 (1944) (remarks of Rep. Vorhis).

"As this Court observed shortly afterward,"

"[o]bviously, Congress' purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance."

"Prudential Insurance Co. v. Benjamin,328 U. S. 408, 328 U. S. 429 (1946)."

St. Paul Fire & Marine Insurance Co. v. Barry, supra, at 438 U. S. 539.

The majority opinion correctly notes that Congress did not intend the McCarran-Ferguson Act to give the States

Page 470 U. S. 890

any power to tax or regulate the insurance industry other than they already possessed. But the legislative history cited by the majority, ante at 470 U. S. 879, n. 7, relates not to differential taxation, but to decisions of this Court that had invalidated state taxes on contracts of insurance entered into outside the State's jurisdiction. See H.R.Rep. No. 143, 79th Cong., 1st Sess., 3 (1945). The Court fails to mention that, at the time the Act was under consideration, the taxing schemes of Alabama, Arizona, Arkansas, Illinois, Kansas, Kentucky, Maine, Michigan, Mississippi, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Washington, and Wisconsin all incorporated tax differentials favoring domestic insurers. See App. 377-379.

Any doubt that Congress' intent encompassed taxes that discriminate in favor of local insurers was dispelled in Prudential Insurance Co. v. Benjamin,328 U. S. 408 (1946). Cf. Note, Congressional Consent to Discriminatory State Legislation, 45 Colum.L.Rev. 927 (1945) (discussing the issues of constitutional power posed by the Act). There, a foreign insurer challenged a tax on annual gross premiums imposed on foreign, but not domestic, insurers as a condition for renewal of its license to do business. Congress, the foreign insurer argued, was powerless to sanction the tax at issue because "the commerce clause, by its own force,' forbids discriminatory state taxation." 328 U.S. at 328 U. S. 426. A unanimous Court rejected the argument that exacting a 3% gross premium tax from foreign insurers was invalid as "somehow technically of an inherently discriminatory character." Id. at 328 U. S. 432. The Court concluded that the McCarran-Ferguson Act's effect was "clearly to sustain the exaction and that this can be done without violating any constitutional provision." Id. at 328 U. S. 427 (emphasis added).

Benjamin expressly noted that nothing in the Equal Protection Clause forbade the State to enact a law such as the tax at issue. Id. at 328 U. S. 438, and n. 50. In this regard, the Court relied in part on Hanover Fire Ins. Co. v. Harding,

Page 470 U. S. 891

272 U. S. 494 (1926), a decision that explicitly recognized that differential taxation of revenues of foreign corporations may not be arbitrary or without reasonable basis. See Western & Southern Life Ins. Co. v. State Board of Equalization of California, 451 U.S. at 451 U. S. 664, n. 17. The Commerce Clause, Benjamin emphasized, is not a "one-way street," but encompasses congressional power "to discriminate against interstate commerce and in favor of local trade," "subject only to the restrictions placed upon its authority by other constitutional provisions." 328 U.S. at 328 U. S. 434. Where the States and Congress have acted in concert to effect a policy favoring local concerns, their action must be upheld unless it unequivocally exceeds

"some explicit and compelling limitation imposed by a constitutional provision or provisions designed and intended to outlaw the action taken entirely from our constitutional framework."

Id. at 328 U. S. 435-436.

Our more recent decision in Western & Southern in no way undermines the force of the analysis in Benjamin.Western & Southern confirms that differential premium taxes are not immune from review as "privilege" taxes, but it also teaches that the Constitution requires only that discrimination between domestic and foreign corporations bear a rational relationship to a legitimate state purpose. Benjamin clearly recognized that differentially taxing foreign insurers to promote a local insurance industry was a legitimate state purpose completely consonant with Congress' purpose in the McCarran-Ferguson Act.

The contemporary realities of insurance regulation and taxation continue to justify a uniquely local perspective. Insurance regulation and taxation must serve local social policies including assuring the solvency and reliability of companies doing business in the State and providing special protection for those who might be denied insurance in a free market, such as the urban poor, small businesses, and family farms. GAO Report 10-13; State Insurance Regulation, Hearing before the Subcommittee on Antitrust, Monopoly

Page 470 U. S. 892

and Business Rights of the Senate Committee on the Judiciary, 96th Cong., 1st Sess., 19-21 (1979) (hereinafter Insurance Regulation). Currently, at least 28 of the 50 States employ a combination of investment incentives and differential premium taxes favoring domestic insurers to encourage local investment of policyholders' premiums and to partially shelter smaller domestic insurers from competition with the large multistate companies. App. 66.

State insurance commissions vary widely in manpower and expertise. GAO Report 14. In practice, the State of incorporation exercises primary oversight of the solvency of its insurers. Id. at 36-38. See generally Dunne, Risk, Reality, and Reason in Financial Services Deregulation: A State Legislative Perspective, 2 J.Ins.Reg. 342 (1984) (prepared by the Conference of Insurance Legislators). See, e.g., Ala.Code § 27-2-21 (Supp.1984); Ill.Rev.Stat., ch. 73, 745 (1983) (power to examine books of domestic insurers); Ala.Code § 27-32-1 et seq. (1975); Ill.Rev.Stat., ch. 73,

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