Cities have leeway in forgiving tax payments: Supreme Court

WASHINGTON (Reuters) - The Supreme Court ruled on Monday that a city did not violate the Constitution when it forgave some future property tax obligations for certain taxpayers, but refused to refund payments made by other taxpayers for the same assessments.

In a case that impacts tax policy, taxpayers and local governments, the high court ruled by a 6-3 vote that authorities in Indianapolis had a rational basis for making the distinction and had not violated the Constitution's Equal Protection Clause in their handling of a special sewer tax levied in 2004.

Property owners who paid the $9,278 tax up front were upset when the Indianapolis Board of Public Works in 2005 decided to forgive the obligations of those who chose to pay in monthly installments, with interest, over 10, 15 or 30 years.

Under a new public improvements financing system adopted by the city, which cited high administrative costs of the previous policy, homeowners now pay a flat fee of $2,500 to connect to the sewer line.

The property owners who had paid in full sued the city when it refused their demands for a refund, noting that those on the 30-year installment plan had paid only $309.

A trial court and the Indiana Court of Appeals ruled that their constitutional right to equal protection had been violated, but the Indiana Supreme Court disagreed and ruled the city had acted properly in seeking to reduce administrative costs and preserve its limited resources.

On Monday, the U.S. Supreme Court upheld that decision. Writing for the majority, Justice Stephen Breyer said it was rational for the city to draw a line that avoided complex, expensive burdens, and such administrative concerns ordinarily could justify such a tax-related distinction.

He said the distinction between past payments and future obligations was well known in the law.

Breyer said the city's tax classification did not involve a fundamental constitutional right, describing the subject matter as local, economic, social and commercial. No one has claimed the city discriminated against out-of-state commerce or new residents, he said.

Chief Justice John Roberts and Justices Antonin Scalia and Samuel Alito dissented.

The Supreme Court case is Armour v. City of Indianapolis, No. 11-161.

(Reporting By James Vicini; Editing by Paul Simao)