261 Kan. 239
(930 P2d 1)
No. 75,205
ERIC PEDEN and SHARON L. SMITH, for themselves and all others similarly situated, Appellees, v. STATE OF KANSAS, KANSAS DEPARTMENT OF REVENUE, NANCY PARRISH, Secretary of Revenue of the State of Kansas, and ALISA DOTSON, Director of Taxation of the State of Kansas, Appellants.
SYLLABUS BY THE COURT
1. Determining whether a statute violates equal protection is a question of law. When determining a question of law, this court may exercise an unlimited de novo standard of review.
2. A statute is presumed constitutional and all doubts must be resolved in favor of its validity. If there is any reasonable way to construe a statute as constitutionally valid, the court must do so. A statute must clearly violate the constitution before it may be struck down. This court not only has the authority, but also the duty, to construe a statute in such a manner that it is constitutional if the same can be done within the apparent intent of the legislature in passing the statute.
3. Equal protection is implicated when a statute treats "arguably indistinguishable" classes of people differently. Single and married taxpayers are arguably indistinguishable in a legal sense, and the Kansas Income Tax Act treats single and married taxpayers differently in regard to the tax rates applicable to each group. Thus, the Kansas Income Tax Act implicates equal protection.
4.The rational basis standard (sometimes referred to as the reasonable basis test) applies to laws which result in some economic inequality. Under this standard, a law is constitutional, despite some unequal classification of citizens, if the classification bears a reasonable relationship to a valid legislative objective.
5. The reasonable basis test is violated only if the statutory classification rests on grounds wholly irrelevant to the achievement of the State's legitimate objective. The state legislature is presumed to have acted within its constitutional power, even if the statute results in some inequality. Under the reasonable basis test, a statutory discrimination will not be set aside if any state of facts reasonably may be conceived to justify it.
6. A plaintiff asserting the unconstitutionality of a statute under the rational basis standard has the burden to negate every conceivable basis which might support the classification.
7. In taxation, even more than in other fields, legislatures possess the greatest freedom in classification.
8. Under the reasonable basis test, it is unnecessary to ascertain the specific purpose the Kansas Legislature espoused, if any, in establishing the challenged classification. Rather, if any state of facts reasonably may be conceived to justify the alleged statutory discrimination, the statute will not be set aside as a violation of equal protection.
9. Courts are compelled under rational basis review to accept a legislature's generalizations even when there is an imperfect fit between means and ends. A classification does not fail rational basis review because it is not made with mathematical nicety or because in practice it results in some inequality.
10. Although the rational basis standard requires that the discriminatory classification (in this case, the tax rate disparity between single and married taxpayers) be rationally related to valid State interests or goals, the standard does not require that the classification be the perfect solution to achieve such goals.
11. Public policy relating to marriage is to foster and protect it, to make it a permanent and public institution, to encourage married parties to live together, and to prevent separation.
12. A legislative choice is not subject to courtroom factfinding and may be based on rational speculation unsupported by evidence or empirical data.
Appeal from Shawnee district court; MATTHEW J. DOWD, judge. Opinion filed December 20, 1996. Reversed.
Timothy B. Dyk, of Jones, Day, Reavis & Pogue, of Washington, D.C., argued the cause, and Gregory A. Castanias, of the same firm, and Richard Oxandale, general counsel, David A. Prager, III, and Frank Reeb, of the Kansas Department of Revenue, were with him on the briefs for appellants.
Michael E. Waldeck, of Niewald, Waldeck & Brown, P.C., of Kansas City, Missouri, argued the cause, and Angela K. Green, David T. Glynn, and Vincent F. O' Flaherty, of the same firm, of Overland Park, and Eric C. Peden and Steven J. Schleicher, of Schleicher Latz, P.C., of Kansas City, Missouri, were with him on the brief for appellees.
The opinion of the court was delivered by
ABBOTT, J.: The plaintiff challenged the tax rate schedule found in the Kansas Income Tax Act (KITA), K.S.A. 79-3201 et seq., to the extent that tax rates imposed on single taxpayers are higher than the highest tax rate imposed on married taxpayers filing jointly. The Shawnee County District Court found that such tax rates under KITA were an unconstitutional violation of equal protection. The trial court also ruled that it had subject matter jurisdiction to hear the plaintiff's claim for a tax refund, even though the plaintiff had not exhausted all of his administrative remedies to receive a refund. Finally, the trial court certified a plaintiff class of single taxpayers who were subject to tax rates higher than the highest tax rate imposed on married taxpayers filing jointly. The State appeals all three of these rulings to this court.
Plaintiff's narrow challenge is directed only to the Kansas tax rates applied to unmarried taxpayers which exceed the highest income tax rate charged to married individuals filing under the status of "married filing joint." Stated in terms more understandable to the unmarried taxpayers of this state, this appeal does not involve any taxpayer having a taxable income of $20,000 or less, nor does it involve the first $20,000 of taxable income of any unmarried taxpayer having a taxable income in excess of $20,000 under the 1992-1996 tax rate schedules. (Prior to 1992, the tax rate schedules had different rates and tax brackets and had an overall smaller disparity between married and unmarried taxpayers.) Further, the largest current rate disparity at issue in this appeal between unmarried taxpayers and married taxpayers filing jointly is a 1.3% difference in tax rates. The trial judge only held part of KITA unconstitutional--that part which taxes an unmarried person's taxable income at a tax rate in excess of the highest income tax rate applicable to married taxpayers filing a joint return. Currently, the highest rate for a married person filing a joint return is 6.45%, while an unmarried taxpayer is subject to a 7.5% tax rate if the taxpayer earns more than $20,000 in taxable income and is subject to a 7.75% tax rate if the taxpayer earns more than $30,000 in taxable income. If we were to affirm the trial court's holding that KITA tax rates are unconstitutional in part, KITA's savings clauses (K.S.A. 79-3239 and K.S.A. 79-32,108) would leave the remainder of the act intact. Thus, a single taxpayer earning $20,000 or less in taxable income would continue to be taxed at a 4.4% rate, while a married taxpayer filing jointly who earns $30,000 or less would continue to be taxed at a lower rate of 3.5%.
A summary of the Kansas income tax system is helpful in analyzing this case. Under KITA, each taxpayer in Kansas must pay a certain percentage of his or her taxable income in Kansas income tax. A taxpayer's taxable income is determined by calculating the taxpayer's Kansas adjusted gross income (using the federal adjusted gross income as a base) and subtracting Kansas deductions and personal exemptions from the gross income. The percentage of the taxpayer's taxable income that should be paid as income tax is equivalent to the tax rate applicable to the taxpayer. In Kansas, the tax rate applicable to each taxpayer is dependent upon the amount of taxable income the taxpayer earns and whether the taxpayer is married and filing jointly or filing a separate return as a single person.
The Kansas Legislature first created the tax rate disparity subject to challenge in this case in 1988. At that time, the Kansas Legislature made extensive changes to KITA by replacing the then existing eight-bracket tax rate schedule with a two-bracket tax rate schedule. This new 1988 tax rate schedule imposed higher rates on individual, single tax filers than the tax rates imposed on married taxpayers filing jointly. The 1988 tax rates (L. 1988, ch. 381, § 2) provided:
| (1) Married individuals filing joint returns. |
| If the taxable income is: |
The tax is: |
Not over $35,000
Over $35,000 |
4.5% of Kansas taxable income
$1,418 plus 5.3% of excess over $35,000 |
| (2) All other individuals. |
| If the taxable income is: |
The tax is: |
Not over $27,000
Over $27,500 |
4.8% of Kansas taxable income
$1,320 plus 6.1% of excess over $27,500 |
For the tax years 1989, 1990, and 1991, approximately the same disparity in tax rates applied, but lower tax rates were imposed overall (see K.S.A. 79-32,110[a]):
| (1) Married individuals filing joint returns. |
| If the taxable income is: |
The tax is: |
Not over $35,000
Over $35,000 |
3.65% of Kansas taxable income
$1,278 plus 5.15% of excess over $35,000 |
| (2) All other individuals. |
| If the taxable income is: |
The tax is: |
Not over $27,000
Over $27,500 |
4.5% of Kansas taxable income
$1,238 plus 5.95% of excess over $27,500 |
In 1992, the Kansas Legislature revised the tax rate schedule to create three different tax rates, rather than two, thereby widening the tax rate disparity between married taxpayers filing jointly and single taxpayers. The 1992 rate schedule remains unchanged and is used today. See K.S.A. 1995 Supp. 79-32,110(a). It provides:
| (1) Married individuals filing joint returns. |
| If the taxable income is: |
The tax is: |
Not over $30,000
Over $30,000
but not over $60,000
Over $60,000 |
3.5% of Kansas taxable income
$1,050 plus 6.25% of excess over $30,000
$2,925 plus 6.45% of excess over $60,000
|
| (2) All other individuals. |
| If the taxable income is: |
The tax is: |
Not over $20,000
Over $20,000
but not over $30,000
Over $30,000 |
4.4% of Kansas taxable income
$880 plus 7.5% of excess over $20,000
$1,630 plus 7.75% of excess over $30,000
|
On April 14, 1993, Peden filed a petition in the Shawnee County District Court against the State of Kansas, the Kansas Department of Revenue, the Secretary of Revenue of the State of Kansas, Nancy Parrish, and the Director of Taxation of the State of Kansas, Alisa Dotson. (All defendants are hereinafter referred to as the State.) In this action, Peden sought four things. First, Peden requested that the trial court certify a plaintiff class consisting of all single taxpayers in Kansas who paid taxes under the single tax rates which were higher than the highest tax rate imposed on married taxpayers filing jointly. Second, Peden requested that the trial court declare the single tax rates found in K.S.A. 79-32,110(a) unconstitutional as a violation of equal protection under Article 11, § 2 of the Kansas Constitution and under the 14th Amendment to the United States Constitution to the extent that the single tax rates were higher than the highest tax rate imposed on married taxpayers filing jointly. Third, Peden asked the trial court to enjoin the State from collecting taxes from single taxpayers at an unconstitutional rate in excess of the highest rate imposed on married taxpayers filing jointly. Fourth and finally, Peden sought an accounting of all improperly collected income taxes based on the discriminatory tax rates from 1988 to the present and a refund of such taxes paid with interest.
Peden filed a motion specifically asking the trial court to certify this case as a class action and find that Peden was a proper class representative. The trial court ruled that there was no compelling need for class certification in this case because there was "nothing that [could] be accomplished by class certification that [could not] be handled by ordinary litigation procedures." The court denied Peden's motion and refused to certify a plaintiff class.
On June 21, 1993, the State filed a motion to dismiss Peden's tax refund claim for lack of subject matter jurisdiction because Peden had not yet exhausted all of his administrative remedies. On January 5, 1994, the trial court ruled on this motion. The court found that Peden had not yet exhausted his administrative remedies in regard to the refund claim; thus, the court held that it did not have subject matter jurisdiction to hear the refund claim. The court granted the State's motion and dismissed the refund claim for lack of subject matter jurisdiction. As such, only two claims remained in Peden's petition--(1) an individual request that the court declare the disparate tax rates an unconstitutional violation of equal protection and (2) an individual request that the court enjoin the State from collecting future income taxes from Peden at a rate in excess of the highest rate imposed on married taxpayers filing jointly.
Based on these two claims, Peden filed a motion for summary judgment on March 15, 1994. The State also filed a motion for summary judgment on April 25, 1994. In analyzing the constitutionality of the tax rates, the trial court applied the rational basis test--asking whether there was a valid legislative purpose for KITA's different treatment of similarly situated taxpayers and whether the disparate tax rates were rationally related to this valid legislative purpose. In applying this test, the trial court stated:
"There has been no rational basis for the [tax rate] distinction articulated by the Kansas Legislature, the Kansas Courts, or the executive agencies administering the Kansas tax law. In the Court's view the weakness of the Defendant's attempt to rationalize this disparity is exhibited by the lengths to which the Defendant goes to postulate some reasonable explanation for the obvious discrimination. Even recognizing that the Defendant State is allowed a great deal of latitude, the Court finds no rational basis for the discrimination. The fact that supposedly married couples have a greater economic burden is highly speculative and subject to a great deal of question and uncertainty. That the public policy of the State of Kansas promotes marriage through its tax structure is almost fanciful when analytically examined. The same can be said of the proposition that married individuals are less likely to relocate and will remain a stable economic unit for the State for longer periods of time. This leaves 'ease of administration' and again this Court finds that to be speculative and conjectural. None of the reasons, therefore, advanced by the State would seem to justify the gross disparity and discrimination that exists in the tax rate structure between single individuals and married individuals."
Based on this analysis, the trial court found the tax rates imposed on singles which were higher than the highest tax rate imposed on married taxpayers filing jointly were an unconstitutional violation of equal protection under the United States and Kansas Constitutions. The trial court granted Peden's motion for summary judgment for declaratory relief. The court held that injunctive relief would be unnecessary and therefore inappropriate.
On November 7, 1994, the State timely filed a notice of appeal to the Kansas Supreme Court, challenging the trial court's ruling that the tax rate schedule in KITA was unconstitutional in part. However, after the trial court filed its journal entry, Peden timely filed post-judgment motions on November 14, 1994, asking the trial court, inter alia, to reconsider its prior ruling which dismissed the tax refund claim for lack of subject matter jurisdiction and to reconsider its prior ruling which refused to certify a plaintiff class of single taxpayers.
The trial court declined to rule on Peden's post-judgment motions until after the State's appeal on the constitutionality of the tax rates had been decided. Peden filed a motion to this court, asking it to dismiss the State's appeal. Finding that the trial court had not yet ruled on Peden's post-judgment motions, this court held that State's appeal was premature and dismissed the State's appeal.
On August 22, 1995, the trial court entered a memorandum decision and order regarding Peden's post-judgment motions. In regard to the refund issue, the trial court found that Peden sought relief from unconstitutional tax rates. Since an administrative agency cannot determine the constitutionality of a statute, the court held that no purpose would have been served by requiring Peden to exhaust his administrative remedies. The court ruled that the exhaustion doctrine should not apply in this case. As such, the court found that Peden's apparent lack of exhaustion of administrative remedies should not prevent the court from exercising subject matter jurisdiction over the refund claim. Thus, the court reconsidered its prior ruling, which dismissed the refund claim for lack of subject matter jurisdiction, and held that it could and would exercise jurisdiction over Peden's refund claim. Next, the court reconsidered its ruling in which it refused to certify a plaintiff class of single taxpayers. The court found that all the requirements needed to certify a class under K.S.A. 60-223(a) and (b)(3) were met. The court certified a plaintiff class and found Peden to be a proper class representative. The court defined the class as follows:
"All unmarried persons subject to Kansas state income taxation, at a rate in excess of the highest rate charged to married individuals filing joint returns, for one or more of the tax years 1988 through the present."
Thus, on August 22, 1995, the court granted Peden's motions for reconsideration of subject matter jurisdiction over the refund claim and for reconsideration of class certification. Upon certification of the class, Peden filed a motion to certify Sharon L. Smith as a plaintiff and as another class representative. Apparently, the trial court granted this motion, although the record before us does not so show.
On September 20, 1995, the State filed a timely notice of appeal with this court, challenging these three rulings--the trial court's holding that the tax rates under KITA are an unconstitutional violation of equal protection to the extent that single taxpayers are subject to tax rates which are higher than the highest tax rate imposed on married taxpayers filing jointly; the trial court's ruling that it had subject matter jurisdiction to decide the tax refund claim; and the trial court's certification of the plaintiff class.
Since the trial court ruled that part of the Kansas tax rate schedule was unconstitutional, approximately 5,000 single taxpayers have filed claims with the Director of Taxation requesting tax refunds. All such requests for hearings are being held in abeyance by an administrative law judge pending resolution of this case.
The legislative history behind the rate disparity is slim to none. In a few of the committee meetings in 1988, when the rate disparity was first promulgated, and in 1992, when the rate disparity was widened, a few legislators expressed concern about the fact that single taxpayers were being taxed at higher rates than married taxpayers filing jointly. However, no rationale or explanation for such disparity was ever provided. The legislature passed KITA without any further discussion about the tax rate disparity being recorded. See Minutes of the Senate Committee on Assessment and Taxation, February 3, 1988; February 19, 1988; March 31, 1992; Minutes of the House Committee on Taxation, March 6, 1992.
In its brief, the State argues that the federal income tax system taxes single taxpayers and married taxpayers filing jointly differently, as Kansas does. The State points out that this unequal treatment of taxpayers has not been found to be a constitutional violation of equal protection. Druker v. C.I.R., 697 F.2d 46 (2d Cir. 1982), cert. denied 461 U.S. 957 (1983) (upholding marriage penalty); Mapes v. United States, 576 F.2d 896 (Cl. Ct.), cert. denied 439 U.S. 1046 (1978) (upholding marriage penalty); Kellems v. Commissioner of Internal Revenue, 58 T.C. 556 (1972), aff'd 474 F.2d 1399 (2d Cir.), cert. denied 414 U.S. 831 (1973) (upholding single penalty). Thus, the State asserts that the similar tax rate disparity in Kansas does not violate equal protection, either.
Peden acknowledges that the federal income tax system does treat single taxpayers differently from married taxpayers filing jointly and that such differential treatment has been found to be constitutional. However, Peden asserts that the manner in which the federal tax code treats single and married taxpayers differently is not the same manner in which Kansas tax code treats single and married taxpayers differently. Thus, Peden reasons that just because the federal tax system is constitutional, this does not mean that the state tax system is constitutional. Peden contends that the two systems discriminate between single and married taxpayers in different ways and for different reasons. In fact, Peden argues that the federal tax code has never charged single taxpayers a higher income tax rate than the highest rate applicable to married taxpayers filing jointly. According to Peden and our research on the issue, Kansas is the only state in the nation that has ever imposed higher tax rates on single taxpayers than the highest rate imposed on married taxpayers filing jointly. See Minutes of Senate Committee on Assessment and Taxation, February 19, 1988.
Peden then goes on to explain how the federal income tax system treats single and married taxpayers differently and how this system differs from the Kansas income tax system. As Peden explains, the federal income tax system treats married and single taxpayers differently by setting up different tax brackets, not rates, for married taxpayers and single taxpayers. Peden gives the following example of the 1995 federal income tax brackets:
| Rate |
Single Individuals Bracket |
Married Filing Joint Bracket |
| 15% |
Under $23,350 |
Under $39,000 |
| 28% |
$23,350 - 56,550 |
$39,000 - 94,250 |
| 31% |
$56,550 - 117,950 |
$94,250 - 143,600 |
| 36% |
$117,950 - 256,500 |
$143,600 - 256,500 |
| 39.6% |
Over $256,500 |
Over $256,500 |
1995 Form 1040 Instructions (Department of the Treasury), p. 53. (The 1995 federal income tax schedule also provided brackets for married taxpayers filing separately and heads of household. These are not applicable here.)
Under these brackets, different rates may apply to taxpayers who earn the same amount of taxable income, depending upon whether the taxpayer files a separate return as a single taxpayer or files a joint return as a married taxpayer. A single taxpayer with $25,000 in taxable income is taxed at the 28% rate, while married taxpayers filing jointly with $25,000 in taxable income are taxed at a lower rate of 15%. However, as Peden points out, once married taxpayers filing jointly and single taxpayers earn a certain amount of taxable income, the tax rates even out. For instance, once a single taxpayer earns $117,950 in taxable income, the taxpayer will be taxed at a 36% rate, and once married taxpayers filing jointly earn $143,600 in taxable income, they also are taxed at a 36% rate. Once single taxpayers or married taxpayers filing jointly earn $256,500 in taxable income, both types of taxpayers enter a new bracket at this same income level and are taxed at the same rate--39.6%. Both types of taxpayers will continue to be taxed at this same rate no matter how much more money they earn. However, in 1993, only about .9% of all federal taxpayers fell into the 39.6% tax bracket and were taxed equally regardless of their marital status. Internal Revenue Service, Statistics of Income-1993; Individual Income Tax Returns.
Thus, under the federal law, tax rates for both married taxpayers filing jointly and single taxpayers are the same, and have always been the same, with respect to the lowest and highest rates. 26 U.S.C. § 1 (1994). (The current rates for both types of taxpayers start at 15% and end at 39.6%.) While there are different brackets of taxable income to which the same rates apply, 39.6% is the highest rate to which any individual may be subject under the federal tax system--whether married or unmarried. This is not the case under the Kansas income tax system, which applies different rates to approximately the same amount of income. Under the Kansas system, the top rates never even out, no matter how much money the married taxpayers filing jointly earn. The single taxpayer will always be taxed at a higher rate. In 1995, if a single taxpayer earned $30,001 in taxable income, he or she was taxed at a 7.75% rate, while if married taxpayers filing jointly earned $120,000 in taxable income (four times the single taxpayer), they were still taxed at the lower rate of 6.45% and always would be.
Thus, just because the federal tax system, which treats single and married taxpayers differently, is constitutional, Peden contends that this is not the case with the Kansas tax system and its treatment of single and married taxpayers. According to Peden, the Kansas tax system distinguishes between single and married taxpayers in a manner which is different from how the federal tax system distinguishes between single and married taxpayers. Further, Peden points out that the Kansas tax system does not have the same legislative history and rationale as the federal tax system. The federal tax system has a clear rationale, enumerated in the legislative history, which clarifies that the federal tax brackets treat single and married taxpayers differently in order to create geographic equality among married taxpayers in community property states and non-community property states. The Kansas tax system has no such rationale or legislative history. Thus, Peden asks this court to evaluate the constitutionality of the Kansas tax rates without regard to the constitutionality of the federal tax system.
Determining whether a statute unconstitutionally violates equal protection is a question of law. When determining a question of law, this court may exercise an unlimited de novo standard of review. See Dickerson v. Kansas Dept. of Revenue, 253 Kan. 843, 844, 863 P.2d 364 (1993); State v. Nelson, 249 Kan. 689, 692, 882 P.2d 53 (1991). This court is not bound by the decision of the trial court. Memorial Hospital Ass'n, Inc. v. Knutson, 239 Kan. 663, 668, 722 P.2d 1093 (1986).
"[A] statute is presumed constitutional and all doubts must be resolved in favor of its validity. If there is any reasonable way to construe a statute as constitutionally valid, the court must do so. A statute must clearly violate the constitution before it may be struck down." Boatright v. Kansas Racing Comm'n, 251 Kan. 240, 243, 834 P.2d 368 (1992); see State v. Scherzer, 254 Kan. 926, Syl. ¶ 6, 869 P.2d 729 (1994). "This court not only has the authority, but also the duty, to construe a statute in such a manner that it is constitutional if the same can be done within the apparent intent of the legislature in passing the statute." State v. Durrant, 244 Kan. 522, 534, 769 P.2d 1174, cert. denied 492 U.S. 923 (1989).
A legislative act may not always be viewed by this court as fair or what we think should have been done, but that does not make the act unconstitutional. In Morton Salt Co. v. City of South Hutchinson, 159 F.2d 897, 900 (10th Cir. 1947), the 10th Circuit Court of Appeals commented:
"It is not the judicial province to correct every abuse of legislative taxing power. In the words of Mr. Chief Justice Marshall, 'The interest, wisdom, and justice of the representative body, and its relations with its constituents, furnish the only security, where there is no express contract, against unjust and excessive taxation; as well as against unwise legislation generally.' Providence Bank v. Billings, 29 U.S. 514, 561, 7 L. Ed. 939; Dane v. Jackson, [256 U.S. 589, 65 L. Ed. 1107, 41 S. Ct. 566]; French v. Barber Asphalt Paving Co., 181 U.S. 324, 21 S. Ct. 625, 45 L. Ed. 879; Cool