The Supreme Court is shaking America’s fiscal foundations

CHICAGO — Americans are notorious for turning virtually every dispute into a lawsuit. But the basic terms of America’s fiscal contract, which determines how the federal government finances its operations, the goods and services it provides, have so far remained untouched by legal challenges. Two recent Supreme Court cases threatened to change this. They failed, but only barely, and the forces that advanced them are unlikely to give up any time soon.

Since the 1990s, conservative lawyers and judges in the United States have regularly attacked the federal government’s supposedly sweeping powers. Under former chief justice William Rehnquist, the Supreme Court curtailed Congress’s powers to regulate private conduct. Under chief justice John Roberts, who has presided over the Court since 2005, it has been hostile toward administrative agencies’ regulatory reach, issuing decisions that impeded the implementation of policies such as president Barack Obama’s Affordable Care Act (Obamacare).

But this anti-regulatory turn in US constitutional law never threatened the government’s basic capacity to function. That changed this year, when conservative lawyers launched fiscal moonshots in an effort to accelerate the anti-regulatory agenda.

The first case targeted the tax system. In Moore vs United States, a couple — the Moores — challenged a provision of the 2017 Tax Cuts and Jobs Act imposing a one-time tax on the accumulated undistributed earnings of US shareholders in foreign corporations. The plaintiffs argued that this “mandatory repatriation tax” violates the Sixteenth Amendment to the US Constitution, which authorises the federal government to tax incomes from any source without apportionment or enumeration, and urged the Court to limit this authority to “realised” income.

But the US tax code is full of provisions that treat the income of an entity as the income of its owners, even if the money is not in their hands. Partnerships, S-corporations, bonds, futures contracts, and American-owned foreign corporations are all taxed this way. So, if the Supreme Court had ruled in favour of the Moores, it would have unleashed a flood of legal challenges to the tax code, potentially blowing a massive hole in the federal budget.

Even if the government won every new challenge that Moore v. United States inspired, uncertainty about corporate-tax liabilities would have roiled financial markets, raising doubts about US President Joe Biden’s economic stewardship right before the November presidential election. In the long term, a “realisation” rule would have dampened the government’s ability to prevent corporate and individual tax evasion.

The good news is that the US Supreme Court ruled against the Moores, with Justice Brett Kavanaugh recognising in his opinion that a realisation limit on income taxes would invite “fiscal calamity.” The bad news is that the court was split, with two Supreme Court justices apparently willing to accept the prospect of fiscal upheaval. Justice Clarence Thomas, fresh from disclosing a clutch of “gifts” from billionaire Harlan Crow, seemed even to welcome the prospect of crisis.

In the second case, the Community Financial Services Association of America, a banking-industry trade group, targeted the Consumer Financial Protection Bureau, which conservatives view as a source of excessive regulation. According to the complaint, the CFBP’s funding structure violates the US Constitution’s “appropriations clause”, which stipulates that federal spending must be “in consequence of appropriations made by law”.

The problem, for the litigants, is that Congress has decided against periodic (typically annual) appropriations for some financial-regulation agencies, instead allowing them to finance themselves from other sources (such as fees or interest payments). In the CFPB’s case, funding comes through the earnings of the Federal Reserve System.

Like in Moore, the plaintiffs asked the Court for an idiosyncratic, novel rule to prevent such “unconstitutional” activities. If they had gotten their way, many financial regulators, not just the CFPB, may have found themselves without a budget. A flurry of new lawsuits challenging other funding mechanisms within the federal government would have followed.

One risk stands out: the US Federal Reserve’s funding mechanism is similar to the CFPB’s, with no periodic appropriations. Though the plaintiffs made token efforts to show that their arguments didn’t apply to the Fed, their distinctions were flimsy. A ruling against the CFPB would thus have opened the Fed’s funding structure up to challenge, at a moment when attacks on its independence are proliferating.

At minimum, a shadow of legal uncertainty would have been cast over the Fed. The institution could even have faced a constitutional freeze, with profound consequences for the US and the global economy. It is shocking that two Supreme Court justices, Samuel Alito and Neil Gorsuch, were apparently fine with that prospect.

Why are litigants trying to destabilise America’s fiscal foundations, and how is it that their cases deemed worthy of the Supreme Court’s scarce attention? The answer is simple: the Court’s 6-3 conservative supermajority, having demonstrated its willingness to undermine long-standing government powers to further an anti-regulatory crusade, has emboldened both opportunists and ideologues.

The opportunists are seeking to leverage constitutional law for personal gain: The Moores sought a windfall, and firms challenging the CFPB wanted to avoid financial penalties. For them, systemic instability is just a side effect. The ideologues, for their part, are seeking to take advantage of the Supreme Court’s supermajority to push their agendas on issues like religion, abortion, gay rights and the size of government.

US conservatives have long shown a deep and corrosive skepticism of the federal government. As anti-tax advocate Grover Norquist famously put it, the goal is to shrink government until it is small enough to be “drowned in a bathtub”. Under Donald Trump, this morphed into a nihilistic and conspiratorial war on the federal “deep state”. If crusade leads to crisis, its most zealous proponents believe, all the better: American society needs radical reshaping.

They may get their wish. Thanks to their allies on the Supreme Court, attacks on the American fiscal system are just getting started.

Aziz Huq, professor of Law at the University of Chicago, is the author of “The Collapse of Constitutional Remedies” (Oxford University Press, 2021). Copyright: Project Syndicate, 2024.

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