A somewhat under-the-radar decision by the U.S. Court of Appeals for the Fifth Circuit earlier this month is, on its surface, focused on the issue of home alcohol distilling. But the appeals court’s reasoning could have a big impact on other businesses and various walks of life, including the energy industry.
In short, McNutt vs. U.S. Department of Justice focused on a federal law that banned – through the government’s taxation power – the private home distillation of alcohol. But the Fifth Circuit ruled that using the power to tax as a reason to ban something is an improper abuse of power. This line of constitutional thinking could have much larger implications.
Why? Because the ruling would erect new guardrails on how the government can use its authority to impose a tax in such a way that does not raise revenue but instead bans otherwise legal activity. When we consider all the ways the government has done this over the years, it’s clear that the energy industry has been a prime target for just such an abuse of power — especially in cases where the government used its taxing authority and “necessary and proper” constitutional reasoning to regulate activities.
As a Liskow law blog summarized it, “The case originated when a group of hobby distillers challenged an 1868 federal law that effectively criminalized the distillation of spirits in or near a private residence, even for personal use. The plaintiffs, including members of the Hobby Distillers Association, argued that the prohibition exceeded Congress’s constitutional powers, particularly where the activity was noncommercial and confined to the home.”
The analysis added, “The case underscores that the federal government’s broad federal taxing authority does have limits, particularly when it intersects with private, noncommercial conduct. As challenges to federal regulatory regimes continue, McNutt may serve as an important reference point in defining the boundary between taxation and regulation.”
For energy development, the McNutt decision provides a new avenue to challenge federal prohibition of development when such prohibition has been primarily based on the government’s taxing authority. In other words, is the ban really about taxation (raising revenue), or is it about using the power of taxation to achieve regulation? The Fifth Circuit determined that the latter avenue as a sole motivator is improper.
Hellbound and Down 