Michigan Supreme Court Lansing, Michigan 48909 ____________________________________________________________________________________________ C hief Justice Justices Maura D. Cor rigan

Opinion Michael F. Cavanagh Elizabeth A. Weaver Marilyn Kelly Clifford W. Taylor Robert P. Young, Jr. Stephen J. Markman ____________________________________________________________________________________________________________________________ FILED JULY 3, 2001

TIG INSURANCE COMPANY, INC., Plaintiff-Appellee, v No. 115915 REVENUE DIVISION, DEPARTMENT OF TREASURY, STATE OF MICHIGAN, Defendant-Appellant. ________________________________ TIG PREMIER INSURANCE COMPANY, INC., Plaintiff-Appellee, v No. 115916 REVENUE DIVISION, DEPARTMENT OF TREASURY, STATE OF MICHIGAN, Defendant-Appellant. ________________________________ BEFORE THE ENTIRE BENCH CAVANAGH, J.

These consolidated cases require us to decide whether a 1988 amendment of the Michigan Insurance Code’s retaliatory

tax, MCL 500.476a, deprived plaintiffs TIG Insurance Company and TIG Premier Insurance Company of equal protection of the

laws under US Const, Am XIV and Const 1963, art 1, § 2, or

violated the Uniformity of Taxation Clause of Const 1963, art

9, § 3. Absent an imposition on a fundamental right or a

suspect class, tax legislation is reviewed to determine

whether its classifications bear a rational relation to a

legitimate state purpose. We conclude that the 1988

amendments of the retaliatory tax, which changed the tax

calculation, are rationally related to the legitimate state

purpose of promoting the interstate business of domestic

insurers, the same legitimate purpose behind the retaliatory

tax itself. Thus, the amendments of the retaliatory tax do not violate equal protection, and also do not violate the

Uniformity of Taxation Clause. Accordingly, the judgment of

the Court of Appeals is reversed.

I

This case involves the retaliatory tax that Michigan

imposes on foreign insurers doing business in Michigan. Under

the retaliatory tax, when an insurer’s state of incorporation

imposes a larger aggregate tax burden on a Michigan insurer

doing business in that state than Michigan imposes on a company from that state doing business in Michigan, the

foreign insurer must pay Michigan a tax equal to the difference in the aggregate tax burdens. See MCL 500.476a.

Thus, to compute the retaliatory tax due from a foreign

insurer, if any, Michigan tallies all the taxes, fines,

penalties, and other burdens it otherwise imposes on the

foreign insurer doing business in Michigan. Michigan then

tallies the burden a hypothetical Michigan insurer would pay

to that insurer’s home state were the hypothetical Michigan

insurer doing the same amount of business there. If the other

state’s total burden on the hypothetical Michigan insurer

doing the same amount of business in that state would be

larger than the burden Michigan imposed on the foreign

insurer, the actual burden Michigan imposes is subtracted from

the other state’s burden on the hypothetical insurer, and the

difference is the retaliatory tax the foreign insurer owes

Michigan. These taxes have been common in insurance taxation

since the nineteenth century, see Western & Southern Life Ins

Co v State Bd of Equalization, 451 US 648, 668; 101 S Ct 2070;

68 L Ed 2d 514 (1981), and Michigan has had a form of a retaliatory tax since 1871. See 1871 PA 80, § 4 (adding what

was then § 28 to the insurance code).

Until 1987, the retaliatory tax was one of two taxes imposed on foreign insurers. The other was the premiums tax,

MCL 500.440, repealed by 1987 PA 261, which taxed a percentage

of the insurers’ business. However, in 1987, the Court of

Appeals held that the premiums tax violated equal protection,

and struck it as unconstitutional. See Penn Mut Life Ins Co

v Dep’t of Licensing & Reg, 162 Mich App 123, 130-133; 412 NW2d 668 (1987). After the Court of Appeals decision in Penn

Mutual, which was not appealed to this Court, the Legislature revised the Michigan Insurance Code tax provisions by repealing the premiums tax, subjecting foreign insurers

instead to the Single Business Tax, MCL 208.1 et seq., and

repealing and reenacting the retaliatory tax. See 1987 PA

261, 262. The new retaliatory tax, MCL 500.476a, mirrored the

prior retaliatory tax. However, the revision added subsection

(2), stating that “[T]he purpose of this section is to promote

the interstate business of domestic insurers by deterring

other states from enacting discriminatory or excessive taxes.”

In 1988, actual revenue from insurance taxes was below

the level of projected revenue the Legislature had relied upon

in enacting 1987 PA 261 and 262. One of the reasons that

revenue was lower than expected was that foreign insurers were

including assessments paid to private insurance associations

and facilities, such as the Worker’s Compensation Placement

Facility, among their Michigan burdens when calculating their

retaliatory taxes. When these assessments were included in

the foreign insurers’ Michigan burden, their Michigan burden grew larger, and any differences between the Michigan burden

and the burden the insurers’ home states imposed shrank. The

result was less retaliatory tax revenue.

After these facts were clear, the Legislature enacted

1988 PA 349. This provision did not affect the retaliatory

tax’s scope. Instead, it only changed the method of

calculating the tax by providing that payments to private

insurance associations and facilities are not counted as part

of the Michigan burden when calculating retaliatory taxes.

The resulting statute provides:

(5) Any premium or assessment levied by an association or facility, or any premium or assessment of a similar association or facility formed under a law in force outside this state, is not a burden or special burden for purposes of a calculation under section 476a, and any premium or assessment paid to an association or facility shall not be included in determining the aggregate amount a foreign insurer pays to the commissioner under section 476a.

(6) As used in this section, “association or facility” means an association of insurers created

under this act and any other association or facility formed under this act as a non-profit organization of insurer members, including, but not limited to, the following:

(a) The Michigan worker’s compensation placement facility created under [MCL 500.2301 et seq.]

(b) The Michigan basic property insurance association created under [MCL 500.2901 et seq.]

(c) The catastrophic claims association created under [MCL 500.3101 et seq.]

(d) The Michigan automobile insurance placement facility created under [MCL 500.3301 et seq.]

(e) The Michigan life and health insurance placement facility created under [MCL 500.7701 et seq.]

(f) The property and casualty guaranty association created under [MCL 500.7901 et seq.]

[MCL 500.134(5), (6).][1]

Hence, payments to these and other similar facilities are not

part of the Michigan burden on foreign insurers, and such

payments required by other states cannot be considered part of those states’ burden when calculating retaliatory taxes.

The dispute in this case originally involved plaintiffs’

retaliatory tax returns for 1990, 1991, and 1996. In those years, plaintiffs had made payments to the Worker’s

Compensation Placement Facility, the Basic Property Insurance Association, and the Automobile Insurance Placement Facility.

Subsections 134(5) and (6), however, required plaintiffs to

exclude those payments from their Michigan burdens when calculating the retaliatory tax they owed. Plaintiffs initially excluded these payments from their Michigan burden

The Michigan Assigned Claims Facility created under MCL 500.3171 was subsequently added to the statute as subsection 6(g). See 1990 PA 256.

and fully paid their retaliatory tax for each year. Later,

though, they filed amended returns that included these

payments in their Michigan burdens, claiming that requiring

them to exclude the payments violated the Equal Protection

Clauses of the state and federal constitutions, as well as the

Uniformity of Taxation Clause of the Michigan Constitution.

Plaintiffs, therefore, sought a refund of the alleged

unconstitutional overcharge. Defendant, however, denied

refunds for all three years.

Plaintiffs appealed the denial of refunds to the Michigan

Court of Claims, which consolidated their cases. The Court of

Claims held that MCL 500.134(5) violates equal protection because it was enacted to raise revenue rather than to deter

other states from imposing discriminatory or excessive taxes

on Michigan insurers doing business in those other states.

Also, the court held that plaintiffs’ 1990 and 1991 claims were time-barred by MCL 205.27a(6). The court, therefore,

ordered defendant to pay plaintiffs refunds consistent with

their amended 1996 retaliatory tax returns.

Both parties appealed, and the Court of Appeals affirmed.

That Court believed that when the Legislature revised the retaliatory tax in 1987, the Legislature did not intend to

change the definition of “burden,” and later did so only because revenues did not meet expectations. Thus, the Court concluded that equal protection was violated because it was

“abundantly clear that 1988 PA 349 was enacted as a stop-gap

measure to raise funds in response to a projected shortfall in

insurance tax revenues. This is not a valid reason for

discriminating against foreign insurers.” 237 Mich App 219,

230; 602 NW2d 839 (1999). The Court of Appeals also affirmed

the Court of Claims conclusion that plaintiffs’ 1990 and 1991

claims were time-barred, leaving plaintiffs with a judgment

for refunds for 1996. Defendant appealed the Court of Appeals

conclusion that 1988 PA 349 violates equal protection, we

granted leave, 463 Mich 905 (2000), and we now reverse.

II

The United States Supreme Court addressed the

constitutionality of retaliatory taxes in Western & Southern

Life Ins Co v State Bd of Equalization, supra. In that case,

California had adopted a retaliatory tax similar to

Michigan’s, and an Ohio corporation challenged its constitutionality. The Supreme Court noted that several

provisions of the constitution generally limit states’ ability

to regulate foreign corporations, but under the Commerce Clause, US Const, art 1, § 8, Congress has delegated insurance

regulation to the states, see 15 USC 1011 et seq., and the

privileges and immunities clause, US Const, art 4, § 2, does

not apply to corporations, see Hemphill v Orloff, 277 US 537, 548-550; 48 S Ct 577; 72 L Ed 978 (1928), leaving only the

Equal Protection Clause as a basis for the challenge. Western & Southern at 656. After reviewing its prior decisions, the

Court concluded that a state’s authority to treat foreign corporations differently than domestic corporations should be upheld if the different treatment bears a rational relation to

a legitimate state purpose. California’s retaliatory tax, the

Court held, had the legitimate state purpose of promoting

domestic insurers in other states by discouraging other states

from excessively taxing domestic insurers. The tax was

reasonably related to that purpose because the California

Legislature could have believed that the tax would “induce

other States to lower the burdens on California insurers in

order to spare their domestic insurers the cost of the

retaliatory tax in California.” Id. at 672. Thus, the

Supreme Court confirmed that retaliatory taxes do not violate

equal protection, and do not violate the constitution.

In light of Western & Southern, the general

constitutionality of Michigan’s retaliatory tax is clear. The

question in this case surrounds 1988 PA 349. That amendment

of Michigan’s retaliatory tax did not change the

classification plan drawn by Michigan’s retaliatory tax.

Rather, it only changed the calculation method of a foreign

insurer’s Michigan burden by providing that payments to

certain private insurance associations and facilities are not included in the burden. Whether the amendment violates the

state or federal Equal Protection Clauses, which are

coextensive, see Armco Steel v Dep’t of Treasury, 419 Mich 582, 591; 358 NW2d 839 (1984), or Michigan’s Uniformity of

Taxation Clause, which is not discernably different from equal

protection in cases involving tax statutes, see id. at 592, presents a question of law. We review questions of law de

novo. See Tolksdorf v Griffith, 464 Mich 1; ___ NW2d ___ (2001).

As Western & Southern declared, rational basis review

applies in challenges of retaliatory taxes. “Rational basis

review does not test the wisdom, need, or appropriateness of

the legislation, or whether the classification is made with

‘mathematical nicety,’ or even whether it results in some

inequity when put into practice.” Crego v Coleman, 463 Mich 248, 260; 615 NW2d 218 (2000). Rather, it tests only whether

the legislation is reasonably related to a legitimate

governmental purpose. The legislation will pass

“constitutional muster if the legislative judgment is

supported by any set of facts, either known or which could

reasonably be assumed, even if such facts may be debatable.”

Id. at 259-260. To prevail under this standard, a party

challenging a statute must overcome the presumption that the

statute is constitutional. Thoman v Lansing, 315 Mich 566, 576; 24 NW2d 213 (1946). Thus, to have the legislation

stricken, the challenger would have to show that the legislation is based “solely on reasons totally unrelated to

the pursuit of the State’s goals,” Clements v Fashing, 457 US 957, 963; 102 S Ct 2836; 73 L Ed 2d 508 (1982), or, in other words, the challenger must “negative every conceivable basis

which might support” the legislation. Lehnhauser v Lake Shore

Auto Parts Co, 410 US 356, 364; 93 S Ct 1001; 35 L Ed 2d 351

(1973).

In this case, plaintiffs claim that Michigan has exceeded

its authority to treat foreign corporations differently than domestic corporations because the different treatment does not

bear a rational relation to a legitimate state purpose. This is so, plaintiffs claim, because 1988 PA 349, which excluded certain payments from plaintiffs’ Michigan burdens for

retaliatory tax calculations, converted the retaliatory tax

from a tax intended to discourage other states from imposing

excessive levels of taxation on Michigan insurers to a tax

designed to raise revenue at the expense of foreign insurers.

Thus, plaintiffs argue that the 1988 amendment of the

retaliatory tax cannot be constitutional.

Initially, we emphasize that Michigan’s retaliatory tax

has never, either before or after the 1988 amendment, treated

foreign insurers as a single class. Rather, the subset of

foreign insurers that must pay Michigan any retaliatory tax is

actually determined by the laws of other states.

Specifically, the subset is determined by the laws of those

states that impose more onerous burdens on Michigan insurers

than Michigan imposes on insurers from those states. The

Supreme Court made this same observation about the retaliatory

tax it held constitutionally permissible in Western & Southern, stating that “[t]he retaliatory tax is not imposed

on foreign corporations qua foreign corporations, as would be

expected were the purpose of the tax to raise revenue from noncitizens; rather, it is imposed only on corporations whose

home States impose more onerous burdens on California insurers

than California otherwise would impose on those corporations.”

Western & Southern at 670, n 23.

Absent a change in the legislative classification, we

cannot agree with plaintiffs’ claim that a 1988 amendment converted the retaliatory tax into a tax designed to raise

revenue from foreign insurers. Rather, the selective imposition of the tax on only those insurers incorporated in states that tax Michigan insurers more heavily than Michigan

taxes them indicates that the purpose of the legislation is to

pressure those states to relieve the tax burden on Michigan

insurers doing business in those states. This is the precise

purpose the Legislature stated for adopting the retaliatory

tax, see MCL 500.476a(2), and the same purpose the Supreme

Court found “not difficult to discern” in Western & Southern

at 668. Further, in Western & Southern, the Supreme Court

held, without discussing the means a state may adopt to

calculate the retaliatory tax, that states are reasonable to

suppose that a retaliatory tax will induce other states to

lower their insurance tax rates. Id. at 672. Even with the

change in the method of calculation of the burden of

Michigan’s retaliatory tax, the tax remains rationally related

to this legitimate purpose, and plaintiffs cannot prevail.

However, even presuming that 1988 PA 349 can somehow be

viewed separately from Michigan’s retaliatory tax structure, the Legislature could have rationally decided to exclude

payments to certain insurance associations and facilities from

Michigan’s retaliatory tax burden. The three facilities in this case, the Worker’s Compensation Placement Facility, the

Automobile Insurance Placement Facility, and the Basic

Property Insurance Association, exist to provide insurance

coverage to insureds that may be unable to “procure the insurance through ordinary methods.” MCL 500.2301(a); see

also MCL 500.3301(a) and MCL 500.2925 (describing eligibility for Basic Property Insurance). Because high risk or otherwise

uninsurable insureds are provided for outside the normal insurance market, insurers doing business in Michigan need not bear the risks of insuring them, at least arguably benefitting

such insurers. The Legislature could have believed that if it

did not require payments to these facilities not to be

excluded from the retaliatory tax burden, other states would

not be discouraged from establishing similar facilities to

grant the same benefit to insurers doing business in those

states, including Michigan insurers. Indeed, if another state

had facilities and associations that paralleled the facilities

and associations mentioned in MCL 500.134, then any

retaliatory tax that insurers from the other state may owe

Michigan would not be affected by 1988 PA 349 at all.2 Again,

then, the Legislature could have had the permissible purpose

of promoting domestic insurers abroad, the same purpose it

stated in the retaliatory tax legislation. Because it is at

least debatable that excluding payments to such facilities

from Michigan’s retaliatory tax burden would encourage other

states to establish such facilities, the 1988 amendment is rationally related to a legitimate purpose, and is not

constitutionally infirm.

Plaintiffs maintain, however, that the 1988 amendment conflicts with the Supreme Court’s decision in Western &

Southern because it was designed entirely “to generate revenue

at the expense of out-of-state insurers.” As we have

explained, the tax does not affect foreign insurers as a

single class. Further, though, plaintiffs overlook the

presumption of constitutionality, and cannot account for the legitimate bases of the legislation. Instead, plaintiffs seek

one possible illegitimate basis for the legislation.

Plaintiffs’ approach conflicts with Supreme Court precedent because they have not shown that the legislation rests “solely

on reasons totally unrelated to the pursuit of the State’s

We note that several other states similarly exclude payments to special associations and facilities from their retaliatory tax burdens. See, e.g., Conn Gen Stat, 12-211; Ill Comp Stat, 5/444.1(2).

goals . . . .” Clements at 963. Because there is at least

one conceivable rational basis that might support the

legislation, plaintiffs have not “negative[d] every

conceivable basis which might support” it, and cannot prevail.

Lehnhauser at 364.

In response, plaintiffs have argued that they need not

negate every conceivable basis for the legislation. This is

because, they claim, in equal protection cases, the Court

“need not . . . accept at face value assertions of legislative

purposes, when an examination of the legislative scheme and

its history demonstrates that the asserted purpose could not

have been a goal of the legislation.” Weinberger v Weisenfeld, 420 US 636, 648, n 16; 95 S Ct 1225; 43 L Ed 2d 514 (1975). However, as discussed, an examination of the

legislative scheme in this case indicates that the asserted purpose could well have been the goal of the legislation. For

plaintiffs to prevail, they must negate every conceivable

basis of the legislation. Because plaintiffs have not, they

cannot prevail.

Finally, plaintiffs attempt to distinguish this case from

Western & Southern by arguing that the tax revenue generated in that case was “relatively modest,” see Western & Southern

at 669, but under the amendment, Michigan’s retaliatory tax immodestly generates over a third of Michigan’s insurance tax revenue. As a preliminary point, the fact that the

retaliatory tax raises revenue does not prove that raising

revenue was the state’s goal in adopting the tax. On rational

basis review, this Court only considers whether the

legislation is reasonably related to a legitimate purpose, and

does not test for “some inequity when [the legislation is] put

into practice.” Crego at 260. But further, though the

Western & Southern Court’s statement strikes us simply as an

observation and not, as plaintiffs contend, as the linchpin of

the Court’s analysis, even if it is an important point, this

case is distinguishable. Michigan’s retaliatory tax may

generate a third of Michigan’s insurance tax revenue, but the

Supreme Court did not state that the retaliatory tax it

approved raised a relatively modest amount of insurance tax

revenue, just that it raised a modest amount of revenue. The

joint appendix shows that although Michigan raised

approximately $67 million annually in retaliatory taxes for the years 1991 through 1995, for example, when compared with

Michigan’s overall tax revenue for that period, which ranged

from $10.5 billion to $17.2 billion annually, see Michigan Dep’t of Treasury, Annual Report of the State Treasurer (1996), p 25, retaliatory tax revenue is certainly “relatively

modest.” Thus, even if retaliatory tax revenue must be

modest, as compared with Michigan’s overall tax revenue,

retaliatory tax revenue is not immodestly large, and

plaintiffs again have not shown Michigan’s retaliatory tax or 1998 PA 349 to be unconstitutional. Again, plaintiffs cannot

prevail.

III In conclusion, neither Michigan’s retaliatory tax nor the

1988 amendment of that tax violates the state or federal

constitutions, which are coextensive in their equal protection

provisions. The retaliatory tax, and the amendments of it,

are rationally related to the legitimate governmental purpose

of promoting Michigan insurers in other states. Because the

tax and its amendment do not violate equal protection, they

also do not violate the Michigan Constitution’s Uniformity of

Taxation Clause, which is not discernibly different from the

Equal Protection Clause when the constitutionality of a tax

statute is being reviewed. Plaintiffs have not carried their

considerable burden, and the judgment of the Court of Appeals

is reversed.

CORRIGAN , C.J., and WEAVER , TAYLOR , YOUNG , and MARKMAN , JJ., concurred with CAVANAGH , J.

S T A T E O F M I C H I G A N

SUPREME COURT

TIG INSURANCE COMPANY, INC., Plaintiff-Appellee, v No. 115915 REVENUE DIVISION, DEPARTMENT OF TREASURY, STATE OF MICHIGAN, Defendant-Appellant. ____________________________________ TIG PREMIER INSURANCE COMPANY, INC., Plaintiff-Appellee, v No. 115916 REVENUE DIVISION, DEPARTMENT OF TREASURY, STATE OF MICHIGAN, Defendant-Appellant. ____________________________________ KELLY, J. (concurring).

While I agree with the conclusion reached by the

majority, I write separately to state my disagreement with certain of the reasoning it employs. Whereas the majority

articulates what would be legitimate purposes for adoption of

the amendment, it completely ignores the evidence presented by

plaintiffs. This evidence throws into doubt whether the

Legislature's actual purpose was legitimate, as it has to be

in order to conform with precedent from the United States Supreme Court.

The states cannot impose more onerous taxes or other

burdens on foreign corporations than on domestic corporations,

unless they bear a rational relation to a legitimate state

purpose. Western & Southern Life Ins Co v State Bd of

Equalization, 451 US 648, 667-668; 101 S Ct 2070; 68 L Ed 2d 514 (1981). A retaliatory tax act, like that in question,

makes of foreign corporations a special classification of

taxpayers.

In evaluating the constitutionality of a challenged

classification, we must consider two separate issues. First, whether the statute in question advances a legitimate purpose and, second, whether, in passing it, the Legislature

reasonably could have believed that the classification would promote that purpose. Id. at 668. Only after a legitimate purpose is ascertained does a rational relationship between

the classification and purpose become relevant. See Metropolitan Life Ins Co v Ward, 470 US 869, 881; 105 S Ct 1676; 84 L Ed 2d 751 (1985).

While this two-step inquiry does not require that the Legislature articulate its purpose in forming the challenged

classification, it does require that a conceivable or

reasonable purpose exist. Nordlinger v Hahn, 505 US 1, 15;

112 S Ct 2326; 120 L Ed 2d 1 (1992). The United States

Supreme Court rejected the proposition that promotion of

domestic industry is always a legitimate purpose, reasoning

that it "eviscerate[s] the Equal Protection Clause." Metropolitan Life, supra at 882. The Court stated that, if

this proposition were accepted, any discriminatory tax would

be upheld if it could be shown that it was reasonably

"intended to benefit domestic business." Id.

This appears to be the rationale used by the majority in

upholding the amendment at issue. The majority does not

discuss the evidence presented by plaintiffs or how this

evidence is insufficient to overcome the presumption of the

amendment's constitutionality. Rather, it concludes that the

purpose of the amendment may have been the same as the purpose

stated in the underlying retaliatory tax act. That was to

promote domestic insurers abroad, a permissible purpose.

It seems unlikely that was the Legislature's purpose because, as stated by the majority, the amendment appeared

when the Legislature discovered that retaliatory tax revenue was far less than expected. See slip op at p 4. If

sufficient evidence had been presented by plaintiffs that the

purpose was to cover the shortfall, the legitimate purposes opined by the majority would not necessarily carry the day.

Therefore, this Court should state explicitly that the rational basis test, while deferential, does not ensure that

all taxation legislation will pass constitutional muster. In this case, plaintiffs presented evidence that employees from

the Department of Management and Budget and the Department of

Treasury advocated the amendment for a purpose that was impermissible. This evidence does not overcome the

presumption of constitutionality because it does not explicitly demonstrate that the "classification is a hostile

and oppressive discrimination." Lehnhausen v Lake Shore Auto

Parts Co, 410 US 356, 364; 93 S Ct 1001; 35 L Ed 2d 351

(1973). But this is not to say that, in another case, the

burden in overcoming the presumption of constitutionality

cannot be met.

In failing to address this fact, it appears that the

majority would uphold any classification, regardless of

evidence demonstrating an actual improper purpose for it. The

majority's scant treatment of the evidence presented seems to

eliminate any possibility of future litigants demonstrating an

improper purpose for a challenged classification. It reduces the test for evaluating the constitutionality of a classification to no more than abstract judicial imaginings

with little or no apparent basis in fact. Moreover, it elevates a plaintiff's burden of proof to insurmountable heights. Such reasoning is contrary to the United States

Supreme Court precedent of Western & Southern Life and Metropolitan Life.