MANSFIELD, Justice.
This administrative review proceeding requires us to decide whether imposing a
The facts in this case are largely undisputed. A generation ago, the American Telephone & Telegraph Company (AT & T) had a dominant position nationally in both local and long-distance telephone service. In Iowa, it did business under the name Northwestern Bell. Most Iowans obtained their local and long-distance phone service through Northwestern Bell. The company owned and maintained lines that ran from Iowa residences and businesses into central offices, where switching equipment was used to route phone calls toward their ultimate destination. Those Iowans who did not get their phone service from Northwestern Bell primarily relied on another local monopoly, such as GTE.
As the result of a lengthy antitrust case, a consent decree was entered in 1982, which ended AT & T's national industry dominance. The decree took effect in 1984 and required AT & T to divest its local telephone businesses. This led to the formation of seven independent regional Bell operating companies, one of which was U S West, Inc., the predecessor to Qwest Corporation. U S West thereafter provided local landline telephone service in fourteen states, including Iowa and the rest of the former Northwestern Bell territory.
Although the divestiture was the death knell for a single telephone company's predominance in this country, it did leave in place a system where local phone service was generally provided by monopoly carriers that had the existing infrastructure to do so (e.g., central offices, switches, and customer phone lines). To address this situation, Congress and the states enacted legislation in the mid-1990s. The Telecommunications Act of 1996 (Telecom Act) required incumbent local exchange carriers (ILECs) like U S West to provide interconnection to their networks and to offer their network elements, such as the hardwired phone lines that entered homes, on an "unbundled" basis to other carriers (CLECs) that sought to enter the marketplace and compete with them. See Telecommunications Act of 1996, Pub.L. 104-104, 110 Stat. 56 (codified in scattered sections of 47 U.S.C.)
Complementing the Telecom Act was House File 518, which had been passed by our general assembly the year before. See 1995 Iowa Acts ch. 199 (current version at Iowa Code §§ 476.95-.101 (2013)). Like the Telecom Act, House File 518 required any ILEC to provide "interconnection" and to make available the "unbundled essential facilities of its network." See id. § 12 (current version at Iowa Code § 476.101(4)(a)(1)). The section entitled "Findings — statement of policy," expressly sets forth certain purposes of the act, as follows:
Iowa Code § 476.95. Thus, the legislature's stated purposes for the act can be interpreted as enhancing the availability of affordable communication services throughout the state, encouraging competition for all telecommunication services, and fostering economic development.
Prior to 1995, ILECs in Iowa like Northwestern Bell/U S West had been subject to rate-base/rate-of-return regulation. See 1963 Iowa Acts ch. 286, § 1 (current version at Iowa Code § 476.8 (2013)). Under this system of regulation, the incumbent carrier essentially received a guarantee that its costs plus a reasonable rate of return would be covered by the tariffs paid by Iowa customers, so long as the company's costs were reasonable. See id. House File 518, however, gave local phone companies the option of exiting from this form of regulation by submitting a "price regulation plan" that, if approved, would set forth the price for "basic communications services" subject to permitted adjustments. See 1995 Iowa Acts ch. 199, § 8 (current version at Iowa Code § 476.97). In 1998, U S West opted for such a voluntary price regulation plan and, consequently, was no longer subject to rate-base/rate-of-return regulation.
The Telecom Act and its Iowa counterpart resulted in an increased CLEC presence in Iowa. From 2000 to 2006, for example, CLEC access lines in Iowa increased from 193,000 to 260,000. But, in the meantime, other competitors for local residential and business service entered the marketplace — cable telephony, voice over internet protocol (VOIP), and wireless service. While the record here does not detail the actual inroads made by each of these competitors on traditional landline service, it is clear that a number of Iowans have swapped their ILEC service for one of these three alternatives. From 2000 to 2006, ILEC access lines declined from 1,759,000 to 1,422,000 — a greater decline than the corresponding increase in CLEC lines.
As Iowans know from their personal experience, the wireless industry has grown significantly in recent years. From 2000 to 2006, the number of wireless service subscriptions in Iowa increased from 975,000 to 1,821,000. A wireless phone is essentially a two-way radio. Wireless communication is based on radio signals as it travels from the handset to the cell tower (or vice versa). After reaching the cell tower, the signal travels by high-speed data circuit
Historically, Iowa has centrally (i.e., at the state level) assessed for property tax purposes both the real and the personal property of traditional telephone companies such as Northwestern Bell and its successors U S West and Qwest. This system dates back approximately a century and continues to this day. See Iowa Code § 1330 (1913) ("Said assessment shall include all property of every kind and character whatsoever, real, personal, or mixed, used by said companies in the transaction of telegraph and telephone business...."); id. § 433.4 (2013) (containing similar language). Thus, ILECs are required to pay property tax in Iowa on the switches, computers, and other equipment and personal property they use to provide local telephone service in Iowa. Historically, this tax regime applied to "[e]very telegraph and telephone company operating a line in this state." See id. § 1328 (1913) (current version at id. § 433.1 (2013)).
As we noted in Heritage Cablevision v. Marion County Board of Supervisors, "In times past Iowa statutes provided for an extensive personal property tax." 436 N.W.2d 37, 37 (Iowa 1989). However: "In 1973 the general assembly adopted a scheme under which most personal property would no longer be taxed." Heritage Cablevision, 436 N.W.2d at 37; see also 1973 Iowa Acts ch. 255, § 1 (codified as Iowa Code § 427A.11 (1975)) (phasing out personal property tax). Yet this phaseout did not apply to telephone companies and certain other enterprises. See Iowa Code § 427A.1(1)(h) (2013) (indicating that "[p]roperty assessed by the department of revenue pursuant to sections 428.24 to 428.29, or chapters 433, 434, 437, 437A, and 438" shall be assessed as real property). Northwestern Bell, GTE, and other telephone companies continued to have to pay property tax on their switches, computers, and other equipment and personal property in Iowa. Nonetheless, as Qwest's counsel acknowledged at oral argument in this case, so long as the telephone company remained subject to rate-base/rate-of-return regulation, it was allowed to include those tax obligations in its rate base and, thus, ultimately to pass them along to Iowa consumers.
House File 518 in 1995 provided that "competitive long distance telephone compan[ies]" (CLDTCs) would not be subject to this property taxation scheme. See 1995 Iowa Acts ch. 199, § 1 (current version at Iowa Code § 476.1D(10)(b)). Instead, such companies essentially would be taxed on their real property only for property acquired after January 1, 1996. Iowa Code § 476.1D(10)(b). A "competitive long distance telephone company" was defined as one where "more than half of the company's revenues from its Iowa intrastate telecommunications services and facilities are received from services and facilities that the board has determined to be subject to effective competition." Id. § 476.1D(10)(a). It is undisputed that this provision was intended to encourage so-called "facilities-based competition," that is, the deployment of additional equipment in Iowa by competitive carriers. Seven carriers have since qualified for CLDTC status, including MCI, AT & T, Sprint, McLeod, and a long-distance affiliate of Qwest.
Although both CLEC service and other forms of telephone service have made significant incursions into ILEC market share, Qwest continues to have a large share of local phone service. As of December 2007, it still had 730,166 access lines in Iowa. Within its service territory, it had seventy-eight percent of the wireline connections; in over 100 communities, it had at least ninety percent of wireline customers. While some customers had "cut the cord" and substituted wireless for wireline service, the record indicates that in the Midwest region as a whole this would have been only about 15.8% of households as of the second half of 2007. Certain demographic and geographic factors suggested the number would be even lower in Iowa.
Qwest's taxable personal property in Iowa includes a substantial amount of property (perhaps thirty-five to forty-five percent) that was acquired while Qwest was still subject to rate-base/rate-of-return regulation. On November 3, 2006, the Iowa Department of Revenue issued a notice of assessment to Qwest placing a value on its Iowa operating property of $1,028,480,000. Qwest elected to challenge the general assembly's previous decision to tax the personal property of ILECs but not CLDTCs or wireless providers operating in Iowa. Thus, Qwest responded to the 2006 assessment by filing a protest appealing the assessment to the Iowa State Board of Tax Review.
On December 11, Qwest filed an amended protest acknowledging an agreement between the parties which reduced the total assessed value of Qwest's property to $785,000,000, while preserving Qwest's constitutional arguments. Qwest took the position that the dissimilar tax treatment it received in comparison to other similarly situated telecommunications companies amounted to unconstitutional discrimination.
The parties jointly requested transfer of the case to the Department of Inspections and Appeals (DIA) for a contested case hearing. Subsequently, an evidentiary hearing was held before the DIA over a five-day period from June 23 to 26 and
(Internal citations and quotation marks omitted.)
Turning to the wireless providers, the ALJ concluded:
Qwest filed a timely appeal to the Iowa State Board of Tax Review. The parties stipulated, however, that the ALJ's decision would be treated as that of the Board, subject to Qwest's right to seek judicial review thereon. Accordingly, the Board issued a final order on October 12, adopting the ALJ's decision in full.
On November 10, Qwest brought a petition for judicial review in the Polk County District Court, raising only its state constitutional challenge. After a hearing, the district court reversed the Board's ruling and found that Qwest's Iowa constitutional rights were violated with respect to the tax treatment it received compared to CLDTCs and wireless providers. With respect to the CLDTCs, the district court found:
(Internal citations omitted.)
Similarly, concerning wireless providers, the district court wrote:
The Board timely appealed to this Court.
We generally review a district court's decision on a petition for judicial review of agency action for correction of errors at law. Timberland Partners XXI, LLP v. Iowa Dep't of Revenue, 757 N.W.2d 172, 174 (Iowa 2008). However, in cases such as this, where constitutional issues are raised, our review is de novo. Id.
Social and economic legislation, such as the tax provisions at issue here, is reviewed under the rational basis test. See King v. State, 818 N.W.2d 1, 27 (Iowa 2012); accord Sanchez v. State, 692 N.W.2d 812, 817 (Iowa 2005). This is "a very deferential standard." Varnum, 763 N.W.2d at 879; accord King, 818 N.W.2d at 27; Ames Rental Prop. Ass'n v. City of Ames, 736 N.W.2d 255, 259 (Iowa 2007). "Under rational-basis review, the statute need only be rationally related to a legitimate state interest." Sanchez, 692 N.W.2d at 817-18. "[T]he [s]tate does not have to produce evidence, and only a plausible justification is required." King, 818 N.W.2d at 28; see also Varnum, 763 N.W.2d at 879. The challenging party "has the heavy burden of showing the statute unconstitutional and must negate every reasonable basis upon which the classification may be sustained." Varnum, 763 N.W.2d at 879 (citation and internal quotation marks omitted); accord King, 818 N.W.2d at 28; Sperfslage v. Ames City Bd. of Review, 480 N.W.2d 47, 49 (Iowa 1992) ("The statute will ... be upheld under the rational basis standard if we find the legislature could reasonably conclude that the classification would promote a legitimate state interest."). The fit between the means and the end can be "far from perfect" so long as the relationship "is not so attenuated as to render the distinction arbitrary or irrational." Varnum, 763 N.W.2d at 879 & n. 7 (citation and internal quotation marks omitted); see also King, 818 N.W.2d at 28.
When we have applied the rational basis test to tax laws, they have generally been upheld without much difficulty. "The rational basis standard is easily met in challenges to tax statutes." Hearst Corp. v. Iowa Dep't of Revenue & Fin., 461 N.W.2d 295, 306 (Iowa 1990); accord Heritage Cablevision, 436 N.W.2d at 38 ("It is widely recognized that the rational basis standard is easily satisfied in challenges to tax statutes."); City of Waterloo v. Selden, 251 N.W.2d 506, 508-09 (Iowa 1977) ("An iron rule of equal taxation is neither attainable nor necessary.").
Id. It went without saying that the exemption applied regardless of whether the buyer of the newspaper was a person of moderate to low means and did not apply even if the magazine would have been a similarly inexpensive source of public information for people of moderate to low means.
Similarly, in Sperfslage, we upheld a state regulation that required all buildings with three or more living units to be classified as commercial properties for property taxation purposes while allowing all buildings with one or two units to be classified as residential even when used as a commercial venture. 480 N.W.2d at 48-49. We reiterated that the rational basis test "is easily satisfied in challenges to tax statutes." Sperfslage, 480 N.W.2d at 49. We then found the regulation constitutional because it was "far more likely that an owner occupier would purchase one-unit or two-unit rental properties than three-unit property for use as a residence." Id. Again, this rough correspondence between the asserted state interest and the classification was enough. It did not matter that in a particular case, the single or double-unit property never had a residential purpose.
And in Home Builders Ass'n of Greater Des Moines v. City of West Des Moines, we rejected a federal constitutional challenge to a parks fee imposed on residential but not commercial developers, and based on the geographic size of the parcel, without regard to the anticipated density of the proposed subdivision. 644 N.W.2d 339, 352-53 (Iowa 2002). We noted that the city had "the freedom in economic matters to encourage one type of property usage over another by differentiating the fees imposed on different usages" and was "free to encourage commercial development by relieving it from payment of the parks fee." Home Builders, 644 N.W.2d at 352-53. We added that the City "may reasonably assume that commercial users of property generate less need for park facilities than do residential developers." Id. at 353.
In Racing Ass'n of Central Iowa v. Fitzgerald (RACI II), following remand from the United States Supreme Court, we concluded that the legislature's decision to tax racetrack gross gambling receipts at a rate of thirty-six percent and riverboat gross gambling receipts at a rate of twenty percent violated article I, section 6 of the Iowa Constitution. 675 N.W.2d 1, 15-16 (Iowa 2004).
RACI II, 675 N.W.2d at 7-8 (footnotes omitted).
In two separate footnotes, we elaborated on what we meant by the phrases "realistically conceivable" and "basis in fact." With respect to the former, we said:
Id. at 7 n. 3 Concerning the latter, we stated:
Id. at 8 n. 4. Thus, we made clear that actual proof of an asserted justification was not necessary, but the court would not simply accept it at face value and would examine it to determine whether it was credible as opposed to specious.
We also reiterated that a party bringing a rational basis challenge must "negat[e] every reasonable basis that might support
Applying these standards, we rejected four asserted justifications in RACI II for the disparate taxation — promoting economic development of river communities, protecting the reliance interests of riverboat operators, aiding the financial positions of the riverboats, and maintaining riverboats in Iowa. Id. at 9-15. Concerning the first asserted state interest, we noted that there were river communities with racetracks and nonriver communities with riverboats. Id. at 10. Thus, the justification was "illogical." Id. It involved "extreme degrees of overinclusion and underinclusion." Id. (quoting Bierkamp v. Rogers, 293 N.W.2d 577, 584 (Iowa 1980)). We then rejected the asserted reliance interest of riverboat operators because the taxation lines drawn had nothing to do with the time of investment. Id. at 11. "[T]he differential tax is triggered not by whether the business engaged in gambling prior to the implementation of the new tax rates, but [by] whether the gambling takes place on a floating casino." Id. at 12.
We also concluded that aiding the financial position of riverboats was an insufficient justification by itself. If that were so, "any differential tax would be constitutional because a lower tax always benefits the financial situation of the taxpayer subject to the lower rate." Id. at 13. Finally, we could not accept the State's contention that a thirty-six percent tax on gross gambling receipts of racetracks (much higher than the tax rate recommended by the legislative study committee) was designed as an incentive to keep riverboats in Iowa. Id. at 15. As we put it, "[T]he legislature could not reasonably have believed that taxing racetracks at thirty-six percent rather than at the twenty-four percent rate recommended by the committee would have any impact on the competitive position of the excursion boats vis-à-vis their out-of-state counterparts." Id. "There [wa]s simply no rational connection between this conceivable legislative purpose and the discriminatory tax rate imposed on the racetracks." Id.
With the preceding principles in mind, we now turn to the personal property tax scheme at issue in this case.
Nonetheless, we agree with the Board's conclusion that a rational basis exists for
The district court assumed for the sake of argument that section 476.1D(10)'s tax exemption may have served a rational purpose in 1995, but found that it does not do so now because Qwest "is no longer dominant." We have said before that "when applying a rational basis test under the Iowa Constitution, changes in the underlying circumstances can allow us to find a statute no longer rationally relates to a legitimate government purpose." State v. Groves, 742 N.W.2d 90, 93 (Iowa 2007) (citing Bierkamp, 293 N.W.2d at 581).
However, in this case, we disagree with the district court's conclusion. To find that Qwest "is no longer dominant," the district court considered Qwest's percentage of total wireline and wireless connections. But this assumes that wireless and wireline are substitutes, when the record before the Board showed that most wireless customers (eighty-five percent or more during the time period covered by this proceeding) continue to pay for wireline service. Thus, one can plausibly argue that there remains a distinct demand
Additionally, to the extent there is a separate market for wireline services in which the ILECs have monopoly power, a legislature could reasonably conclude that taxing the ILECs' personal property is an appropriate way to capture some of their monopoly rent. See FCC v. Beach Commc'ns, Inc., 508 U.S. 307, 319-20, 113 S.Ct. 2096, 2104, 124 L.Ed.2d 211, 225 (1993) (justifying a regulatory exemption for satellite service covering commonly owned or managed buildings, but not separately owned and managed buildings, on the ground that an operator in the latter situation is more likely to have unchecked monopoly power).
Turning to the differential treatment of personal property owned by ILECs and wireless providers, we note at first the district court's irrefutable observation: "[T]he growth of wireless providers and subscribers has exploded over the past ten years to the point that by 2006 the number of wireless subscribers in Iowa exceeded the number of wireline customers."
The record contains evidence from which a rational legislator might conclude that the wireless companies operate in a competitive market and Qwest still does not. Wireless rates have been declining dramatically on a per minute basis. Meanwhile, Qwest increased single line flat-rated residential monthly service rates from $12.80 to $14.12 on August 1, 2005, to $15.56 on August 1, 2006, and to $16.60 on August 1, 2007.
It is useful to compare and contrast this case with RACI II. A key weakness of the State's position in RACI II was that it was trying (at least in part) to justify the tax differential simply as a way to promote the companies that were treated favorably by the differential. We do not hold here that the State can simply justify the different tax treatment of ILECs in section 433.4 as a way to promote one group of companies over another — and it hasn't. Rather, the State has made a plausible showing that the ILECs retain some vestiges of their former monopoly status that make it appropriate for the State to tax their property while relieving potential developers of competing infrastructure from a similar burden.
Also, we dismissed the reliance interest in RACI II because nothing in those laws turned on when the investment had been made. By contrast, section 476.1D(10) limits the CLDTC exemption to property purchased after the exemption was enacted. Furthermore, this case concerns property taxes, an area where reliance interests have been viewed as significant. Owners — certainly sophisticated businesses like telecommunications companies — often consider the property tax consequences of their purchases before they make them. It is reasonable for the State to preserve those reliance interests by continuing to tax property as it has been taxed from the date of purchase by its owner. See Nordlinger v. Hahn, 505 U.S. 1, 13-14, 112 S.Ct. 2326, 2333, 120 L.Ed.2d 1, 14 (1992) (upholding California's limits on adjustments to the assessed value of property until it is resold and acknowledging that "classifications serving to protect legitimate expectation and reliance interests do not deny equal protection of the laws").
Qwest's challenge to Iowa's personal property tax scheme is not the only such challenge that has been brought nationally. In Verizon New Jersey Inc. v. Hopewell Borough, an ILEC objected to a New Jersey law that imposed a personal property tax on any "local exchange telephone company," which the law defined as "a telecommunications carrier providing dial tone and access to fifty-one percent of a local telephone exchange." 26 N.J.Tax 400, 404 (2012). The court construed the statute as requiring an annual determination of whether the ILEC still had 51% of wireline service, in which case the personal property tax would continue. Verizon, 26
Id. at 428. The court added in dictum that the tax would fail the rational basis test if companies that had originally met the fifty-one percent would "perpetually be subject to tax" regardless of what happened to their competitive position. Id. Notably, though, New Jersey employs a balancing test in rational basis cases that differs analytically from the federal rational basis test. Id. at 425. In any event, the New Jersey court found that the ILECs' retention of a majority of the wireline business was a sufficient constitutional justification for continuing to treat them differently, the same conclusion we are reaching here. See also Qwest Corp. v. Colo. Div. of Prop. Taxation, ___ P.3d ___, No. 10CA1320, 2011 WL 3332876 (Colo.App.2011) (rejecting Qwest's constitutional arguments that "its property must receive the same tax benefits as similar property used by cable companies to provide telephone services"), cert. granted, No. 11SC669, 2012 WL 1940812 (Colo.2012); GTE North, Inc. v. Zaino, 96 Ohio St.3d 9, 770 N.E.2d 65, 69 (2002) (rejecting an ILECs constitutional challenge to an Ohio law that provided for a much higher rate of assessment on certain personal property of ILECs and noting that ILECs "enjoy the advantage ... of being the default provider of intraLATA call service for customers who fail to take affirmative action to choose another provider"); Sw. Bell Tel. Co. v. Combs, 270 S.W.3d 249, 272-73 (Tex.App.2008) (finding no federal or state equal protection violation in imposing franchise taxes on local exchange carriers but not long-distance carriers).
These cases are easily distinguishable, however, because the state constitutions at issue contained specific language requiring uniformity in taxation. Idaho Telephone relied on language in article VII, section 5 of the Idaho Constitution stating, "All taxes shall be uniform upon the same class of subjects within the territorial limits, of the authority levying the tax...." 423 P.2d at 340. In any event, that Idaho decision has been overruled. See Simmons, 723 P.2d at 892-93. The Arizona and Washington courts also relied on similar state constitutional provisions apparently mandating uniform taxation. See Citizens Telecomms. Co, 75 P.3d at 129 ("According to the Uniformity Clause of the Arizona Constitution, Article 9, Section 1, `all taxes shall be uniform upon the same class of property.'"); Inter Island, 883 P.2d at 1382 ("All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax...." (quoting Wash. Const. art. 7, § 1)).
Needless to say, the Iowa Constitution does not contain such a clause. And, such a test would be antithetical to our precedents as we have described them above. Cf. City of Coralville v. Iowa Utils. Bd., 750 N.W.2d 523, 530 n. 3 (Iowa 2008) (declining to interpret the Iowa Constitution as requiring that "all Iowa laws be geographically uniform").
For the foregoing reasons, we reverse the judgment of the district court and remand to that court for further proceedings not inconsistent with this opinion.
All justices concur except WATERMAN, J., who concurs specially and APPEL, J., who takes no part.
WATERMAN, Justice (concurring specially).
I concur in the majority's well-reasoned decision in all respects but one. The majority misses the opportunity to expressly overrule Racing Ass'n of Central Iowa v. Fitzgerald (RACI II), 675 N.W.2d 1 (Iowa 2004). I reiterate my call to expressly overrule RACI II as plainly erroneous for the reasons set forth in my special concurrence in King v. State, 818 N.W.2d 1, 43 n. 28 (Iowa 2012) (Waterman, J., concurring).
In Bierkamp, we found no rational basis for Iowa's automobile guest statute and held it could not withstand constitutional attack under article I, section 6. 293 N.W.2d at 585. At the outset of our rational basis review, we stated that "changes in underlying circumstances may vitiate any rational basis" and "the passage of time may call for a less deferential standard of review as the experimental or trial nature of legislation is less evident." Id. at 581. However, it is unclear that we even applied these principles in that case. Immediately after stating them, we went on to discuss jurisprudence overturning automobile guest statutes in other jurisdictions. Id. at 581-82. Thus, if anything, the Bierkamp decision's reference to "changes in underlying circumstances" contemplates evolving legal trends. There have been no comparable developments of which we are aware in property tax jurisprudence.
Notably, the Eighth Circuit case on which we relied in Groves indicates that elected policymakers are better suited to reevaluate the basis for legislation over time. See Doe, 405 F.3d at 715 ("The legislature is institutionally equipped to weigh the benefits and burdens of [legislation], and to reconsider its initial decision in light of experience and data accumulated over time."). Still, the United States Supreme Court recognized that a property taxation scheme can become constitutionally invalid if it fails to account for changes in value due to the passage of time. Allegheny Pittsburgh Coal Co. v. Cnty. Comm'n of Webster Cnty., 488 U.S. 336, 343-46, 109 S.Ct. 633, 637-39, 102 L.Ed.2d 688, 697 (1989) (striking down a county's assessment of property taxes primarily on the basis of purchase price, with no adjustments over time, such that new property owners were assessed at roughly 8 to 35 times the rate of those who had owned their property longer).
