The Seventh Circuit Court of Appeals recently confirmed that a state or local government’s intent to discriminate against railroad carriers is a relevant consideration in analyzing allegations of discriminatory taxation in violation of the federal Railroad Revitalization and Regulatory Reform Act (“4-R Act”). 49 U.S.C. § 11501. The court further clarified the relationship between the 4-R Act and the Tax Injunction Act (“TIA”). 28 U.S.C. § 1341; Kansas City S. Ry. Co. and Norfolk S. Ry. Co. v. Koeller, No. 10-2333 (7th Cir. July 27, 2011). The residual clause of the 4-R Act prohibits states and their subdivisions from imposing discriminatory taxes against railroads.

At issue was a shift in 2009 by the Sny Island Levee Drainage District (an Illinois political subdivision), from its longstanding and uniform, per-acre annual maintenance assessment on all property to an assessment based on differentiating between land owned by railroads, pipelines, and utilities (“RPU”), and non-RPU land. Under the new regime, non-RPU land would continue to be assessed on a per-acre basis while RPU land would be assessed according to the value of the benefit conferred on RPU lands by the District’s levee system. The result: 4,800% and 8,300% increases in assessments for Kansas City Southern and Norfolk Southern railroads, respectively, in the span of one year. At the same time, the District chose to exempt land situated within municipalities, which, according to the District’s commissioners, included all non-RPU commercial and industrial properties. To make matters worse, the District never notified RPU landowners of the change in assessment methodologies, as it was required to do under Illinois law.

Applying an analysis similar to that used in TIA cases, the court first determined that the annual maintenance assessment was a tax (rather than a fee) under the 4-R Act because it was designed to generate revenue for the general support of the government. To resolve the issue of whether the tax was discriminatory (and violated the 4-R Act), the court held that discriminatory intent is relevant under the residual clause of the 4-R Act, even if irrelevant under other parts of the Act. Evidence of the District’s intent to discriminate against the railroads pervaded the evidentiary record, and the District’s new methodology was clearly discriminatory in practice.

Finally, the court clarified that in the context of a challenge to a tax that discriminates against a railroad under the 4-R Act’s residual clause, the 4-R Act’s exception to the TIA does not require the challenging railroad to prove anything other than the existence of discrimination. As the railroads had demonstrated, the differential treatment and the District’s intent to discriminate against the railroads in this case, the court ordered that the 2009 assessment be enjoined.