This article originally was published at The Empowerment Alliance and is re-published here with permission via by Real Clear Wire.
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.
Ilya Somin, a law professor at George Mason University writing for Reason.com, called the decision “an important win for constitutional federalism” that affirms that the government’s taxing authority is designed to raise revenue, not to be abused as a backdoor excuse to exert control. Somin points to Fifth Circuit Judge Edith Jones’s reasoning in her opinion for the majority: “The provisions (of the law) operate to reduce revenue instead of raising it. This violates the Supreme Court’s explanation of how the federal power of taxation works…”
Somin tempers his optimism by noting that the law “could pass muster under Congress’ power to regulate interstate commerce, which the Fifth Circuit did not consider, because the government chose not to argue this issue on appeal.” That means “the federal government…could potentially try to continue to enforce this law and — if challenged again — defend it under the Commerce Clause.”
Over time, the hope is that the Supreme Court will expand the decision to rein in the Commerce Clause aspect of such regulations. Either way, the Fifth Circuit’s ruling is a welcome nod to the fact that the federal government cannot take tax laws intended to increase revenue and twist them merely to regulate business activities.
For the energy industry, the good news is that the ruling opens the door to new challenges of regulations that have been tied to taxation, whether in regard to EPA rules, land use restrictions, or mining and drilling bans. From carbon taxes to Environmental, Social and Governance (ESG) regulations to the questionable use of the Endangered Species Act to stop construction and development, this decision provides reason for optimism for energy entrepreneurs.
What’s also noteworthy is that the Fifth Circuit’s decision, as noted by Professor Somin in his Reason article, saw judges from different ideological backgrounds come together in unanimous agreement, with the conservative Judge Jones Judge Edith Jones and liberal Obama appointee Judge James Graves reaching the same conclusions.
That a pro-federalism legal view is shared in this case by the right and left is encouraging for all who cherish individual freedom over government overreach. The McNutt decision will by necessity give the federal government pause the next time it considers abusing its taxing powers to control behavior it doesn’t like – and that alone is a big win for all freedom-loving people.
Gary Abernathy is a longtime newspaper editor, reporter and columnist. He was a contributing columnist for the Washington Post from 2017-2023 and a frequent guest analyst across numerous media platforms. He is a contributing opinion columnist for The Empowerment Alliance, which advocates for realistic approaches to energy consumption and environmental conservation.
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