Local governments watching Supreme Court tax case

WASHINGTON -- Whether the good fortune of some Indianapolis homeowners who saved themselves thousands of dollars simply by putting off paying a bill is unconstitutionally unfair will be debated by the nine U.S. Supreme Court justices on Wednesday.

But the potential impact of the case goes far beyond those few homeowners.

Organizations representing state and local government officials across the country have asked the Supreme Court to side with the city of Indianapolis, which forgave outstanding balances owed by some homeowners for a sewer project when the city switched to a new funding system. Government officials say a ruling in favor of the homeowners could interfere with their decision making.

When the switch in the funding system in Indianapolis occurred some residents had already paid the full amount of $9,278 while others in the same neighborhood who were on an installment plan had paid only $309.

Taxpayer-right groups back the homeowners who paid the full price, as did a Marion County court and the Indiana Court of Appeals. The Indiana Supreme Court sided with Indianapolis last year.

In a separate suit by homeowners filed in federal court, a federal judge in Indianapolis ruled in 2010 that the city violated the equal-protection clause. The opposing conclusions reached by the federal judge and by the Indiana Supreme Court may be a reason the U.S. Supreme Court decided to get involved.

The homeowners in the Northwestside's Northern Estates neighborhood want refunds for paying the full $9,278 they were assessed in 2004. At the time, the city used a state law — called the Barrett Law — to divide up the sewer cost equally among the approximately 180 properties benefiting. Property owners could pay upfront, or could pay in installments with interest over 10, 15 or 30 years.

When the city decided in 2005 to no longer use the Barrett Law for future projects, the Northern Estates owners were one year into the payment process. So those who hadn't paid up front had shelled out only $928, $464 or $309, depending on the length of payment plan they'd chosen. Their remaining balances were forgiven and liens on their property removed.

City officials said they needed to change how sewer projects are funded because the Barrett Law was unpopular and thousands of septic systems in Marion County are failing.

The city argues it had three choices for how to transition to the new system. It could have continued to collect on the more than 40 projects that still had outstanding balances, a process that would take nearly 30 years. It could have refunded every payment ever made under the old program, which would have cost a lot of money and been "an administrative nightmare." Or, as the city decided to do, it could make a clean break from the old system.

That latter choice meant a windfall for the neighbors who hadn't fully paid for their hookup, the city acknowledges.

"But envy does not a constitutional violation make," the city wrote in its Supreme Court brief in advance of Wednesday's oral arguments.

"As long as the government is even-handed about applying the effective date, there is simply no constitutional issue implicated," the city's attorneys wrote.