Taxes and Ability to Pay in Municipal Bankruptcy

61 Pages Posted: 7 Oct 2015 Last revised: 23 Oct 2015

See all articles by John P. Hunt

John P. Hunt

University of California, Davis - School of Law

Date Written: July 20, 2015

Abstract

Scholars and commentators have argued that municipalities can and should use bankruptcy to shed unwanted liabilities, particularly employee healthcare and pension commitments. Courts increasingly have agreed: Detroit’s approved bankruptcy plan cut pensions, and the bankruptcy court overseeing the bankruptcy of Stockton, California brought down barriers to pension-cutting. Both courts found their way around state provisions arguably protecting municipal pensions.

Now that pension-cutting in bankruptcy has momentum, we can expect to hear arguments for using bankruptcy not just in cases like Detroit and Stockton where the municipality can’t meet all its obligations, but also in cases where residents or politicians come to regret municipal promises to workers.

This Article presents the most sustained, straightforward, and comprehensive argument to date that existing law requires bankruptcy courts to provide relief only when municipalities are reasonably unable to meet their obligations. The legislative history of the municipal bankruptcy statutes consistently sounds this theme, and judicial precedents are in agreement.

Congress did not provide a clear standard for courts to apply when looking at tax levels in municipal bankruptcy. Although the legislative history and caselaw provide some support for the proposition that municipalities should be required to tax at the level that maximizes revenue, the Article suggests a more moderate criterion: courts could require that a municipality tax at the top of its peer group as a condition of bankruptcy eligibility and plan confirmation.

Keywords: municipal bankruptcy, state and local tax, legislative history, Detroit, Stockton

JEL Classification: K39

Suggested Citation

Hunt, John P., Taxes and Ability to Pay in Municipal Bankruptcy (July 20, 2015). Washington Law Review, Forthcoming, UC Davis Legal Studies Research Paper No. 463, Available at SSRN: https://ssrn.com/abstract=2670273

John P. Hunt (Contact Author)

University of California, Davis - School of Law ( email )

Martin Luther King, Jr. Hall
Davis, CA CA 95616-5201
United States
(530) 752-5052 (Phone)

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