Thursday, July 10, 2014

Dow v. Black -- Spending Power -- Thumbs Down

Case Summary of Dow v. Black, [1875] UKPC 17. The origins of the spending power.

The Pithlord lives in a town that enjoys arguing about municipally-financed infrastructure projects (right now, a bridge and a sewage treatment plant generate most of the passion). Perhaps you do too. James Dow and William T. Black, who made their home in Confederation-era New Brunswick, certainly did. They were on opposite sides of a knock-down municipal battle about whether to subsidize a rail link to Maine.

The town of Boulton in Maine was willing to put up some of the capital to encourage a private company to build the link, but only if the corresponding New Brunswick parish of St. Stephen would match them. Dow and his supporters saw the benefits in jobs and cross-border shopping opportunities. Black and his cronies saw no reason for local taxpayer to foot the bill for a profit-making white elephant.

Weeks after New Brunswick became part of the new Dominion of Canada (to considerable controversy), its legislature passed a bill authorizing St. Stephen to borrow money for the project if 2/3 of the ratepayers voted "yes". Bill Black spoke for the motion. Jim Dow against. Bill and his friends got the necessary votes.

And so it would have ended, had not Jim Dow been a pioneer in trying to reverse political losses to court. He noted that s. 92 (10) of the British North America Act  gave authority over railways "extending beyond the Limits of the Province" to the feds.  He persuaded the New Brunswick Supreme Court (there is still no Supreme Court of Canada) that this was so.

Black's lawyer -- the former Secretary of State for the Confederacy, and now a British barrister named Judah P. Benjamin argued that railways "extending beyond the Limits of the Province" did not include railways going to other countries. This was a dumb argument, and did not persuade the Privy Council. But they ruled for his client, and provincial authority, anyway.

The Law Lords distinguished sharply between regulatory authority and spending resources. The Act, they said, "was merely one which enabled the majority of the inhabitants of the parish of St. Stephen to raise by local taxation a subsidy designed to promote a work which they considered for the benefit of their town..." It was the same as if a private association or individual spent private resources for the same purpose.

This move --approved by conventional opinion to this day -- ultimately dooms classical federalism. Ultimately, subsidizing or penalizing activity is a (perhaps imperfect) substitute for requiring or banning it. If a provincial entity can tax and spend in federal areas, or (more importantly ultimately) a federal entity can tax and spend in provincial areas, then there is really no line between the two, other than the line they negotiate.

This move rests, moreover, on a fallacy. State resources are not like private resources. They are obtained coercively. The coercion can only be justified because of the purposes the state needs to fulfil. When that state is a federation, the purposes for which each level of government should be able to tax (and therefore spend) should properly be seen to be limited by the constitution.

I would therefore have dissented. (Except the Privy Council did not allow dissents. And I wasn't born for another century.) Building international railways was not among the proper functions of local governments under the post-Confederation arrangement, and therefore not something the local government (or any other provincial entity) should have been allowed to spend money on.

Postscript on municipal taxation: Dow is the source of the proposition that municipalities can tax their citizens if provincial legislatures authorize them to do so. Bill Black made an interesting argument to the contrary that the Privy Council didn't give a fair shake to. Section 92 (2) gives the provinces power tl make laws in relation to "Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes." Contrast this with section 92 (9) referring to "Shop, Saloon, Tavern, Auctioneer and other Licences in order to the raising of a Revenue for Provincial, Local, or Municipal Purposes."

A good argument now and a good argument then was that the inclusion of "local or municipal purposes" in section 92 (9) renders their exclusion in 92 (2) meaningful. It would suggest that the BNA Act thought licence revenue should be sufficient for municipal and local government purposes, and therefore that taxation could only be used for provincial purposes. But the Judicial Committee didn't buy it, so if you are a homeowner, you still have to pay property taxes.

Wikipedia's take on the case  is here.

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