Request By:
Paul F. Fauri, General Counsel
Department for Human Resources
275 East Main Street
Frankfort, Kentucky 40621
Opinion
Opinion By: Steven L. Beshear, Attorney General; Martin Glazer, Assistant Attorney General
You seek an opinion of this Office as to whether the tax increases for employers paying unemployment taxes create a constitutional problem involving the impairment of contracts clause of the Federal and State Constitutions.
H.B. 746, 1982 General Assembly, increases the wage base and tax rate of unemployment insurance contributions. The employer will now pay contributions on the first $8,000 of each worker's covered wages rather than on the first $6,000. The tax rate is also increased.
The bill creates an emergency clause and makes the rate and base retroactive to January 1, 1982.
Some employers have entered into contracts (particularly construction contracts) which have figured costs based upon prior tax rates. These employers have questioned whether the tax, as enacted, impairs their obligation of contract under the Kentucky and Federal Constitutions.
The questions raised by these employers reveal a complete misunderstanding of the legal nature of the impairment of contract clauses in the aforesaid Constitutions.
First of all, we should point out that making the tax an emergency and making it retroactive to January 1, 1982, does not make the tax itself retroactive. The previous rate covered the entire calendar year, 1981. The amendment to KRS 341.270 (in H.B. 746, Sec. 2), subsection 3, states, in part, "For the calendar year 1982 [instead of 1981] and each calendar year thereafter . . ." the rate is increased. So, the rate is based on an entire calendar year and the increase covers the entire calendar year in which the tax was amended.
In
Welch v. Henry, 305 U.S. 134, 59 S. Ct. 121 (1938), the Supreme Court upheld the constitutionality of a retroactive tax.
Secondly, the tax, as raised, does not impair the obligation of contracts. The obligation of contracts is only impaired when such contract is rendered invalid, released, or extinguished.
City of Covington v. Sanitation Dist. No. 1, Ky., 301 S.W.2d 885, 888 (1957). The raising of the state tax on unemployment insurance does not render invalid any contract which is in existence, neither does it release an existing contract or extinguish one.
At most, the tax increase creates an additional expense to the contracting parties in carrying out their obligation. The nature of the obligations remains the same, and the terms have not been altered.
Further, contracts are subject to the state's police powers and legislation enacted thereunder are not rendered invalid by the incidental effect on an existing contract.
Johnson Bonding Co., Inc. v. Commonwealth of Kentucky, 420 F.Supp 331 (1979).
In that case, the state under its police powers practically destroyed private bonding companies providing bail for criminal defendants.
Here, the tax increase in no way destroys existing contracts. The contracting parties have the same obligations which they had before the taxes were raised, nor does the statutory change extinguish any existing contract, nor release such a contract.
Obviously, any existing contract may be affected by changes in taxation and if that fact were to constitute a violation of the impairment of contract clause of the State and Federal Constitutions, no tax amendment could ever be enacted.
And, even if it be shown that a statutory change may impair the obligations of existing contracts and may violate the contracts clause of the Constitution, such clause is subject to a state's inherent police powers. In re Auto Electric Repair and Parts Co., 46 F.Supp 3 (D.C. Ky. 1941);
Johnson Bonding Co., Inc. v. Commonwealth of Kentucky, supra.
CONCLUSION
1. The amendment to the unemployment insurance tax on employers is not retroactive because the base period extends to January 1, 1982, since the tax covers the concurrent calendar year in which it was amended.
2. Increasing incidental costs of carrying out a contract does not impair the obligation of contracts nor violate such clause in State and Federal Constitutions because the terms are still the same and the obligation has not been released or extinguished.
3. And, even if a statute were to impair the obligation of an existing contract, such is permissible when the statute is enacted to safeguard the vital interests of the people under the state's police powers.
I trust that this has answered your inquiry.