Testimony

Constitutionality of the Prosperity Zone Compact

Arizona State Legislature
Joint Ad Hoc
Committee on Prosperity Districts

Chairmen Smith and Montenegro and members of the committee, thank you for this opportunity to discuss legal and constitutional issues attending the prosperity zone compact method for achieving policy reform.

As a member of the Compact for America’s (“CFA”) council of scholars, I’m an ardent supporter of the compact approach. This method makes the path to state-initiated reform quicker, easier, and more legally certain. It allows states to agree in advance to policies and procedures. It allows Congress to fulfill its entire role in a single resolution passed once. When time is of the essence and the federal government is unsupportive, this approach would allow positive change to occur as soon as two states agree on it. I know of no other approach that does this with the certainty, efficiency, and safety offered by a compact.

What Is a Compact?

An interstate compact is both a law and a contract among two or more states. It is often formed by the passage of a statute in one state that creates an open offer to enter into or “adopt” a specified agreement and the subsequent passage of counterpart statutes in other states that likewise “adopt” the specified agreement. In both the offering and accepting states, the statutes adopting the agreement are passed as ordinary legislation, with gubernatorial presentment.

The subject matter of compacts between the states may involve the invocation of any sovereign power, including the police power. There are over 200 existing interstate compacts. The average state is a party to at least 25 compacts.

Although most compacts deal with subjects that have immediate and direct interstate effects, such as a shared border or water resources, others simply coordinate and standardize policies for the sake of encouraging greater legal certainty and reliability among member states, their residents and businesses. The Interstate Insurance Product Regulation Compact, for example, requires all member states to adopt the same standards for approving insurance companies and policies. Likewise, the Agreement on Qualifications of Educational Personnel coordinates the uniform recognition of public-school teacher certification. Similarly, the Interstate Medical Licensure Compact provides relatively streamlined and reciprocal licensing for various medical professionals.

In our nation’s interconnected economy, the use of interstate agreements to coordinate public policy is not surprising. All states have interests in each other’s policies because they want to maintain predictable legal frameworks for their own businesses and residents as they travel and engage in commerce among the states. One of the earliest interstate compacts, predating the Constitution, reciprocally guaranteed the continued protection of existing property and contract rights in the adopting states from “any law which rendered those rights less valid and secure.” Although this early compact guaranteed continuity of internal policies among bordering states, modern communications and transportation allows such mutual interest to be the same regardless of where the states are located.

For the same reason that nearly every state has adopted uniform laws on topics such as commercial transactions, adult guardianships, and trade secrets, virtually any intrastate public policy is reasonably embedded in a compact. That’s why the subject matters of existing interstate compacts now span a huge public policy spectrum, such as boundary-line resolution, regulatory policy, economic development, transportation policy, tax-law coordination, and even advancing constitutional amendments.

The Prosperity Zone Compact as a Legal Institution

Once at least two states pass the same legislation to adopt the Prosperity Zone Compact, a sovereign contract is formed between them whereby certain state-level policy reforms become entrenched in the Prosperity Zone from future repeal and reciprocally recognized. This Compact would replace decades of special interest-driven tax and regulatory policies with best practices in easily formed and expandable areas.

But can the Prosperity Zone Compact withstand legal scrutiny? The short answer is yes. Interstate compacts can offer all the authority of an ordinary state statute plus the durability of a sovereign contract and the capacity to replace federal law with congressional consent.

One concern sometimes expressed about the Prosperity Zone Compact is that it cannot have any legal effect before it receives congressional consent in the form of a joint or concurrent resolution passed by the House and Senate. This concern is based on the text of article I, section 10 of the Constitution, which provides: “No State shall, without the consent of Congress … enter into agreement or compact with another State.” The broadness of the language of the “Compact Clause,” when read literally in isolation, seems to indicate that all agreements between or among states would require the consent of Congress. This interpretation is wrong because the Supreme Court has never interpreted this clause in isolation from the rest of the Constitution.

In recognition of the limited powers of the federal government, the Court has long recognized that the Compact Clause sweeps no more broadly than is needed to defend federal supremacy in the exercise of its delegated powers. For example, over 120 years ago, in Virginia v. Tennessee, 148 U.S. 503, 518 (1893), the Court held that only those interstate agreements that affect the power of the national government or the “political balance” among the state and federal governments require the consent of Congress. Respect for state sovereignty drove the Court to rule that the Compact Clause is not a freestanding prohibition on compacts that lack congressional consent. As it held in U.S. Steel v. Multistate Tax Commission, 434 U.S. 452, 495 (1978), if a compact merely coordinates powers that states could exercise rightfully on their own—without enhancing their authority relative to the federal government or invading any federal power—that compact does not trigger the need for congressional consent.

Further, the Court has held very clearly that the Compact Clause is exclusively concerned about such “vertical” effects between the states and federal government. It has expressly refused to apply the clause regarding the “horizontal” effects of an interstate compact, such as concerns about “collusion” among compacting states. Id. at 473, 478. In view of these principles, there is no question that the Prosperity Zone Compact can have immediate effect upon state passage of legislation adopting it for three reasons.

First, when passed by only one state, the Compact expressly only has the status of state legislation. No sovereign contract is formed at that time, no interstate commission is formed, and the state remains fully free to repeal the legislation or amend it. In other words, the Compact is purely statutory upon its first enactment. Hence, the Compact Clause is not implicated at all.

Second, the Prosperity Zone Compact actually already enjoys a measure of congressional consent. The Compact expressly invokes 4 U.S.C. § 112, which federal courts have held to provide congressional consent, in advance, to a wide range of interstate agreements related to criminal justice—such as compacts on extradition and the transfer and supervision of probationers and parolees. The Supreme Court specifically held the statute to effectively give advance consent to a compact formed decades after the original statute. Cuyler v. Adams, 449 U.S. 433, 440-41 (1981). Section 112 can thus apply to parts of the Prosperity Zone Compact: (a) authorizing the formation of Prosperity Districts with exclusive authority over criminal law, and requiring reciprocal recognition of such authority among all member states; and (b) requiring disputes over jurisdictional or interpretative disputes among federal and state agencies to be settled by alternative dispute resolution overseen by the Compact’s commission. To some extent, therefore, congressional consent already exists for the Prosperity Zone Compact, allowing it to be effective upon formation to the extent that it encroaches on federal criminal law and policy.

Third, the Compact Clause is no bar to the effectiveness of the Prosperity Zone Compact because the Compact uses conditional enactments to segregate the contractual provisions that merely exercise and coordinate powers that states could exercise rightfully on their own—such as reciprocally recognizing and committing to maintain the compact’s state law reforms—from those that may be construed as overriding contrary federal law beyond that which is already authorized by 4 U.S.C. §112. The former are deemed immediately effective upon a second state adopting the Compact. The latter are expressly deemed effective only if the requisite additional congressional consent is secured. The use of conditional enactments in this way precludes any claim that the Prosperity Zone Compact threatens or displaces federal supremacy. That is because the compact has neither the intent nor effect of altering federal-state relations until the requisite congressional consent is received. The Compact’s severance clause further underscores this intent by authorizing a court to sever any provision that might violate the Compact Clause.

Furthermore, the Compact’s use of conditional enactments is entirely consistent with the general rule that congressional consent can be given for a compact after it’s formed. As explained in Virginia v. Tennessee, 148 U.S. 503, 521 (1893), a compact’s near-term effect on federal-state relations may be immaterial (or inherently unknowable) at formation. Accordingly, the mere creation of the Prosperity Zone Compact can’t threaten federal power because it doesn’t effect any change in policy until a Prosperity District is actually formed. Thus, the extent to which additional consent is needed for the Compact’s terms to become federal law can’t be known until the issue ripens via interactions between federal agencies and a future District.

In sum, the non-contractual terms of the Prosperity Zone Compact are immediately effective as ordinary legislation in the first state that passes it. This enables Prosperity Districts to be formed as soon as 20 days after the first state adopts the Compact. Additionally, the Compact’s contractual terms enabling the formation of cross-border districts, requiring reciprocal recognition of reform policies and guaranteeing that such reform policies will be maintained are immediately effective when two states adopt the Compact. Finally, the terms of the Prosperity Zone Compact that can be construed as “enabling cooperative effort and mutual assistance in the prevention of crime and in the enforcement of their respective criminal laws and policies, and to establish such agencies, joint or otherwise, as they may deem desirable for making effective such agreements and compacts” are immediately effective on the basis of advance congressional consent under 4 US.C. § 112. Only the portion of the Prosperity Zone Compact that seeks to “upgrade” its fiscal and regulatory policies to the status of federal law beyond the consent furnished by § 112 is not immediately effective. By express provision, this upgrade must wait for congressional consent—precisely as the Constitution commands.

“Upgrading” the Prosperity Zone Compact

The Compact is designed to “upgrade” the reforms within the Prosperity Zone to include the similar replacement of suboptimal federal laws, taxes, and regulations. This upgrade would require congressional consent. Interstate compacts receiving congressional consent are now clearly recognized as equivalent to federal law under the Supremacy Clause and as a potential source of vested rights that are protected against federal regulatory action. Indeed, interstate compacts receiving congressional consent not only displace state law under the Supremacy Clause, but have been held to supersede prior federal law and even to delegate federal power to compact-created agencies as well. For example, the D.C. Circuit has held that the liability provisions of the previously enacted Federal Employer’s Liability Act were displaced by the contrary provisions of the Washington Metropolitan Area Transit Authority interstate compact. McKenna v. WMATA, 829 F.2d 186, 188 (D.C. Cir. 1987).

Additionally, the rights, guarantees, and obligations such interstate compacts create are protected from deprivation by the federal government as vested rights under the Fifth Amendment’s Due Process Clause. For example, the Supreme Court ruled that water rights under the Colorado River Compact are protected against a federal agency’s efforts to undermine them by enforcing an inconsistent federal law. Bryant v. Yellen, 447 U.S. 352, 369 (1980).

The clear rule of law establishing the “upgradeability” of an interstate compact to the status of federal law for the foregoing purposes did not emerge suddenly. It is something with which courts and policy makers have grappled for centuries. Most of the time, federal upgradeability has been regarded as a bug and not a feature. An examination of a wide range of congressionally approved compacts reveals a common feature: provisions that prevent the compact from altering the powers of the federal government.

The only known possible limit on the federal law “upgrade” of an interstate compact that receives congressional consent is whether the compact is an appropriate area for congressional legislation. But early Supreme Court precedent indicates that there is another theoretical basis of recognizing the Prosperity Zone Compact’s equivalency in status to federal law upon congressional consent. Specifically, such status can also stem from construing such consent as yielding to the independent sovereignty of the states over the subject matter of the compact.

Even if the sole test for receiving federal-law status upon congressional consent were an assessment of whether a compact’s subject matter was appropriate for federal legislation, it’s not difficult to justify such status for the Prosperity Zone Compact. After all, the Compact expressly seeks to replace federal laws and policies with its regulatory and fiscal reforms. The authority for such localized reform is precisely the same as that which authorized the federal law that it would replace. Perhaps ironically, the Supreme Court’s broad reading of the Commerce Clause and other federal powers provides strong support for federal upgradeability of the Prosperity Zone Compact and almost any compact no matter how locally focused or non-federal it may seem.

Other Constitutional Concerns

There are no independent constitutional impediments to the treatment of the Prosperity Zone Compact as the equivalent of federal law when it receives congressional consent. The targeted nature of its tax reforms to areas governed by a Prosperity District should pose no problems under the Uniformity Clause of Article I, section 8, which states, “all Duties, Imposts and Excises shall be uniform.” The Compact does not define the class of objects to be taxed in geographic terms and indeed imposes no taxes at all. It merely replaces existing statutory taxes with a revenue-sharing covenant that is voluntarily adopted while forming a Prosperity District. The Prosperity Zone Compact is open to entry by all states based on uniform criteria. There is simply no way the Uniformity Clause would preclude the Prosperity Zone Compact from attaining the status of federal law upon receiving congressional consent.

Likewise, treating the Prosperity Zone Compact as the equivalent of federal law when it receives congressional consent is not precluded by the non-delegation doctrine under the Constitution’s separation of powers guarantee. Although the replacement of inconsistent federal laws and policies is triggered by the formation of a Prosperity District, all criteria for granting the owners’/residents’ petition are specified in the Compact and no substantive federal policy matter is otherwise delegated to any private party. The process is not materially different than the petition process used by private parties to establish special districts throughout the states, all of which thereby gain access to analogous federal tax exemptions for municipal borrowing (which no one challenges as an improper delegation of federal taxing authority). Moreover, the Supreme Court has long sustained legislative acts entailing direct private-party approval or rejection of new regulatory schemes—even where a substantial degree of policy discretion was vested in those private parties. Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 398-99 (1940); Currin v. Wallace, 306 U.S. 1, 14-15 (1939). In contrast to the “unfair competition” regulations sustained in Sunshine Anthracite or the price controls in Currin, no coercive power and far less legislative power is delegated to those private parties who want to form a Prosperity District. For this reason, current case law should easily sustain the Prosperity Zone Compact as federal law without raising concerns about impermissible legislative delegation.

Finally, it is exceedingly unlikely that the Prosperity Zone Compact’s alternative dispute-resolution process would be seen as improperly delegating the Article III judicial power. In Texas v. New Mexico, 462 U.S. 554, 571 n.18 (1983), the Supreme Court emphasized that it would happily defer to the informal dispute-resolution decisions of the Pecos River Commission, a compact agency created by the Pecos River Compact as a “completely adequate means” of resolving disputes among member states. The Court would likewise defer to the Prosperity Zone Compact’s dispute-resolution process overseen by its interstate commission.

Conclusion

The Prosperity Zone Compact, once it came into being, would be a fully legal institution, an enforceable contract between state sovereigns that could be “upgraded” to the status of federal law upon congressional consent. There are no constitutional reasons why the fiscal and regulatory reforms contemplated for Prosperity Districts cannot be achieved in this manner.

Thank you for your time. I welcome your questions.

Note:

* Much of this presentation is drawn from Compact for America Policy Brief No. 10, “The Prosperity Zone Compact, Leveraging the Power and Promise of Interstate Compacts to Bring Back the American Dream,” July 21, 2016, available at goo.gl/uPM8E1.