February 10, 2014

Is protectionism a traditional government function?

By Jonathan Wood Attorney

Last week, the Court of Appeals of Kentucky issued an odd decision that appears to restrict the extent to which the U.S. Constitution restricts states from benefiting domestic industries at the expense of interstate commerce. The Dormant Commerce Clause forbids states from doing this on the grounds that regulating interstate commerce is left to Congress.

At issue in the case was a regulation adopted by the state agency that regulates the horse racing industry. The regulation forbid purchasers of certain types of race horses from racing them in any other state for a period of time. One such purchaser is challenging this regulation as a naked attempt to benefit the domestic horse racing industry at the expense of purchasers and the racing industry in other states, and therefore unconstitutional.

The Court of Appeals ruled against him. In the decision, the court declined to subject the regulation to real scrutiny on the grounds that regulating industries is a “traditional government function” and the “everyone else is doing it” defense. The first ground threatens to obliterate the Dormant Commerce Clause, because, regardless of how pervasively the government regulates industry, it can’t do so by discriminating in favor of domestic interests without a reason. And the Court did not identify any legitimate reason for this discrimination.

[T]here can be little doubt that the pervasive role of the state in regulating the horse racing industry meets the broad criteria for traditional governmental function contemplated by the Supreme Court. The purpose and effect of the regulation in question is not to give preference to any individual in-state private party, but to nurture and promote the market for race horses, and to ensure that the public as a whole will benefit from the stronger fields and more competitive races that will result.

The Court may be right, but this is a non sequitur. The regulation doesn’t directly discriminate in favor of a particular domestic business. So what? It does benefit in-state businesses at the expense of out-of-state businesses. That’s precisely what the Dormant Commerce Clause forbids.

Additionally, the Court relied on the fact that other states are unlawfully favoring their domestic horse racing industries with similar laws. But this too is not relevant to whether the discrimination is constitutional.

Second, the vast majority of states that permit wagering on horse racing—27 out of 38 states—have enacted laws similar to the Regulation. If nearly every other horse racing jurisdiction has a similar rule, the alleged impact on interstate commerce is likely inconsequential.

If 27 other states jumped off a cliff…

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