470 U.S. 869 (1985)
Since 1955 Alabama has maintained a domestic preference tax statute that taxes the gross premiums received by insurance companies on policies issued in the State.1 Foreign life insurance companies pay a tax at a rate of three percent, and foreign companies selling other types of insurance pay at a rate of four percent.2 All domestic insurance companies pay at a rate of only one percent.3 The statute permits domestic insurers to exclude from taxable premium income all premiums received from policies issued in other States in which they are not licensed.4 Foreign insurers may reduce but never eliminate the tax differential by investing prescribed percentages of their worldwide assets in specified Alabama assets and securities.5
Appellants are a group of insurance companies incorporated outside Alabama. Metropolitan Life Insurance Co. represents the life insurance claimants, and Prudential Property and Casualty Co. represents the nonlife claimants.6 In 1981 appellants filed claims with the Alabama Department of Insurance seeking refunds of taxes paid for the tax years 1977 through 1980.7 They contended that the domestic preference tax statute as applied to them violated the Equal Protection Clause.8 The Commissioner of Insurance denied all claims on July 8, 1981.9
Appellants appealed to the Circuit Court for Montgomery County.10 The court consolidated the appeals and selected two lead cases.11 On cross-motions for summary judgment the court ruled on May 17, 1982 that the statute was constitutional.12 After the Court of Civil Appeals affirmed the finding of legitimate state purposes but remanded for an evidentiary hearing on rational relationship, appellants waived their right to an evidentiary hearing.13 The Alabama Supreme Court ultimately entered judgment for the State and intervenors.14
The Supreme Court of the United States noted probable jurisdiction in 1984.15 It consolidated the cases and heard argument on October 31, 1984.16
Whether Alabama’s domestic preference tax statute, which imposes a substantially lower gross premiums tax rate on domestic insurance companies than on out-of-state insurance companies, violates the Equal Protection Clause of the Fourteenth Amendment?17
The Equal Protection Clause of the Fourteenth Amendment requires that a state tax classification be rationally related to a legitimate state purpose.18
Yes. Alabama's domestic preference tax statute imposes a substantially lower gross premiums tax rate on domestic insurance companies than on out-of-state insurance companies.19 This classification is not rationally related to the purpose of encouraging the formation of new domestic insurance companies.20 The statute burdens all foreign insurers without regard to whether they might form domestic subsidiaries or the extent of their investment in Alabama assets.21
The classification is both overinclusive and underinclusive.22 The interest in raising revenue is not a sufficient justification for the discriminatory tax.23 The statute therefore violates the Equal Protection Clause of the Fourteenth Amendment.24
The Alabama domestic preference tax statute violates the Equal Protection Clause of the Fourteenth Amendment.25
Related opinions on this issue
Joined by Justice Rehnquist
Justice O’Connor dissented.26 She argued that the Alabama statute is rationally related to legitimate state purposes of encouraging the formation of domestic insurance companies and capital investment in Alabama assets.27 She maintained that the rational-basis standard does not require that a statute be perfectly tailored to its purposes.28
The classification is a rational means of achieving the state's legitimate purposes.29 She further contended that the state's interest in raising revenue can justify the tax classification.30 The Court had applied the rational-basis standard too mechanically.31