Kansas City Southern Railway Co. v. Koeller

In the

United States Court of Appeals
For the Seventh Circuit

No. 10-2333

K ANSAS C ITY S OUTHERN R AILWAY C O . and
N ORFOLK S OUTHERN R AILWAY C O .,

Plaintiffs-Appellants,
v.

R USSELL E. K OELLER, et al.,
Defendants-Appellees.

Appeal from the United States District Court
for the Central District of Illinois.
No. 09-3094—Jeanne E. Scott, Judge.

A RGUED S EPTEMBER 29, 2010—D ECIDED JULY 27, 2011

Before B AUER, W OOD , and W ILLIAMS, Circuit Judges.
W OOD , Circuit Judge. The Railroad Revitalization and
Regulatory Reform Act (“4-R Act”) prevents states and
their subdivisions from imposing discriminatory taxes
against railroad carriers. 49 U.S.C. § 11501. In 2008, the
Sny Island Levee Drainage District (“Sny Island” or
“District”), a subdivision of Illinois, changed its long-
2 No. 10-2333

standing method for calculating assessments due from
railroads and other properties within its system. Two
rail carriers—Kansas City Southern Railway Company
and Norfolk Southern Railway Company (collectively
“Railroads”)—brought suit under the residual clause of
the 4-R Act, which prevents imposition of “another tax
that discriminates against a rail carrier.” Id. § 11501(b)(4).
After the district court held that the assessment qualifies
as “another tax” actionable under subsection (b)(4), the
Railroads sought a preliminary injunction. The case
proceeded to a bench trial, after which the district court
entered judgment for Sny Island on the ground that it
was powerless to enjoin the tax. While we agree with
the district court that Sny Island’s assessment should be
characterized as a “tax” for purposes of the 4-R Act,
we conclude that the court erred in its assessment
of its authority to enjoin the tax as discriminatory. Ac-
cordingly, we reverse and remand.

I
For over a hundred years, Sny Island has operated in
central Illinois a levee and drainage system that is
designed to prevent the Mississippi River from flooding
a 60-mile, 114,000-acre area. (For an interesting account
of the checkered history of such efforts all along the
Mississippi, see JOHN M. B ARRY, R ISING T IDE: T HE G REAT
M ISSISSIPPI F LOOD OF 1927 AND H OW IT C HANGED
A MERICA (1997).) The overwhelming majority of the
protected land, some 99.5 percent, is used for agricultural
purposes. The remaining fraction of a percent includes
No. 10-2333 3

residential, commercial, utility, and railroad lands. The
Railroads are two of 700 landowners within the District.
Overall, their holdings are quite small: 210 acres belongs
to Kansas City Southern, and just over 145 acres to
Norfolk Southern.
To enable Sny Island to fund its general operations, the
Illinois Drainage Code empowers the District’s commis-
sioners to “levy assessments upon the lands and other
property benefitted” by the levee system. 70 ILCS 605/4-18.
The Drainage Code provides for annual levies, and his-
torically the District took advantage of this authority.
70 ILCS 605/5-1, 5-19. In order to increase an existing
“annual maintenance assessment,” Sny Island commis-
sioners must petition the Pike County Court for authori-
zation. 70 ILCS 605/4-19. In evaluating a petition, the
county court considers whether a proposed assessment
is “necessary or advisable” and whether “the cost thereof
to the lands and other property in the district will exceed
the benefits thereto.” 70 ILCS 605/4-24. If the proposal
is not necessary or advisable or its costs outweigh its
benefits, “the court shall dismiss the petition.” Id. When-
ever the commissioners file a petition, they are required
to send out notices of the proposed assessment and
advise property owners when the court will conduct
its hearing so that objections, if any, can be considered.
70 ILCS 605/4-20 to 24.
For decades, Sny Island collected a uniform annual
maintenance assessment from all its landowners. To
calculate the amounts due, Sny Island simply divided
its operating budget by the total number of benefited
4 No. 10-2333

acres and assessed a per-acre fee to each landowner
based upon the number of acres owned. These rates were
also adjusted, in small measure, to account for the eleva-
tion of each tract. On average, landowners paid $8.50 per
acre. This rate had been in place since 1987 and, by all
accounts, it provided sufficient funding for the District.
After severe floods in 2008, coupled with a sharp increase
in the price of diesel fuel (which is used to operate the
drainage pumps), however, the District’s operating
funds and its emergency coffers ran dry. Accordingly, in
February 2008 Sny Island’s commissioners decided they
needed to increase the annual maintenance assessment
for 2009.
Between March and June 2008, the commissioners
debated how much of an increase in the annual assess-
ment was needed. Initially they considered a $5-per-acre
increase, but when their projected needs doubled (pri-
marily because of the still-rising cost of diesel), they
settled on a $10-per-acre increase; the 2009 assessment
was therefore expected to average $18.50 an acre. In a
break from tradition, however, the commissioners chose
not to apply this rate uniformly. Instead, they opted to
differentiate by property type.
Most significantly for our purposes, the commissioners
decided that land owned by railroads, pipelines, and
utilities (to which everyone in this case refers as the
“RPU” properties) would not be assessed on a per-acre
formula. This change was proposed only for the RPU
properties; all other landowners—that is, 692 of the 700
landowners within the District—would continue to be
No. 10-2333 5

charged on a per-acre basis. Of those 692 owners, the
vast majority are engaged in agriculture, 14 conduct
commercial and industrial operations, and a handful
represent residential uses. The RPU properties are easy
to identify: the two Railroads involved in this case, four
pipelines, and two utilities—an electric company and a
telephone provider. The commissioners took the posi-
tion that the per-acre formula “underassessed” RPU
lands—especially Railroad lands—and so they decided
to calculate their 2009 assessment for this small group
on a “benefit” basis. (We discuss below what they meant
by that.) The commissioners also asserted that the
Drainage Code, which requires the commissioners to
prepare an “assessment roll of benefits, damages and
compensation” for each property in the district, sup-
ported this shift. 70 ILCS 605/5-2 (emphasis added).
From July through early August 2008, the commissioners
set out to determine (1) what benefit Sny Island’s levee
system conferred upon RPU properties and (2) how
much of that benefit should be subject to a fee. For assis-
tance, Sny Island hired David Human, an attorney special-
izing in flood protection projects. Taking the second
determination first, Human testified that he wanted to
“make sure that the assessments were equitable and
proportionate” between agricultural and RPU properties.
He began by figuring out an “assessment ratio” based
upon the $18.50 fee for non-RPU land that the commis-
sioners had already decided to levy. Human estimated
that the agricultural lands received a $280-per-acre
benefit from the levees and, dividing $18.50 by $280,
arrived at an “assessment ratio” of 6.6%.
6 No. 10-2333

The source of this $280 “benefit” figure for the agricul-
tural lands is, to put it charitably, unclear. Human claims
to have taken three primary factors into account: the
difference in value between land within the District and
the land outside the levees; the annual crop rentals
being paid to landowners; and the agricultural produc-
tion of lands within the District. Based solely upon their
personal experiences, the commissioners assumed that
land inside their levees was worth $6,000 per acre, while
unprotected ground was worth approximately $2,500
an acre. (The record does not reveal how far this “unpro-
tected” ground was from the river.) This showed, Human
thought, that the benefit from Sny Island was $3,500 per
acre. He did not, as far as we can tell, take any other
criteria, such as proximity to transportation, quality of
soil, or topography, into account. Human applied an
unexplained 8% “capitalization rate” to that figure, which
came to $280. He then looked at a March 2008 report
describing the crop production records and budgets
published by the Department of Agricultural and Con-
sumer Economics at the University of Illinois. Looking
at the reported “operator and land return values,” which
he thought averaged $560, Human divided the produc-
tion average in half on the assumption that owners
engage in a 50/50 crop share—which is the cash rental
value—and would thereby have a $280 return per acre.
Once again, there was no hard data to support those
numbers. Crop returns in central Illinois (where Sny
Island is located), for example, averaged $418 for high
productivity farmland and $358 for low productivity
farmland, nowhere near $560. Northern and Southern
No. 10-2333 7

Illinois land averages are even lower. Nonetheless,
Human thought in the end that “all the numbers were
tending towards $280 an acre,” and so that is the
number he and the commissioners decided to use.
For measuring the benefit to RPU properties, Human’s
basic goal was to find a uniform system. He assumed a
hypothetical flood without the benefit of drainage
levees, and then determined what costs are typically
saved by the existence of levees. Here, too, his methodol-
ogy was sorely lacking. Human looked to (1) “decreased
maintenance costs” (by which he meant the costs of
repairing any structural damage caused by a flood) and
(2) “increased physical efficiency costs” (the financial
loss caused by not being able to operate due to a flood)
attributable to the District’s services. Human’s estimate
of the increased physical efficiency was curious: he as-
sumed “that the value of the physical efficiency of
having the [property] is at least equal to the costs of
[the property].” This prompted him to use the estimated
cost of replacing property as a basis for determining
efficiency. Thus, for the Railroads, Human multiplied
the total cost of replacing the rail line—which includes
ballast (the layer of crushed rock on which the railroad
track is laid), track, ties, and embankments—by the
number of days he expected the rail line to be closed as a
result of a flood or clean-up following a flood. Though
he made the same estimate for pipelines and utilities,
based upon the assumed cost to replace the pipeline,
electricity tower, or telephone pole, his decision to use
“greenfield” replacement costs for the Railroads vaulted
their assumed “benefit” well above other RPU properties.
8 No. 10-2333

The formula that Human created took the sum of (A)
the decreased maintenance costs and (B) the increased
physical efficiency to determine the total “benefit” con-
ferred by the District. That number was then multiplied
by the 6.6% assessment ratio he had derived earlier.
Human made different assumptions about flooding for
the Railroads than he did for the pipelines and utilities.
For the latter two, Human assumed a “significant flood”
(468 feet above mean sea level) that would affect either
overhead distribution (for the utilities) or buried gas lines
(for the pipelines). He assumed that the frequency of
such flooding would be once every six months, but that
damage would occur only once every third flood. To
support these numbers, he relied upon flood-rate data
complied by the U.S. Army Corps of Engineers between
1993 and early 2008, using river-height measurement
gauges. His approach to the Railroads was much more
involved. His worksheets set forth three types of floods:
a 16- to 17-foot flood, roughly once every 1.5 years,
that would affect ballast and close the railroad for
24 days; a 20-foot flood, once every 1.77 years, which
would send the river over the top of the railroad, require
ballast cleaning and resurfacing, and close the railroad
for 37 days; and a 24-foot flood every four years, which
would cause a complete scour, erosion of the railroad
embankment, and close the railroad for 40 days. Though
these numbers were roughly based upon the Army
Corps’ river-data, some of Human’s calculations and
assumptions, as reflected on the worksheets, depart
from these data without any explanation.
No. 10-2333 9

The results of Human’s formula over-shot the amount
Sny Island thought that it could justify, either as a matter
of its expected budget or the Drainage Code, and so the
commissioners asked Human to work with the Dis-
trict’s superintendent and treasurer, Michael H. Reed, to
“refine” the numbers. See 70 ILCS 605/5-1 (requiring
proportional assessment). Reed and Human played for
a while with the numbers, assuming a lower flood rate
for the 24-foot flood (changing it to eight years), claiming
to fix a “math error” that remains unspecified, and recal-
culating the “benefit” amount. In the end, the commis-
sioners adopted a benefit figure of $1,296,125 for Kan-
sas City Southern and $1,422,990 for Norfolk South-
ern. As before, these numbers were then multiplied by
the 6.6% ratio. Though significantly lower than Human’s
first attempt, for the Railroads this “refined” assessment
represented an astronomical increase in assessment:
$85,545 for Kansas City Southern, a 4800% increase over
its 2008 assessment of $1,774, and $93,920 for Norfolk
Southern, an 8300% increase over its 2008 assessment of
$1,126. Had the Railroads been assessed on a per-acre
basis for 2009, Kansas City Southern would have been
obligated to pay $3,898, while Norfolk Southern would
have owed $2,578.
In addition to distinguishing between RPU and non-RPU
lands, the commissioners made a second change to
their assessment collections. They decided to exempt
land within municipalities; that land had been charged
$5 per lot under the old system. The commissioners
concluded that the costs of mailing and collecting monies
from property owners within municipalities would out-
10 No. 10-2333

weigh the benefits the District could expect, even if it
raised the assessment to $25 per lot. Not finished yet,
the commissioners also assumed that all 14 non-RPU
commercial and industrial properties were located
within municipal limits. That assumption was incorrect,
as they must have known; six commercial and industrial
properties are located beyond municipal limits. These
six parcels were assessed on the per-acre basis, subject
only to the $10 increase between 2008 and 2009. Sny
Island says now that it inadvertently overlooked these
properties because of the overwhelming stress the com-
missioners were under as they struggled to combat ex-
tensive flooding.
The commissioners finalized these numbers and filed
a petition for authorization with the Pike County Court.
The commissioners published notices in local newspapers
and then sent a notice about new assessments to all
landowners within the District. The notice stated that
the “reassessment, if approved, would generally result
in a maximum $10.00-per-acre increase in annual
drainage assessment to benefitted agricultural land in
the District.” The notice said nothing about the District’s
new distinction between per-acre assessments for agri-
cultural land and benefit-based assessments for RPU
properties, nor did it mention the exemption for land
within municipalities. The county court conducted an
evidentiary hearing on the petition in October 2008 and
heard objections by some agricultural landowners over
the fee increase. Having no reason to believe that their
assessment would increase by more than $10 per acre,
the Railroads did not object to the assessment or attend
No. 10-2333 11

the hearing. The court determined that the proposed
assessment was “necessary and advisable”; found that
Sny Island complied with all notice requirements; and
certified the new assessment.
The Railroads discovered what was about to happen
to them when they received their bills in January 2009.
Instead of paying, they filed suit under subsection (b)(4)
of the 4-R Act. Sny Island moved to dismiss on jurisdic-
tional grounds, arguing that the Rooker-Feldman doctrine
precluded federal review of the assessment because it
was the result of a state court’s judgment. The district
court denied the motion. It then ruled that Sny Island’s
annual maintenance fee was a “tax” within the meaning
of subsection (b)(4). In the same order, the court denied
the Railroads’ request for a preliminary injunction on the
basis that they had not put forth any evidence that
the “assessed value” of the Railroads’ land exceeded its
“true market value” by at least five percent, which the
district court reasoned was required by the 4-R Act. The
district court acknowledged that market value evidence
is “unnecessary to prove a violation of” subsection (b)(4),
but it thought that it could not order a preliminary in-
junction under subsection (c) of the Act without it. See
49 U.S.C. § 11501(c).
Following a bench trial, the district court changed course.
It concluded that the Railroads had failed to prove a
violation of subsection (b)(4) because the court could not
locate “evidence relating to the true market value of
lands within the District” in the record. And, because
the Railroads “had the burden of demonstrating discrimi-
12 No. 10-2333

natory impact,” and they had not done so, it found that
their claim failed “for lack of proof.” The court noted
that the process employed by the commissioners to de-
velop the 2009 assessment “raises questions about
their intent to discriminate against” the Railroads, but
it held that intent was irrelevant. It accepted the Dis-
trict’s argument that its failure to tax the six commer-
cial and industrial properties outside of the municipal
boundaries on the same basis as other RPU properties
was “inadvertent,” saying that it “trust[ed]” that the
commissioners would assess these properties in the
same manner as the other RPU properties going for-
ward. The Railroads have now appealed.

II
We start, as we must, with jurisdiction. Sny Island
renews its contention that the Rooker-Feldman doctrine
deprived the district court of jurisdiction because the
county court approved the fee. See generally District of
Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983);
Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923). Under
Rooker-Feldman, “lower federal courts do not have juris-
diction to conduct direct review of state court decisions,”
or to review claims “inextricably intertwined” with a
state court’s judgment. Lewis v. Anderson, 308 F.3d 768, 772
(7th Cir. 2002). Only the Supreme Court, Congress has
determined, can engage in such appellate review. See
28 U.S.C. § 1257; Gilbert v. Illinois State Bd. of Educ., 591
F.3d 896, 900 (7th Cir. 2010).
No. 10-2333 13

The Rooker-Feldman rule is inapplicable here. The
parties debate whether the state court was acting in a
“legislative” capacity, which would remove the pro-
ceeding from the ambit of Rooker-Feldman. See Feldman, 460
U.S. at 476-77; Leaf v. Supreme Ct. of Wis., 979 F.2d 589, 596-
98 (7th Cir. 1992). Because the court was approving a
fee, we might be inclined to agree. Cf. Prentis v. Atl. Coast
Line Co., 211 U.S. 210, 226 (1908) (“The establishment of a
rate is the making of a rule for the future, and therefore
is an act legislative, not judicial, in kind.”). But we
need not address this dispute because Rooker-Feldman
would not apply even if this were a judicial action. The
Rooker-Feldman doctrine is “confined to . . . cases brought
by state-court losers complaining of injuries caused by
state-court judgments rendered before the district court
proceedings commenced and inviting district court
review and rejection of those judgments.” Exxon Mobil
Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 248 (2005);
see also Skinner v. Switzer, 131 S. Ct. 1289, 1297 (2011);
Lance v. Dennis, 546 U.S. 459, 464 (2006); Hukic v. Aurora
Loan Servs., 588 F.3d 420, 431-32 (7th Cir. 2009). As Sny
Island concedes, the Railroads were not present at the
state court’s hearing, nor were they a “party” there.
Accordingly, they cannot be characterized as “state-
court losers” complaining of a judgement rendered
against them. Cf. Johnson v. De Grandy, 512 U.S. 997, 1006
(1994) (“[T]he invocation of Rooker/Feldman is . . . inapt
here, for unlike Rooker or Feldman, the [plaintiff] was not
a party in the state court.”).
The fact that the 4-R Act provides an independent
federal right of action reinforces this conclusion. The
14 No. 10-2333

Railroads are not seeking review of a state-court judgment.
They do not care whether the District’s new assessment
is “necessary or advisable,” or whether Sny Island com-
plied with the Drainage Code’s notice requirements.
Instead, they raise the independent argument that the
fees amount to tax discrimination under the 4-R Act. Cf.
Skinner, 131 S. Ct. at 1297 (explaining that a “state-court
decision is not reviewable by lower federal courts, but a
statute or rule governing the decision may be challenged
in a federal action”); Hemmer v. Indiana Bd. of Animal
Health, 532 F.3d 610, 614 (7th Cir. 2008). Our jurisdiction
is secure.

III
On the merits, the Railroads present two questions
for our consideration: first, whether the assessment
charged by Sny Island constitutes “another tax” within the
meaning of subsection (b)(4) of the 4-R Act; and second,
if so, whether that tax impermissibly discriminates
against them.

A
We begin, as we must, with the language of the statute.
CSX Transp., Inc. v. Alabama Dep’t of Rev., 131 S. Ct. 1101,
1107 (2011); see Carter v. Tennant Co., 383 F.3d 673, 682 (7th
Cir. 2004). The 4-R Act provides that a state and its sub-
divisions may not:
(1) Assess rail transportation property at a value that
has a higher ratio to the true market value of the rail
No. 10-2333 15

transportation property than the ratio that the
assessed value of other commercial and industrial
property in the same assessment jurisdiction has to
the true market value of the other commercial and
industrial property.
(2) Levy or collect a tax on an assessment that may
not be made under paragraph (1) of this subsection.
(3) Levy or collect an ad valorem property tax on
rail transportation property at a tax rate that ex-
ceeds the tax rate applicable to commercial and in-
dustrial property in the same assessment jurisdiction.
(4) Impose another tax that discriminates against a
rail carrier providing transportation subject to the
jurisdiction of the Board under this part.
49 U.S.C. § 11501(b).
The Act does not define the term “tax,” nor does it
offer any other guidance about what falls within its
ambit. CSX Transp., 131 S. Ct. at 1107. For subsec-
tion (b)(4), as CSX Transportation recently emphasized, the
“meaning of ‘tax’ is expansive,” and the phrase “another
tax,” is “best understood to . . . encompass any form of
tax a State might impose, on any asset or transaction,
except the taxes on property previously addressed in
subsections (b)(1)-(3).” Id. In other words, the “phrase
‘another tax’ is a catch-all.” Id.; see also Burlington N.
Ry. Co. v. Superior, 932 F.2d 1185, 1186 (7th Cir. 1991)
(“[Subsection (b)(4)] is a catch-all designed to prevent the
state from accomplishing the forbidden end of discrim-
inating against railroads by substituting another type
16 No. 10-2333

of tax. It could be an income tax, a gross-receipts tax, a
use tax, an occupation tax . . .—whatever.”) (“Superior”).
Even granting that the term “tax” is a broad one, how-
ever, we must still distinguish between a “tax” on one
hand and a “special assessment” or “fee” on the other. See
Illinois Central R.R. Co. v. Decatur, 147 U.S. 190, 197-99
(1893) (“Decatur”); compare Empress Casino Joliet Corp. v.
Balmoral Racing Club, Inc., No. 09-3975, 2011 WL 2652201,
at *5-6 (7th Cir. July 8, 2011) (en banc) (distinguishing
among taxes, fees, and other exactions for purposes of
the Tax Injunction Act (“TIA”), 28 U.S.C. § 1341). The 4-R
Act does not apply to the latter. Union Carbide Corp. v.
Bd. of Tax Comm’rs, 69 F.3d 1356, 1359 (7th Cir. 1995)
(“Union Carbide”); see Chicago & N. W. Transp. Co. v. Webster
Cnty. Bd. of Supervisors, 71 F.3d 265, 266 (8th Cir. 1995)
(“Because the board is not violating the 4-R Act if it is not
taxing the railroad, our first inquiry must be whether
imposing . . . costs . . . on the railroad constitutes a tax
within the meaning of [subsection (b)(4)].”).
In order to decide whether Sny Island’s “annual mainte-
nance assessment” is a “tax” actionable under subsec-
tion (b)(4) or a non-actionable “assessment” or “fee,” it is
useful to compare it similar exactions that courts have
examined in the past. We begin with the Supreme
Court’s Head Money Cases (Edye v. Robertson), which
considered a congressional act that required a “ ‘duty of
fifty cents for each and every passenger, not a citizen of
the United States, who shall come by steam or sail vessel
from a foreign port to any port within the United States.’ ”
112 U.S. 580, 589-90 (1884) (quoting 22 Stat. 214). The
No. 10-2333 17

money collected was then paid into the U.S. Treasury,
but was segregated into a special “ ‘immigrant fund . . . to
defray the expenses of regulating immigration.’ ” Id. at
590. The petitioners challenged the law on the ground
that the act went beyond the taxing power of Congress as
laid out in Article I. See id. at 594. The Court responded
that the “true power exercised” was not the taxing power
at all. Instead, it was a “fee,” because the “sum de-
manded” did not go “to the general support of the gov-
ernment,” but was a “fund raised from those who are
engaged in the transportation of these passengers.” Id. at
596. See also Union Pac. R.R. Co. v. Pub. Util. Comm’n of
Or., 899 F.2d at 854, 858-59, 861 (9th Cir. 1990).
Second, Houck v. Little River Drainage District considered
a challenge on behalf of several landowners under the
Takings Clause to a 25-cent per-acre fee “levied generally
upon the lands” within a drainage district, 239 U.S.
254, 259 (1915). Like the District here, the drainage
district was a political subdivision of the state, and it
had the power to tax those within its jurisdiction. Id. at
262. In the course of addressing the takings argument,
the Court defined a “tax” as “an enforced contribution
for the payment of public expenses,” which is “laid
by some rule of apportionment according to which the
persons or property taxed share the public burden.” Id. at
265. By contrast, when “local improvements may be
deemed to result in special benefits, a further classifica-
tion may be made and special assessments imposed
accordingly.” Id.; see also Decatur, 147 U.S. at 208 (using
similar language). Houck also noted that this distinction
18 No. 10-2333

does not depend on the fact that the drainage district, not
the state directly, was levying the fee because “whether
taxation operates upon all within the State, or upon
those of a given class or locality, its essential nature is
the same.” 239 U.S. at 265.
In our case, the district court relied on Houck and con-
cluded that the District’s exaction was a “tax” for
purposes of subsection (b)(4). This resolution is faithful to
Houck and is also consistent with our approach to the
problem of characterization in Empress Casino. There, we
rejected a multi-factor approach in favor of a clean line
between taxes, which are designed to generate revenue,
and other exactions designed either to punish or to com-
pensate for a service that the state provides. 2011 WL
2652201, at *5-6. Flood control, from that perspective,
cannot be considered an optional service that someone
might want to take or leave. It is just as much a public
responsibility as the provision of roads or sewage. The
District’s annual exaction distributes the cost of this
public good across all of those living within Sny Island,
not just the Railroads or even RPU properties. Everyone
in the District (indeed, arguably everyone in the state,
to the extent that state monies are typically expended
for disaster relief) benefits by having fewer or less extreme
floods when the Mississippi begins to swell. Unlike
other fees, which might pertain only to certain property-
holders in the District or fund one-time projects, the
annual maintenance assessment provides funding for
the widely-dispersed, general “work of the district.”
70 ILCS 605/5-1; see id. (defining “additional assessments”
in contradistinction to “annual maintenance assess-
No. 10-2333 19

ments”); Upper Salt Fork Drainage Dist. v. DiNovo, 904 N.E.
2d 84, 93, 95 (Ill. App. 2008) (distinguishing “additional
assessments” and “annual maintenance assessments”).
Treating Sny Island’s assessment as a tax is also consis-
tent with the Head Money Cases. These cases “stand for the
proposition that a government levy is a tax if it raises
revenue to spend for the general public welfare.” Chicago
& North Western, 71 F.3d at 267; see also Wheeling & Lake
Erie Ry. Co. v. Pub. Util. Comm’n of Penn., 141 F.3d 88,
96 (3d Cir. 1998). Contrary to the District’s view, the
fact that the levee district covers less than the entire
state of Illinois is immaterial. See, e.g., Houck, 239 U.S. at
265 (focusing on a drainage district’s fee); Kansas City
S. Ry. Co. v. Road Improvement Dist. No. 6, 256 U.S. 658, 660
(1920) (finding tax discrimination in a local drainage
district’s assessment, and affirming the state’s power to
“create taxing districts to meet the expense of local im-
provements” (internal quotation marks and citations
omitted)). The text of the 4-R Act itself precludes the
District’s interpretation, because the statute applies to a
state and its subdivisions. 49 U.S.C. 11501(b); see CSX
Transp., 131 S. Ct. at 1105; cf. Western Air Lines, Inc. v.
Bd. of Equalization, 480 U.S. 123, 131 (1987) (explaining
that “the 4-R Act demonstrates Congress’ awareness that
interstate carriers ‘are easy prey for State and local tax
assessors’ in that they are ‘nonvoting, often nonresident,
targets for local taxation,’ who cannot easily remove
themselves from the locality.” (quoting S. Rep. No. 91-630,
p. 3 (1969) (emphasis added)); Superior, 932 F.2d at 1186.
Our sister circuits share this interpretation of the 4-R
Act. In Chicago & North Western, the Eighth Circuit consid-
20 No. 10-2333

ered a charge imposed by a drainage district that ordered
a railroad to install a new culvert on railway land in
order to keep its right-of-way intact as the district
widened a drainage ditch. 71 F.3d 265. The railroad
refused, and so the district built the culvert and then
sought reimbursement. In finding this exaction not to
be a “tax,” the Eighth Circuit distinguished the
situation from an instance where the expenditure was
for the cost of widening the ditch, an improvement that
would benefit the “general public.” Id. at 267. Because
the railroad was the only beneficiary of the culvert, the
fee was not a tax. Id. Similarly, in Wheeling & Lake Erie
the Third Circuit considered a fee charged against a
railroad for a portion of the construction and main-
tenance costs for a new bridge that preserved the
railroad’s right-of-way. 141 F.3d at 90-91. The bridge
initially had been paid for by the local town. Another
railroad was charged a similar fee, as was the state’s
department of transportation, and the state’s bridge
project fund picked up the bulk of the tab. Id. Though
the bridge served some public benefit, the court deemed
the fee an “assessment” because it did not raise revenue
for the “general fund” of the town, id. at 96. More impor-
tantly, it conferred a particular benefit on the railroad—one
that the railroad could have foregone, if necessary. Id. at
96-97. It was thus unlike the District’s exaction, which
applies across-the-board to the property owners in the
district, goes into the District’s “general fund,” and
supports a broad public system. See also Decatur, 147 U.S.
at 208-09; Utility Comm’n of Or., 899 F.2d at 858-59.
As we have already noted, characterizing the District’s
exaction as a tax is consistent with our reading of the
No. 10-2333 21

Tax Injunction Act. Other courts have also seen the
close relation between these two statutes. See, e.g., Bidart
Bros. v. California Apple Comm’n, 73 F.3d 925, 929-30 (9th
Cir. 1996); San Juan Cellular Tel. v. Pub. Servs. Comm’n,
967 F.2d 683, 685 (1st Cir. 1992). This is no accident:
consistency is essential, because the 4-R Act’s remedial
provision provides an exception to the TIA. 49 U.S.C.
§ 11501(c).
In summary, the District’s exaction, as the commis-
sioners concede, raises general revenues, and its ultimate
use is for the whole District. Unlike an assessment for
a small project, the money raised is available for all
the work of the District; no particular expenditure is tied
to a particular benefit obtained by a specific taxpayer.
The commissioners use their funds to pay their salaries,
make repairs to levees far away from railroad property,
purchase new equipment, and pay for diesel fuel to
operate the pumps. Bearing in mind the expansive
reading of the term “tax” that the Supreme Court has
endorsed, this is enough to make it a “tax” for purposes
of the 4-R Act.” CSX Transp., 131 S. Ct. at 1107.

B
The remaining question is whether the District’s tax
discriminates against the Railroads. In order to answer
it, we must first determine “the class of taxpayers with
whom the railroads are to be compared.” Union Pac. R.R.
Co. v. Minnesota Dep’t of Rev., 507 F.3d 693, 695 (8th Cir.
2007); see also Alabama Great S. R.R. Co. v. Eagerton, 541
22 No. 10-2333

F. Supp. 1084, 1086 (M.D. Ala. 1982). After selecting
a comparison class, we must then decide whether the
record reveals actionable discrimination.

1. The comparison class.
The proper approach toward defining the appropriate
class for comparison under subsection (b)(4) has divided
the circuits, and the Supreme Court’s most recent decision
in this area, CSX Transportation, declined to resolve the
split. 131 S. Ct. at 1107 n.5; see id. at 1115, 1118 n.3
(Thomas, J., dissenting) (noting the division of authority);
Norfolk S. Ry. Co. v. Alabama Dep’t of Rev., 550 F.3d 1306,
1308 n.3 (11th Cir. 2008) (collecting cases), abrogated on
other grounds by CSX Transp., 131 S. Ct. 1101. The
critical question appears to be the proper level of
generality for analysis: as applied to our case, should one
take (1) a universal approach, looking at all property
owners within the District; (2) a functional approach,
looking at other commercial and industrial property; or
(3) a competitive approach, focusing on a railroad’s chief
competitors as a baseline for finding discrimination?
Compare, e.g., Burlington N. Santa Fe Ry. Co. v. Lohman, 193
F.3d 984, 985 (8th Cir. 1999) (adopting the competitive
option), with Atchison, Topeka, and Santa Fe Ry. Co. v.
Arizona, 78 F.3d 438, 441-42 (9th Cir. 1996) (applying a
functional approach), and Kansas City S. R.R. Co. v.
McNamara, 817 F.2d 368, 375-76 (5th Cir. 1987) (same).
We can easily reject the universal approach, which the
Railroads have advocated. No appellate court has gone
No. 10-2333 23

this far, and we think this interpretation was foreclosed
by Department of Rev. v. ACF Industries, 510 U.S. 332
(1994). Cf. CSX Transp., 131 S. Ct. at 1119 n.4 (Thomas, J.,
dissenting) (“A comparison class of ‘anyone’ is broader
than either of the sides in the lower courts’ split on this
issue.”). In ACF Industries, the court explained that
the “interplay between subsections (b)(1)-(3) and the
definition of ‘commercial and industrial property’ in
subsection (a)(4) is central to interpretation of subsection
(b)(4).” 510 U.S. at 340. Subsection (a)(4) defines com-
mercial and industrial property to exclude “land
used primarily for agricultural purposes,” 49 U.S.C.
§ 11501(a)(4), which perfectly describes 99.5% of the
land encompassed by Sny Island. Under ACF Industries,
the “fact that Congress made this particular exclusion
demonstrates its intent to permit the States to tax
railroad property at a higher rate than agricultural land,
not withstanding subsection (b)(3)’s general prohibition
of rate discrimination.” 510 U.S. at 340. The rationale
supporting ACF Industries, under which states are
allowed to distinguish between agricultural land and
other land, even to the extent of exempting the former,
is applicable here as well. To hold otherwise, would
prevent the same type of basic disparities allowed by
the structure of subsection (b).
The more difficult choice is between a functional ap-
proach and a competitive approach. Of the two, the one
more favorable to Sny Island is the functional approach;
indeed, it urges us to compare its treatment of the Rail-
roads to that of other “commercial and industrial tax-
payers.” This finds some support in our earlier decision
24 No. 10-2333

in Superior, where we said that a “state is confined to
taxing railroads as members of larger taxpayer groups—
owners of commercial or industrial property, recipients
of gross income, recipients of net income, whatever.”
932 F.2d at 1188. In so holding, we drew on the Fifth
Circuit’s opinion in McNamara, supra, which set out the
rationale for adopting the comparison class of other
commercial and industrial taxpayers:
The only simple way to prevent tax discrimination
against the railroads is to tie their fate to the fate of a
large and local group of taxpayers. A large group of
local taxpayers will have the political and economic
power to protect itself against an unfair distribution
of the tax burden.
817 F.2d at 375. A smaller comparison class, McNamara
worried, might be “too small and too foreign to fulfill
this function.” Id. In addition, the smaller class might
“result in preferential treatment for the railroads,” which
Congress certainly did not intend. Atchison, 78 F.3d at
442; see also CSX Transp., 131 S. Ct. at 1109 n.8; id. at 1119
(Thomas, J., dissenting). On the other hand, if “too broad
a comparison class is chosen, the railroads will be placed
at a competitive disadvantage that would defeat the
purpose of the statute.” Lohman, 193 F.3d at 986.
Perhaps this is just another illustration of Aristotle’s
golden mean, or more familiarly the story of the Three
Bears. Either way, it seems to us that the appropriate
comparison class for subsection (b)(4) does not lie at
either extreme on the continuum of generality to particu-
larity. It is the functional, middle group of all other com-
No. 10-2333 25

mercial and industrial taxpayers. This conclusion is
supported by the need to read subsection (b)(4) “in light
of the approach taken in the first three subsections” of
the 4-R Act, which all directly or indirectly look to other
commercial and industrial property. Superior, 932 F.2d
at 1188; see also Atchison, 78 F.3d at 442; Eagerton, 541
F. Supp. at 1086 (relying on the “clear indication found
in the body of § 1150[1](b) that commercial and
industrial taxpayers are to be considered”). Thus, while
many different types of taxes fall within the broad catch-
all provision beyond those specified in subsections (b)(1)-
(3), CSX Transp., 131 S. Ct. at 1107, the risk of discrimina-
tion that Congress was addressing remains constant.
We do not regard this conclusion as incompatible with
the Eighth Circuit’s Lohman decision, which compared
the railroads to their direct competitors but which
also commented that “the comparison class should be
appropriate to the type of tax and discrimination chal-
lenged in a particular case.” 193 F.3d at 986. Given our
preference for clarity, however, rather than an ill-defined
“all the circumstances” type of test, we are content for
now to endorse reference to other commercial and in-
dustrial users. If, as we contemplated in Superior, rail
carriers in a later case so dominate the economy that
the group of all commercial and industrial taxpayers
would overlap almost entirely with that of railroads, it
is possible that the statute would require a broader per-
spective. 932 F.2d at 1188. That is not our problem, how-
ever, and so we are content to leave that hypothetical
for another day.
26 No. 10-2333

For the sake of completeness, we add a word or two to
explain why we reject the “competitive” approach. In this
case, there are no competitors of the railroads—“motor
carriers, air carriers, barges, [or] Great Lakes ships”—that
Sny Island is trying to tax. Compare Minnesota Dep’t
of Rev., 507 F.3d at 695. The District’s effort to gerry-
mander a competitive class by grouping the Railroads
with pipelines and utilities is unpersuasive, largely
because the individual members are not competitors
in any meaningful sense of the term. Expanding the
comparison class to include the 14 additional commercial
and industrial taxpayers helps both by creating a pool
large enough for meaningful analysis and by providing
a group that includes (as the statute contemplated) tax-
payers with local political representation (which is
perhaps why those within city limits were exempt, and
those outside of the city limits were “inadvertently”
treated like the agricultural taxpayers).

2. Discrimination.
As with the phrase “another tax,” the “statute does not
define ‘discriminates,’ and so we look again to the ordinary
meaning of the word.” CSX Transp., 131 S. Ct. at 1108.
Discrimination, the Court has said, is the “ ‘failure to
treat all persons equally when no reasonable distinction
can be found between those favored and those not fa-
vored.’ ” Id. (quoting B LACK’S L AW D ICTIONARY 534 (9th
ed. 2009). CSX Transportation did not shed much addi-
tional light on what constitutes discrimination in the
present context. In dicta, however, the Court observed
No. 10-2333 27

that “[w]hether the railroad will prevail—that is, whether
it can prove the alleged discrimination—depends on
whether the State offers a sufficient justification for de-
clining to provide the exemption at issue to rail carriers.”
Id. at 1109 n.8. In ACF Industries, the Court suggested
another way to show discrimination under the 4-R Act’s
catch-all: discrimination might occur in a “case in which
the railroads—either alone or as part of some isolated
and target group—are the only commercial entities”
subject to a tax. 510 U.S. at 346. In such a case, “one could
say that the State had singled out railroad property for
discriminatory treatment.” Id. at 346-47.
Those were the basic facts in Superior, which ACF Indus-
tries cited in support of this form of discrimination for
purposes of subsection (b)(4). See id. at 436. There, Wiscon-
sin passed a per-ton tax to be applied at iron ore docks.
The tax, although framed broadly, applied only to a rail
carrier, because it was the sole operator of the three
iron ore docks in the state. Superior, 932 F.2d at 1186.
Because the state was “levying a tax on an activity in
which . . . only railroads engage,” the tax could not stand.
Id. at 1188. It is now well established that a showing that
the railroads have been targeted is enough to prove
discrimination; indeed, this may be the only way to show
discrimination for an ad valorem property tax exemption,
which normally falls under subsection(b)(3). See Alabama
Dep’t of Rev., 550 F.3d at 1316 n.16 (collecting cases
where taxes “target the railway industry”); Burlington
N. R.R. Co. v. Wisconsin Dep’t of Rev., 59 F.3d 55, 57-58 &
n.2 (7th Cir. 1995) (holding that an ad valorem exemption
must “target” railroads). For taxes solely within the
28 No. 10-2333

ambit of subsection (b)(4), it remains to be considered
whether anything other than deliberate targeting might
amount to discrimination. In principle, the answer must
be yes. CSX Transportation spoke of the state’s being
required to demonstrate a “sufficient justification” for
disparate treatment, and it selected a definition of dis-
crimination that implies “reasonable distinctions”
between the favored and the disfavored. In our view,
this confirms that discrimination can be shown even if
there is no direct evidence of targeting.
A discriminatory tax is one that “imposes a proportion-
ately heavier tax on railroading than other activities.”
Superior, 932 F.2d at 1187. The record shows that this
happened here. The commissioners may have started
off with a “reasonable distinction” in mind: improved
land derives a greater benefit from flood prevention than
unimproved land and, we will assume, may legitimately
be taxed at a rate that reflects this benefit. But the
District quickly went astray as it tried to apply this
insight. In the end, it did not tax all industrial and com-
mercial property equally. Instead, of the 14 taxpayers
other than the Railroads in this class, the eight properties
within municipal limits were charged no maintenance
assessment whatsoever and the remaining six were
treated the same as the agricultural landowners. The
district court recognized that these facts support the
inference that the District had an “intent to discriminate,”
and we agree.
Nevertheless, the district court found no impermissible
discrimination, because it thought that “intent to discrimi-
No. 10-2333 29

nate is irrelevant under the 4-R Act.” This statement is
too broad. Instead, for subsection (b)(4), as with discrimi-
nation in other contexts, intent matters in determining
whether a justification for disparate treatment is
sufficient or is nothing but a pretext. The district court
thought that its view of intent was supported by
Burlington N. R.R. Co. v. Bair, 815 F. Supp. 1223, 1227
(S.D. Iowa 1993) (quoting Burlington N. R.R. Co. v. Bair, 766
F.2d 1222, 1226 (8th Cir. 1985)), but it was not. Although
Bair said intent was irrelevant, this was for purposes of
a tax challenged under subsection (b)(1) of the 4-R Act,
not (b)(4). 766 F.2d at 1226. In contrast to (b)(4)’s broad
language, (b)(1) prohibits a state or subdivision from
assessing railroad property at a higher ratio of its true
market value than the ratio of true market value assessed
to other commercial and industrial property. 49 U.S.C.
§ 11501(b)(1). Only when the ratio of assessed value and
true market value exceeds 5% that of commercial and
industrial property can a rail carrier obtain relief. Id.
§ 11501(c). The precise standard thus outlined makes
intent irrelevant. See Bair, 766 F.2d at 1226 (“Because
there is no intent element in section 306, [the railroad]
need only prove the accurate values, not purposeful
undervaluation or overvaluation.”). The catch-all provi-
sion of (b)(4), in contrast, encompasses any other
kind of discrimination that may arise. See CSX Transp.,
131 S. Ct. at 1107-08; ACF Indus., 510 U.S. at 343;
Union Carbide, 69 F.3d at 1359. The intent to discriminate
may be what signifies that a tax characterized nominally
as one of general applicability is really one aimed at or
designed to target the railroads.
30 No. 10-2333

The district court credited the commissioners’ state-
ment that their failure to assess the six commercial and
industrial properties outside of municipal boundaries
was “inadvertent,” and the commissioners have prom-
ised to charge them on the new RPU method the next
time around. This would still leave eight exempt com-
mercial and industrial properties. That might be suf-
ficient to show discrimination.
But that is not all that we have on this record. The
discriminatory result is undisputed. The glaring evidence
that this is exactly what the District meant to do appears
in its methodology. The district court recognized that
this “process” was questionable at best. Recall that the
“assessment ratio,” which looks similar to the type of
equalization contemplated in subsection (b)(1), was
created in a back-handed way. Rather than assess the
actual value of agricultural property, Human made
sweeping estimates based solely on a telephone call
with the commissioners; he did this after the average
increase for those properties had been capped at $10.
Human’s worksheets and assumptions of the benefit
conferred by the levees might have been fair in theory
(although they were sorely lacking in a solid empirical
base), but they were discriminatory in practice. For the
“decreased maintenance costs” Human assumed that
damage might occur once every third flood for the pipe-
lines, but he calculated the Railroads’ maintenance costs
in a way that resulted in a significantly greater value.
There was no reason not to use consistent assumptions
about flooding. The “increased physical efficiency”
benefit, as we explained above, suffers from a similar
No. 10-2333 31

defect—the calculations were much more extensive, in a
way that resulted in a greater assumed benefit (and
thus corresponding cost) for the railroads than for the
pipelines and utilities. Even worse, Human’s proposed
worksheets for the other six commercial and industrial
properties do not even use “increased physical efficiency”
as a metric for determining the benefit to tax.
We emphasize that we are not criticizing the District’s
theory that improved property should bear a greater
proportional share of the tax burden. The problem, as we
have already said, was in the implementation. If, as the
commissioners maintain, the Drainage Code requires
them to assess all property on a “benefit basis” then
their entire scheme should reflect that, for agricultural
and other commercial and industrial properties just
as much as for RPU properties.

IV
The last question we must address relates to the proper
remedy. Subsection (c) of § 11501 provides an exemption
to the Tax Injunction Act:
Notwithstanding section 1341 of title 28 . . . a district
court of the United States has jurisdiction . . . to pre-
vent a violation of subsection (b) of this section.
Relief may be granted under this subsection only if
the ratio of assessed market value of rail transporta-
tion property exceeds by at least 5 percent the ratio
of assessed value to true market value of other com-
mercial and industrial property in the same assess-
ment jurisdiction.
32 No. 10-2333

49 U.S.C. § 11501(c). The district court reasoned, and Sny
Island argues on appeal, that the second sentence of
subsection (c) limits our ability to issue injunctive relief
here because there is no evidence of the ratio between
true market value and assessed value. The district court
read the statute to require such a showing even if the
underlying violation arose under subsection (b)(4) rather
than any of the earlier provisions of subsection (b).
Since this case was before the district court, the Su-
preme Court has clarified that the second sentence of
subsection (c) “concerns the relief available for viola-
tions” only of subsections (b)(1) and (2), not subsections
(b)(3) or (4). CSX Transp., 131 S. Ct. at 1105 n.2. It noted
that an interpretation of subsection (c) that was limited
to property taxes “cannot be right, because it would
nullify subsection (b)(4) (and, for that matter, subsection
(b)(3) as well).” Id. at 1108 n.7. Instead, the Court
wrote, “subsection (c)’s remedial provision” should be
understood “neither as limiting the broad grant of juris-
diction to federal courts to prevent violations of subsec-
tion (b) nor as otherwise restricting the scope of that
subsection.” Id. The remedial provision “simply limits
the availability of relief” when a state or its subdivision
“discriminates in assessing the value of railroad property,
as proscribed by subsections (b)(1) and (b)(2).” Id.
Although an injunction is therefore possible, principles
of comity require the federal court to act with restraint.
For that reason, any injunction should “eliminate only
[the] discriminatory effects rather than enjoining the
entire rate or assessment scheme and requiring state
No. 10-2333 33

authorities to comply with federal law from scratch.”
McNamara, 817 F.2d at 378; see also Clinchfield R.R. Co. v.
Lynch, 700 F.2d 126, 131 n.6 (4th Cir. 1983). The Railroads
would like us to enjoin the District from collecting an
assessment in excess of the $10-per-acre increase plus
the 2008 assessment, but this is a step too far. On remand,
the district court must enjoin the 2009 assessment, while
at the same time leaving the District free to go back to
the drawing board and craft an assessment that is non-
discriminatory, as we have explained that concept.
The judgment of the district court is R EVERSED and the
case is R EMANDED for further proceedings consistent
with this opinion.

7-27-11