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LEGAL CERTAINTY AND SUNSET CLAUSES

A ‘Foe’ to Legal Certainty

Sunset clauses determine the periodic termination of laws. At first sight, this might sound contrary to the minimum stability level required by a sound investment strategy. To wit, entrepreneurs base their investment decisions on legislation that will in principle be extinguished within a limited number of years, but can only expect to recover their investments over a long time span. According to Max Weber, legal certainty is fundamental to capitalism since without legal security the investment of capital will be reduced.[1] A capitalist system requires predictable and calculable laws, but these are not a synonym of absolute stability. Uncertain rules have the perverse effect of leaving private actors unsure about their rights and duties while affording unconstrained discretion to official decision-makers.[2]

In the United States, it has also been inquired whether the employment of sunset clauses can produce a negative effect on investment policies. Nevertheless, this will particularly occur when legislators establish sunset periods which do not take into consideration the development cycles of the regulated sector.[3] This was the case of the production tax credits which were designed to stimulate investment in renewable energy and hence advance clean energy innovation. These tax credits were subject to a sunset, which could be renewed for the period of one to three years. However, it takes three to seven years to develop a wind farm, which produced a feeling of uncertainty regarding the renewal of the tax credit that slowed down long-term investment.[4] Nonetheless, other scholars in the United States have argued that sunset clauses as such are not harmful for investment and they may even stimulate long-term investment.[5] In the cases involving taxes, a sunset may accelerate investment because taxpayers might fear losing tax benefits. Reluctance to invest in these cases is not unexpected. However, ‘a calculable legal system’ as desired by entrepreneurs, does not necessarily mean that private actors expect that legal systems will solely be inhabited by lasting, clear and unambiguous bright-line rules.[6] There is a discrepancy between the certainty pursued by lawyers, and the one pursued by economic parties. The latter are mainly interested in the certainty regarding their contractual rights and duties - the consequences of their actions.[7] Lawyers, on the contrary, identify legal certainty with the predictability of applying legal rules to specific cases. While lawyers may prefer clear, precise and determinate legal rules; entrepreneurs might often be satisfied with broad legal standards as long as they can allow them to calculate the consequences of their actions.[8]

As explained in Chapter 2, sunset clauses have been employed in recent years in Germany as a tool to reduce regulatory pressure and indirectly create better conditions for investment. However, these legislative instruments do not abound in this country. In Germany, the proposal of general sunset clauses,[9] in other words, clauses that determine that a set of acts or regulations will be extinguished, raised a number of legal questions in different states. The literature has questioned whether a temporal limitation of all laws and regulations would not weaken the exercise of the central functions of the state, such as the safeguarding of freedom and state authority.[10] This is nevertheless a criticism strongly focused on the introduction of a general sunset clause, which can indeed pose a threat to the continuity of law. All-embracing sunset clauses have not been introduced at the federal level in Germany. In the United States, a seven-year sunset rule was proposed in 1995 for agencies, but never saw the light.[11] In the Netherlands, the introduction of general sunset clauses for all new regulations was suggested in the political context, but this proposal did not gather sufficient consensus either.

6

General sunset clauses, as opposed to specific sunset provisions, can cause uncertainty and produce a negative influence on investment since they are indiscriminately enacted in the legal order. As explained in Chapter 2, sunset clauses serve multiple functions, but this does not mean that all laws can be rendered temporary. Instead, the duration of the law should be adapted to the reality that the latter intends to regulate. Still, in the United States, (regular) sunset clauses have been criticized for creating uncertainty in the legislative process; these provisions impede private actors from predicting and arranging their financial affairs since they often do not know when provisions will sunset.[12] These effects are particularly visible in tax legislation. This uncertainty does not result from sunset clauses as such, but can be explained by other factors that may affect the predictability of these rules. This is the case of the pressure exercised by lobbies and interest groups who may play a role in the successive renewals or sudden termination of sunset clauses (see Chapter 7).[13]

  • [1] Max Weber, Economy and Society (University of California Press, 1978)883.
  • [2] Anthony D’Amato, ‘Legal Uncertainty’ (1983) 71(1) California LawReview 3.
  • [3] Erin Dewey, ‘Sundown and You Better Take Care: Why Sunset ProvisionsHarm the Renewable Energy Industry and Violate Tax Principles’ (2011) 52Boston College Law Review 1105.
  • [4] Ibid.
  • [5] George K. Yin, ‘Temporary-effect Legislation, Political Accountability, andFiscal Restraint’ (2008) 84 New York University Law Review 174.
  • [6] Offer Raban, ‘The Fallacy of Legal Certainty: Why Vague Legal Standardsmay be Better for Capitalism and Liberalism’ (2010) 19(2) Public Interest LawJournal 182-3.
  • [7] Ibid. 189-90.
  • [8] Ibid. 190.
  • [9] Sunset clauses determine the extinction of a specific statute or a number ofits dispositions. ‘General sunset clauses’ impose the extinction of a large numberof statutes or regulations.
  • [10] Peter Zimmermann, ‘Reform der Staatstatigkeit durch generelle Befristungvon Gesetzen - Aspekte einer Problembewaltigung mit verfassungswidrigenMitteln’ (2003) 22 Die offentliche Verwaltung 943. For a more extensive analysisof this objection, see Sofia Ranchordas, ‘Sunset Clauses and ExperimentalLegislation: Blessing or Curse for Legal Certainty’ (2014) Statute Law Review(online), 11 February 2014 doi:10.1093/slr/hmu002.
  • [11] Congressional Quarterly CQ Almanac, Vol. LI, 1995, 3-7; Chris Edwards,‘“Sunsetting” to Reform and Abolish Federal Agencies’ (2002) 6 Cato InstituteTax and Budget Bulletin, available at www.cato.org/sites/cato.org/files/pubs/pdf/tbb-0205-6.pdf.
  • [12] Manoj Viswanathan, ‘Sunset Provisions in the Tax Code: A CriticalEvaluation and Prescriptions for the Future’ (2011) 8 (2) New York UniversityLaw Review 657, 671-2.
  • [13] For a critical perspective on sunset clauses in tax legislation, see RebeccaM. Kysar, ‘Lasting Legislation’ (2011) 159 University of Pennsylvania LawReview 101.
 
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