Constraining State Business Tax Incentives: The Commerce Clause's Role

Abstract

One of the primary motivations behind the drafting of the Constitution was concern about the deleterious effects of the economic competition among the states under the Articles of Confederation, particularly in the form of tariff impositions. In consequence, the Constitution's Commerce Clause has long been applied by the courts to prohibit the states from deploying discriminatory tax provisions that provide a direct commercial advantage to in-state economic activity. This paper assesses the extent to which this Commerce Clause anti-discrimination principle is likely to be applied by the courts to invalidate familiar types of state business tax incentives, as it was when the U.S. Court of Appeals for the Sixth Circuit invalidated Ohio's investment tax credit in the Cuno decision, which was overturned on jurisdictional grounds by the Supreme Court in May 2006. The paper articulates the argument for invalidation of a wide range of familiar tax incentives, and compares that argument with the Sixth Circuit's reasoning in Cuno and with other recent cases. It then considers and responds to several arguments, deployed in the course of the recent litigation and in scholarly commentary, that seek to insulate state business tax incentives from Commerce Clause attack. In particular, it responds to critics who propose to reconstruct or to deconstruct the courts' anti-discrimination jurisprudence based on its inability to draw principled distinctions between impermissible measures and functionally similar but permitted alternatives. The paper argues that the approach developed by the courts succeeds in offering relatively straightforward standards, relatively well grounded in the Commerce Clause's history and intentions, for drawing boundaries along dimensions where judicial line-drawing is urgently needed.