Insidious Regulatory Taxes

Abstract

Courts have long held the utmost respect for tax laws, reflecting a recognition that the revenue-raising function of taxes allows legislators to distribute the burden of funding the government as they see fit. Unelected judges, the sentiment goes, should be hesitant to trifle with tax laws and upset those political decisions. However, taxes are not mere revenue-raising tools; they also are used to regulate behavior. Intentional regulatory effects might be expected to lessen the privileged state of taxes before the courts in order to bring the treatment of regulatory taxes in line with that of direct regulations, but this is not the case. Courts continue to defer to the institutional interests in raising revenue, even when regulatory taxes raise only nominal revenue. The problems with this approach are highlighted by state-level controlled substance taxes, which impose taxes on individuals for the possession and sale of illegal drugs without providing those individuals the protections available under criminal law, such as high burdens of proof for the government. These regulatory taxes are insidious vehicles for undermining those protections against harmful government actions, and the use of the taxes is incentivized by the judiciary’s current approach to taxes. Not only do insidious regulatory taxes stealthily sacrifice protections for individuals, they are less efficient than their direct regulation counterparts and thus unnecessarily burden society. Courts need a new framework to remove the incentive to use such insidious regulatory taxes, and this Article taps modern tax expenditure analysis to provide that framework—one that appropriately balances institutional and individual interests when taxes are challenged.