Delegating Up: State Conformity with the Federal Tax Base

Congress uses the income tax to achieve policy goals. States import federal tax policies into their own tax systems when they incorporate by reference the federal income tax base as the starting point for assessment of state income taxes. But federal tax policies reflect national, not state, political choices. This Article calls attention to the practice of tax-base conformity and to its advantages and disadvantages. Conformity conserves legislative, administrative, and judicial resources, and it reduces taxpayers\u27 compliance burdens. At the same time, however, conforming states cede tax autonomy to the federal government, thereby jeopardizing federalism values, such as regulatory diversity and diffusion of power. Conforming states also expose themselves to revenue volatility stemming from the ever-changing federal tax law. Despite these concerns, the administrative and compliance advantages of federal-state tax-base conformity are so significant that states are unlikely to abandon it. Thus, this Article makes only limited recommendations for reducing the adverse impacts of tax-base conformity

Delegating Up: State Conformity with the Federal Tax Base

Congress uses the income tax to achieve policy goals. States import federal tax policies into their own tax systems when they incorporate by reference the federal income tax base as the starting point for assessment of state income taxes. But federal tax policies reflect national, not state, political choices. This Article calls attention to the practice of tax-base conformity and to its advantages and disadvantages. Conformity conserves legislative, administrative, and judicial resources, and it reduces taxpayers\u27 compliance burdens. At the same time, however, conforming states cede tax autonomy to the federal government, thereby jeopardizing federalism values, such as regulatory diversity and diffusion of power. Conforming states also expose themselves to revenue volatility stemming from the ever-changing federal tax law. Despite these concerns, the administrative and compliance advantages of federal-state tax-base conformity are so significant that states are unlikely to abandon it. Thus, this Article makes only limited recommendations for reducing the adverse impacts of tax-base conformity

Made in America for European Tax: The Internal Consistency Test

The European Court of Justice ( ECJ ) has come under increasing criticism for overstepping its institutional authority in tax cases by invalidating national tax regimes that are not discriminatory. This Article offers an explanation for the ECJ\u27s difficulties in tax cases. Overlapping taxation —the simultaneous exercise of tax jurisdiction by two states in cross-border tax cases—tends to create real, but nondiscriminatory, cross-border tax disadvantages that the ECJ may mistake for discrimination. When the ECJ mistakenly invalidates nondiscriminatory tax legislation, it encroaches on the tax sovereignty of the European Union member states and undermines their tax policy goals. To address this problem, this Article proposes that the ECJ adopt the internal consistency test in tax cases. Under this approach, developed by the U.S. Supreme Court to analyze state tax discrimination claims under the Dormant Commerce Clause, the ECJ would ask: If all twenty-seven member states enacted the challenged rule, would intra-Community commerce bear a burden that purely domestic commerce would not also bear? This Article shows how use of this test could reduce the risk of judicial error in tax cases, thereby deferring to member state tax autonomy while potentially fostering market integration

The Economic Foundation of the Dormant Commerce Clause

Last Term, a sharply divided Supreme Court decided a landmark dormant Commerce Clause case, Comptroller of the Treasury of Maryland v. Wynne. Wynne represents the Court’s first clear acknowledgement of the economic underpinnings of one of its main doctrinal tools for resolving tax discrimination cases, the internal consistency test. In deciding Wynne, the Court relied on economic analysis we provided. This Essay explains that analysis, why the majority accepted it, why the dissenters’ objections to the majority’s reasoning miss their mark, and what Wynne means for state taxation. Essential to our analysis and the Court’s decision in Wynne is the idea that states are capable of discriminating not only on an inbound basis, but also on an outbound basis, and that the Commerce Clause prohibits discrimination on either basis. To aid in explicating our position, this Essay introduces the term “retentionism” as an analogue to protectionism. Whereas taxes or regulations are protectionist when they discourage outsiders from engaging in economic activities within a state, taxes or regulations are retentionist when then discourage in-state economic actors from engaging in out-of-state activities. As we show, the tax struck down in Wynne was both protectionist and retentionist

\u3ci\u3eComptroller v. Wynne\u3c/i\u3e: Internal Consistency, a National Marketplace, and Limits on State Sovereignty to Tax

On November 12, 2014, the U.S. Supreme Court heard oral argument in Comptroller of the Treasury v. Wynne. The case, which has already been called the Court’s most important state tax case in decades, asks how the dormant Commerce Clause restrains state taxation of individual income. Because Wynne lacks the usual indicia of “certworthiness,” the case raises the possibility that the Court will reshape the constitutional balance between the states’ sovereign interest in collecting taxes and the national interest in maintaining an open economy. The challenge for the Court, whose dormant Commerce Clause rulings have attracted intense criticism, is to delineate clear limits on state taxation that promote a national market economy without unduly restricting the states’ taxing authority. In earlier writings, we developed a framework to resolve tax discrimination cases in a consistent and intuitive manner that provides states with broad flexibility while maintaining an open interstate market. In this Essay, we apply that framework to Wynne to demonstrate how Maryland’s current system violates the dormant Commerce Clause. We also describe how our approach addresses Maryland’s arguments and resolves many issues that seemed to trouble the Justices at oral argument. The rest of this Essay proceeds as follows. After providing the factual and legal background of the case, we show that the contested Maryland income tax regime fails the Court’s long-standing internal consistency test and so would be struck down were the Court to apply that test. We then respond to Maryland’s three major arguments why the Court should not apply the internal consistency test. Drawing on our earlier work, we first show that Maryland’s principal claim, that its tax law does not discourage cross-border commerce because residents are taxed at the same rate on in-state and out-of-state income, whereas non-residents are taxed at a lower rate on in-state income and not at all on out-of-state income, is not dispositive. Maryland’s argument should not prevail because economic analysis shows that the comparison of tax rates that Maryland offers is too simplistic to reveal whether the Maryland tax system discourages cross-border commerce. Second, Maryland claims that any interference with the Wynnes’ cross-border commerce stems from the interaction of different states’ tax systems rather than Maryland’s tax regime alone. This claim is wrong, and we show that Maryland’s tax system would burden interstate commerce even if no other state imposed taxes. Third, we show that Maryland’s claim that a decision for the taxpayer would allow residents with out-of-state income to free-ride on Maryland’s public services is overstated because the internal consistency test provides states with wide flexibility to tax. The arguments in Wynne largely followed the outline above, with an important exception. The taxpayer argued that the dormant Commerce Clause requires Maryland to eliminate double taxation of their interstate commerce for the simple reason that Maryland is their state of residence. But the Court’s dormant Commerce Clause doctrine does not clearly support the interpretation that the state of residence must eliminate double taxation. Nor is such an interpretation needed for the Wynnes to win their case. Rather than requiring elimination of double taxation, the dormant Commerce Clause prohibits states from discriminating against interstate commerce. We show that Maryland discriminates against interstate taxation, and this discrimination would persist even if no other states imposed taxes. It is, therefore, independent of any double taxation that arises under the Maryland tax, and it is also independent of any action other states take. Double taxation is not the focus of the dormant Commerce Clause, and avoiding double taxation is not the same as not discouraging cross-border commerce. As we show, a state can discourage cross-border commerce even though there is no double taxation, and double taxation can occur without discouraging cross-border commerce

How the Massachusetts Supreme Judicial Court Should Interpret \u3ci\u3eWynne\u3c/i\u3e

In this special report, Knoll and Mason discuss how the Massachusetts Supreme Judicial Court should apply Wynne when it hears on remand First Marblehead v. Commissioner of Revenue. The authors conclude that when it originally heard the case, the Massachusetts court mistakenly considered, as part of its internal consistency analysis, whether Gate Holdings Inc. experienced double state taxation. As developed by the U.S. Supreme Court and most recently applied in Wynne, the internal consistency test is not concerned with actual double taxation that may arise from the interaction of different states’ laws. Rather, the test is designed to determine whether the challenged state’s law alone discriminates against interstate commerce. The authors show how this standard applies to the challenged Massachusetts apportionment rules, and they conclude that in order to ascertain the constitutionality of the challenged Massachusetts law, the Massachusetts court must determine how the other states would tax Gate if the other states applied Massachusetts law for non-domiciled taxpayers

The Dormant Foreign Commerce Clause After \u3ci\u3eWynne\u3c/i\u3e

This Essay surveys dormant foreign Commerce Clause doctrine to determine what limits it places on state taxation of international income, including both income earned by foreigners in a U.S. state and income earned by U.S. residents abroad. The dormant Commerce Clause similarly limits states’ powers to tax interstate and foreign commerce; in particular, it forbids states from discriminating against interstate or international commerce. But there are differences between the interstate and foreign commerce contexts, including differences in the nationality of affected taxpayers and differences in the impact of state taxes on federal tax and foreign-relations goals. Given current Supreme Court doctrine, we provide states guidance as to how to conform their regimes for taxing international income to constitutional requirements