State Taxation Conflict between the states' interest in exercising their essential taxing power and the nation's interest in fostering economic and political unity has been an enduring feature of the American federal system. The Constitution imposes only three explicit restrictions on the exercise of state tax power, and none of these restraints has broad application. The Import‐Export Clause provides that “[n]o State shall, without the Consent of Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's [
sic] inspection Laws.” The Supreme Court has construed this prohibition as applying only to taxes that discriminate against goods imported from or exported to foreign countries (
Michelin Tire Corp. v. Wages 1976;
Woodruff v. Parham 1868). The other constitutional restraints directed expressly to state tax power are the rarely invoked provision that “[n]o State shall, without the consent of Congress, lay any Duty of Tonnage,” and the Twenty‐fourth Amendment, which bars states from conditioning the right to vote in a federal election on payment of a poll tax.
Because the Constitution itself says so little about the limits on state tax sovereignty in the federal system, and because Congress has rarely exercised its legislative power to restrain state taxation, virtually the entire body of federal legal restrictions on state tax sovereignty was articulated by the Supreme Court in its interpretation of constitutional provisions directed to concerns broader than taxation alone. The fundamental notion that a state's taxing power extends only to persons, property, or activities that have some connection with its territory has been reflected in numerous Court decisions arising under the Due Process and Commerce Clauses, although neither clause makes any explicit reference to territorial limits on the exercise of state authority (e.g.,
Allied‐Signal, Inc. v. Director, Division of Taxation, 1992).
The Commerce Clause by its terms is no more than an affirmative grant of power to Congress “to regulate Commerce with foreign nations, and among the several States, and with the Indian Tribes.” Nevertheless the Supreme Court has construed the Commerce Clause as imposing implied constraints on the exercise of state tax power, even when Congress does not legislate to restrain such power. In
Complete Auto Transit, Inc. v. Brady (1977), the Supreme Court articulated its contemporary approach to adjudicating the validity of state taxes under the Commerce Clause. First, the tax must be applied to an activity that has a substantial nexus with the state. Second, the tax must be fairly apportioned to activities carried on by the taxpayer in the state. Third, the tax must not discriminate against interstate commerce. Fourth, the tax must be fairly related to services provided by the state.
The Equal Protection Clause of the Fourteenth Amendment prohibits a state from “deny[ing] to any person within its jurisdiction the equal protection of the laws.” The Supreme Court has construed the clause as prohibiting the states from making unreasonable classifications. The states enjoy broad leeway, however, in making classifications for tax purposes, and this latitude has largely insulated state taxes from attack under the Equal Protection Clause (
Fitzgerald v. Racing Association of Iowa, 2003).
The Supreme Court has construed the Supremacy Clause as limiting the states' power to tax the federal government. In the landmark case of
McCulloch v. Maryland (1819), the Court observed that “the power to tax involves the power to destroy” (p. 431) and it held that the states could not tax the instrumentalities of the federal government, such as the national bank. Although early decisions created a broad zone of immunity from state taxation for the federal government and those with whom it dealt, modern case law has narrowed the immunity to a proscription against taxes whose legal incidence falls on the United States or its instrumentalities and to levies that discriminate against them.
The Supreme Court has construed the Privileges and Immunities Clause of Article IV as forbidding states from discriminating against nonresidents in their taxing schemes unless there is a substantial reason for the discrimination and the discrimination bears a substantial relationship to the state's objective (
Lunding v. New York Tax Appeals Tribunal, 1998).
Bibliography
Jerome R. Hellerstein and and Walter Hellerstein , State Taxation, vols. 1 and 2, 3d ed. (1998);
Jerome R. Hellerstein and and Walter Hellerstein , State and Local Taxation, 7th ed. (2001).
James B. Stoneking
; revised by
Walter Hellerstein
