State and Local Government Taxation

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The Constitution contains only one provision explicitly restricting the general scope of state and local tax power. The Import-Export Clause provides that "no State shall, without the Consent of Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection laws." For most of America's constitutional history, the Supreme Court construed this clause as forbidding any state tax on imports and exports, a question the Court resolved by asking whether the imported goods subject to tax were in their Original Package and whether the exported goods subject to tax were within the "stream" of exportation. In Michelin Tire Company v. Administrator Of Wages (1976), however, the Court dramatically revised its approach to import-export clause analysis by refocusing the constitutional inquiry on the question of whether the levy at issue was an "impost" or "duty," which the Court in essence defined as a tax discriminating against imports and exports. Hence, nondiscriminatory taxes, even though imposed on imports or exports, are constitutionally tolerable under contemporary doctrine.

Other restraints on state and local taxation derive from constitutional provisions directed at concerns much broader than the subject of taxation. The Court has construed the Commerce Clause as requiring that any tax affecting interstate commerce must satisfy four criteria: 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 the activities carried on by the taxpayer in the taxing state. Third, the tax must not discriminate against Interstate Commerce. Fourth, the tax must be fairly related to services provided by the state. The commerce clause has been by far the most significant source for judicially developed restraints on state taxation of interstate business. The Court has decided hundreds of such cases delineating commerce clause restraints on state taxation.

The Court has interpreted the Due Process clause of the Fourteenth Amendment as restraining the territorial reach of the states' taxing powers. It has declared that there must be a minimum link between the state and the person, property, or transaction it seeks to tax. Furthermore, the due process clause requires a state, in taxing the property or income of an interstate enterprise, to include within the tax base only that portion of the taxpayer's property or income that is fairly apportioned to the taxpayer's activities in the state. Thus, there is considerable overlap between the restraints imposed by the commerce and due process clauses. However, the due process clause restrains state tax power under circumstances in which the commerce clause is inapplicable, either because the tax does not affect interstate commerce or because Congress has consented to state taxation under its power to regulate commerce.

The Court has interpreted the Equal Protection clause of the Fourteenth Amendment as prohibiting the states from making unreasonable classifications. The Court, however, has generally accorded the states considerable leeway in drawing classifications for tax purposes. Under current doctrine, a state tax classification will be sustained if the tax has a legitimate state purpose and if it was reasonable for state legislators to believe that the use of the challenged classification would promote that purpose.

The Supreme Court has relied on the Privileges And Immunities clause of Article IV to invalidate state taxes that discriminate against residents of other states. Thus, the Court has struck down license and other taxes that impose heavier burdens on nonresidents than on residents, and it has invalidated a taxing scheme that denied personal income tax exemptions to nonresidents. The scope of the privileges and immunities clause was significantly limited, however, by the Court's determination in the mid-nineteenth century that the clause, which technically protects only "citizens" of other states, did not apply to corporations.

In Mcculloch v. Maryland (1819) the Court held that the states are forbidden from taxing the federal government or its instrumentalities. Rooted in both the Supremacy Clause and the underlying structure of the federal system, this Intergovernmental Immunity doctrine was for many years interpreted broadly to exempt from state taxation not only the federal government itself but also private contractors who dealt with the government. Beginning in the late 1930s, however, the Court substantially cut back on the scope of the federal government's immunity from state taxation. Broadly speaking, modern case law has narrowed the immunity to a proscription against taxes whose legal incidence falls on the United States and to levies that discriminate against the federal government.

Walter Hellerstein

(see also: Economic Due Process; Economic Equal Protection; Intergovernmental Tax Immunities; State Regulation of Commerce.)


Hellerstein, Jerome R. 1983 State Taxation, I: Corporate Franchise and Income Taxes. Boston, Mass.: Warren, Gorham & Lamont.

——and Hellerstein, Walter 1988 State and Local Taxation, 5th ed. St. Paul, Minn.: West Publishing Co.

——1989 Cumulative Supplement to State Taxation, I: Corporate Franchise and Income Taxes. Boston, Mass.: Warren, Gorham & Lamont.

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State and Local Government Taxation

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