Monday, March 19, 2012
Congress uses the income tax to regulate. Because states impose their own income taxes on the federally-defined income tax base, rather than on separately determined state tax bases, states automatically import federal policies into their own tax systems. 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 drawbacks. Conformity conserves legislative, administrative, and judicial resources, and it reduces taxpayers’ 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 competition, and exposing themselves to revenue volatility stemming from the ever-changing federal tax law. While the significant administrative and compliance advantages of federal-state tax base conformity generally outweigh these concerns, this article makes recommendations for reducing the adverse impact of base conformity and for further study.