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Tuesday, July 3, 2012

Do State Corporate Tax Incentives Violate the Equal Protection Clause

Tax AnalystsJustin T. Golart (J.D. 2012, George Washington), Corporate Tax Incentives And the Equal Protection Clause, 65 State Tax Notes 33 (July 2, 2012):

The argument that targeted tax incentives are unconstitutional under the equal protection clause of the 14th Amendment is admittedly an aggressive one. Although it’s unlikely to succeed in the near future, strong arguments do exist that could form the basis for a challenge in the future. If the composition of the Supreme Court changes over time to a lineup that is more likely to extend the borders of suspect classifications, small business owners have a strong case that these discriminatory laws should be subject to heightened scrutiny.

In the short term, the more logical approach is to conduct studies and collect data demonstrating that there is no rational basis for states to offer tax breaks to select corporations. A skeptic would likely conclude that tax incentives are more related to continued financial support of elected leaders than they are to job growth and economic development. Although both arguments, in their current forms, are not slam-dunk cases, the Supreme Court’s decision in Citizens United is an excellent starting point for holding corporations to the same standard as natural persons and saying that corporations cannot pick and choose when they wish to be treated as natural persons. To ignore that argument is to accept the consequences of Citizens United that empower corporations without demanding the consequences that hold them accountable.

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The author claims that the small business owner will be less capable of protecting himself from harm as Citizens United emboldens large corporations. But the small business owner is not actually suffering an individualized harm in any real sense. The tax rate on the small business owner in the Mercedes example did not change in any way. Mercedes had a lower tax rate, thereby bringing substantial capital into Alabama. It seems highly unlikely that any court will ever look at that situation and say that small businesses, as a class, have suffered a discriminatory, harmful impact. Isn't it just as likely that the influx of capital increased the economic power of the Alabama population, thereby increasing their spending within the community, which would be most likely to benefit local, small businesses? Given the fact that the result of these tax incentives is just as likely (if not more likely) to benefit small businesses as it is to harm them, you are unlikely to convince a court that a discrimination is even taking place, let alone one that qualifies them as a suspect class, which is not even to mention the impossibility of proving that the tax incentives are in no way rationally related to any legitimate governmental interest. Furthermore, the article discusses horizontal equity to point out that similarly situated entities should be treated similarly, and then goes on at length to point out the differences between large corporations and small corporations. If they really are to be treated as persons, then your argument is essentially that Bill Gates and Joe the Plumber are similarly situated and should be taxed identically...but also that Bill and Joe are totally different and these differences result in power dynamics unfavorable to Joe. You can't have it both ways...that would be like saying something isn't a tax, except when it is a tax.

Posted by: Kevin | Jul 9, 2012 11:47:15 PM

Kevin, thanks for the comment! Here are a couple responses to some of your points.

Regarding horizontal equity: In your hypothetical about Bill Gates and Joe the Plumber, my point is that they are NOT similarly situated...but that Joe the Plumber is also not truly similarly situated as Dave the Carpenter, Joe's next-door neighbor. I did not say that Bill Gates and Joe the Plumber should be taxed identically. What I suggested is that when a state legislature says "here is our tax applies to everyone except Bill Gates," that generates an equal protection analysis. The result of that equal protection analysis is a separate issue. My purpose was only to suggest that the analysis is necessary and provide some ideas for how to approach it.

Regarding your point that tax breaks for large corporations are just as likely to benefit small businesses: That is not a universally accepted proposition. This goes to whether the government's basis for the distinction it has drawn has a rational basis. My point is to suggest that if corporate tax incentives consistently do not achieve the economic benefits that are used to justify them, then states should not be given a free pass to continue passing discriminatory laws based on nothing more than their own assertions that their bases are rational.

Posted by: Justin Golart | Jul 11, 2012 6:51:09 AM