Thursday, February 27, 2014
Alan D. Viard (American Enterprise Institute) presents Putting the Commerce Back in the Dormant Commerce Clause: State Taxes, Trade Neutrality, and Nondiscrimination at Northwestern today as part of its Tax Colloquium Series hosted by by Herbert Beller, Charlotte Crane, David Cameron, Philip Postlewaite, Jeffrey Sheffield, and Robert Wootton:
The Supreme Court’s Dormant Commerce Clause jurisprudence has been intensely criticized as incoherent, with many questioning whether coherence is even possible. We explain that a coherent DCC jurisprudence arises if state taxes and subsidies are evaluated based on their relative treatment of interstate and intrastate trade. Under this “trade neutrality” standard, state taxes and subsides are invalid if they create an economic incentive to engage in intrastate trade rather than interstate trade. Economic analysis reveals that such an incentive arises when the combined tax on imports and exports exceeds the tax on intrastate transactions or when the subsidy to intrastate transactions exceeds the combined subsidy to imports and exports.
This trade neutrality standard is not a radical revision to DCC jurisprudence. A crucial prong of the Complete Auto test, echoing repeated statements in the Court’s earlier decisions, requires that state taxes not discriminate against interstate commerce, which is the concept embedded in trade neutrality. The Court’s failure to explain this principle, however, has led to four flaws in its DCC jurisprudence. First, the Court has understated the role of the internal consistency test by presenting it as a purely hypothetical measure of the effects that a state’s tax or subsidy system would have in the highly unlikely case that every state adopted the same system. Second, the Court has mistakenly focused on whether a specific transaction is taxed by more than one state, suggesting that economic reality is better measured by a tax system’s “external consistency.” Third, the Court has sometimes said that the DCC prohibits states from treating residents more favorably than nonresidents, failing to recognize that this ill-conceived principle is completely different from nondiscrimination against interstate commerce. Fourth, and related to its misplaced focus on nonresident equality, the Court has failed to provide a coherent treatment of subsidies.