Paul L. Caron

Wednesday, April 27, 2022

Layser: Overcoming Constitutional (And Political) Barriers To State Place-Based Tax Incentive Reform

Michelle Layser (Illinois; moving to San Diego; Google Scholar), Overcoming Constitutional (And Political) Barriers to State Place-Based Tax Incentive Reform, 170 U. Pa. L. Rev. ___ (2022):

Penn Law ReviewPlace-based tax incentives, which are used to promote investment in distressed geographies, have the potential to become an effective tool to fight poverty at the state and local level. However, the incentives that are currently used by state and local governments to advance their community economic development strategies often fail to benefit residents of low-income communities. Ideally, these tax incentives would be reformed by restricting their availability to activities that directly benefit low-income residents of distressed regions within the state, such as by requiring business taxpayers to hire or serve residents of the targeted areas. However, for reasons to be explained in this Article, under current constitutional law frameworks, these proposed reforms would constitute unconstitutional discrimination under the Dormant Commerce Clause—a consequence of decades of Court doctrine that has developed to constrain state tax competition. Successful state place-based tax incentive reform will require Congress to modify the existing constitutional framework to enable these types of reforms. Without such changes, there is a real and imminent risk that constitutional frameworks will continue to evolve in ways that further restrict the use of place-based tax incentives, depriving state and local governments of an important anti-poverty tool.

State place-based tax incentives can be reformed to improve outcomes for residents of low-income communities. Through a careful analysis of relevant statutory law, constitutional doctrine, and political economy considerations, this Article has presented a roadmap for state place-based tax incentive reform. Although some reforms can be achieved entirely through state-level statutory amendments, some of the most promising reform proposals would require changes to federal constitutional frameworks. This Article has shown how constitutional barriers to reform can be overcome through Congressional legislation.

In doing so, this Article has revealed the full extent of the state place-based tax incentive reform project. Successful reform of the tax incentive landscape will require changes to both state and federal law, involving lawmakers at every level of government. It has also revealed the urgency. If reformers fail to take steps to change the constitutional framework in ways that enhance their capacity to implement community oriented reforms, there is a real and imminent risk that the constitutional frameworks will continue to evolve in ways that render many place-based tax incentives unconstitutional, including those that could otherwise be reformed to benefit low-income communities.

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