Paul L. Caron

Thursday, February 23, 2023

Duplicative Taxation Among The States: A Problem Not Worth Solving?

Julie Roin (Chicago), Duplicative Taxation Among The States: A Problem Not Worth Solving?:

Recent legal and economic changes—not to mention the rise in telecommuting caused by COVID--have raised the salience of a long-simmering fact about the operation of state and local income tax systems: some multistate employers and employees pay a combined income tax liability that is higher than the tax they would have borne had they operated in just one jurisdiction. Seemingly beyond the reach of the courts to correct, there have been persistent calls for Congressional action to eliminate or reduce this “duplicative” taxation. This Article suggests that the alleged problem may be both less of a problem, and more resistant to a solution, than is commonly understood.

There is little doubt that obvious cases of duplicative taxation are on the rise, and with them, some measure of taxpayer discontent, not to mention taxpayer avoidance behavior. The question is what Congress can and should do about it. Congress has the power to provide some measure of uniformity in the apportionment of state corporate income taxes, and in the assignment of tax revenues from employee income. Whether the benefits of such uniformity are worth the inevitable political costs are another matter entirely. Past federal forays in the area have not been particularly successful. Virtually every tax expert regards the nexus limitation on mail order sales as misguided and ripe for repeal, and its earlier attempt to mandate a uniform UDITPA formula succeeded only in unifying states around a formula different from the one it had proposed. Perhaps (if it decides to intervene at all) that should be its intent: to develop a sufficiently unacceptable rule to bring wandering state legislatures into agreement on a common formula and definition of factors. But the longevity of such an agreement, as the Moorman case shows, would be far from certain. As the last part of the Article argues, the apparent effects of uniformity and “fairness” may be just that. When states are determined to collect the “right” amount of revenues from their residents and workers and businesses, they can rely on a number of different fiscal tools. 

All the same, obvious “double taxation” rankles in ways that less obvious burden shifting may not. Particularly in this political climate, appearances may matter more than substance and provide justification for greater apparent uniformity and the absence of explicit duplicative taxation. But the path to apparent uniformity will not be easy. States, like nations, continue to disagree over the proper split of tax revenues between market and origination jurisdictions. Even if, over time, the choice of formula and factor definitions can be undone by rearranging fiscal systems, the initial choices will determine which jurisdictions will be faced with the need to make such rearrangements. It is unlikely that any jurisdiction will willingly take on the burden of such political and other costs and uncertainties. Ultimately the question is whether the game is worth the candle.

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