Holderness: Self-Policing Through Retaliatory Taxation

Hayes Holderness (Richmond), Self-Policing Through Retaliatory Taxation, 77 Tax Law. ___ (2024):

A fundamental goal of the U.S. Constitution is to create a shared national economy that citizens of any state may access. Burdensome state regulation or taxation of interstate commerce threatens that goal. Recently, the Supreme Court has loosened the restrictions of the dormant Commerce Clause doctrine on the states’ authority to tax interstate commerce. As a result, states have modified their taxes to adapt to the changing world, many times through the expansion of the reach of the taxes. Some states have adopted tax policies that sister states believe inappropriately burden the national marketplace, making it difficult for citizens of those sister states to engage in interstate commerce. With the federal judiciary stepping out of the role of regulator of state taxation of interstate commerce and Congress seemingly unwilling to exercise its Commerce Clause authority in this context, the states have begun to take matters into their own hands. Without federal action, the states will continue to do so.

A surprising action that states have recently taken is retaliatory taxation, an old practice that concerned even the Founders.

Retaliatory taxation occurs when a state imposes specialized tax burdens on a nonresident to mirror the tax policies of the nonresident’s home state that the taxing state finds offensive. By subjecting the nonresident to their home state’s tax policy, the taxing state aims to persuade that nonresident to lobby for change in their home state. Retaliatory taxation is a rough and volatile tool to achieve this goal, but it may be the best tool available to the states to regulate sister states’ taxation of interstate commerce. Though the discrimination against nonresidents inherent to retaliatory taxation might be expected to violate multiple provisions of the U.S. Constitution, the current Supreme Court appears primed to allow new retaliatory taxation regimes to stand, thereby passing the baton to the states to protect the national marketplace in the absence of Congressional action. A federal response will be needed to avoid the proliferation of retaliatory taxation.