Our current system of state and local taxation of interstate and foreign commerce, simply put, is a mess. First, the mere number of jurisdictions that may impose taxes is seemingly limitless: each of the fifty states, plus the District of Columbia, may impose its own set of taxes. In addition, each state may authorize local government units within the state, such as counties, municipalities, townships, and special districts, to assess and collect taxes. For example, in 1994, well over 6,000 separate jurisdictions were authorized to impose sales taxes.
Second, the states may impose a wide variety of taxes and may authorize their local jurisdictions to impose such taxes. For example, states may impose individual income taxes, corporation income taxes, general sales taxes, property taxes, estate taxes, and a wide variety of excise taxes, such as gasoline, cigarette, and alcoholic beverage taxes. Each taxing jurisdiction has the power to define independently the tax base and to specify the other rules applicable to each tax.
Finally, the United States Supreme Court's attempts to regulate the area have created substantial uncertainty and confusion. Relying principally on the negative implications of the Commerce Clause, often called the dormant Commerce Clause, the Court, on more than one occasion, has described its decisions in this area as a “quagmire.”
This Article will address the role the Court's dormant Commerce Clause jurisprudence should play in resolving the many problems raised by state and local taxation of interstate and foreign commerce. Ideally, the Court should mandate more uniformity. It should not require that states and local jurisdictions apply a single, uniform tax to interstate and foreign commerce. However, it should order that the states and local jurisdictions apply uniform rules to define the tax base and apply uniform rules to allocate that base among the states with respect to each tax affecting interstate and foreign commerce.
This Article will also address the role the Court should play in the absence of uniformity, the second best solution. The proposed role is based on a refined version of an approach to state tax dormant Commerce Clause jurisprudence developed by Justice Scalia over a period of years. According to that vision, the Court should only strike down a state or local taxing statute if: (1) the statute facially discriminates against interstate or foreign commerce; or (2) the statute is indistinguishable from a statute the Court has previously stricken.
Although this approach is not perfect, it has the potential to compensate for some of the imperfections in the current system of state and local taxation. First, it could eliminate those state taxing statutes that create the most egregious drags on our national economy while providing greater certainty and stability in an area of the law in desperate need of certainty and stability. Second, it could encourage legislation providing for uniformity, and such legislation may be the only feasible means for achieving uniformity.
Part two of this Article explains why uniformity is the best solution to the problems raised by state and local taxation of interstate and foreign commerce. Part three then provides a brief history of the Court's state tax dormant Commerce Clause jurisprudence and explains why the Court is institutionally incapable of mandating uniformity, the first best solution.
Part four discusses the current status of the Court's state tax dormant Commerce Clause jurisprudence. That discussion reveals that the Court's current state tax dormant Commerce Clause jurisprudence, while perhaps improved from earlier jurisprudence, remains extraordinarily uncertain and unstable. It also illustrates that uniformity in taxation would eliminate most, if not all, of that uncertainty.
Part five of the Article describes how the Court should interpret the dormant Commerce Clause as applied to state and local taxation of interstate and foreign commerce. It begins by explaining the origins of second best solutions. It then describes the proposed second best solution and its history. It concludes by explaining why the proposed approach is in fact the second best.
Kathryn L. Moore, State and Local Taxation of Interstate and Foreign Commerce: The Second Best Solution, 42 Wayne L. Rev. 1425 (1996).