Proponents of the Cuno decision (which struck down state investment tax credits conditioned on in-state investment) make great arguments against business taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. incentives. Unfortunately, they make few cogent arguments as to why investment tax credits violate the Commerce Clause of the Constitution.
If one suggests, in a room full of economists and tax experts, that investment tax credits are bad tax policy, one will see a room full of nodding heads. Very few in the tax policy world disagree on this point. But to go further and suggest that Cuno should be accepted because it might end investment tax credits will (and has) engendered much more dissent.
The proponents of Cuno urge us to accept the decision because it will, in the words of law professor Peter Enrich, “save the states from themselves.” But the Commerce Clause is designed to protect interstate markets from discriminatory state interference, not to save taxpayers from dumb tax laws. Cuno will be decided based on whether the investment tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. at issue unduly discriminates against interstate commerce, not whether those credits violate the principles of sound tax policy.
Cuno proponents maintain that the decision is consistent with the Commerce Clause because investment tax credits induce businesses to invest in-state and thereby discriminate against out-of-state investment. This rationale, however, goes too far: virtually any tax law passed by a state can induce businesses to invest in-state. Changes in tax rates, apportionment schemes, and income reporting requirements all enter into a business’ decision whether to invest in-state or out-of-state, and would all be swept in by the over breadth of the Cuno ruling.
The Tax Foundation has published two articles criticizing the Cuno decision. You can read them here and here. Both of them urge the tax policy world to consider the legal impacts of the Cuno decision and focus on whether the holding in Cuno is good law and not good policy.
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