The Limits of State Tax Powers: A Modest Reply to Justice Scalia
May 27, 2015
Should Maryland be able to use its tax system to punish interstate commerce? The U.S. Supreme Court answered that question with a “no” last week in an unusual 5 to 4 split (Alito, Roberts, Kennedy, Breyer, and Sotomayor against Scalia, Thomas, Ginsburg, and Kagan).
The Court majority relied on a 200-year-old doctrine known as the “dormant commerce clause.” While the U.S. Constitution grants Congress the power to regulate interstate commerce (a provision that has been and continues to be subject to wide discussion about its limits or lack thereof), it says nothing explicitly about the courts and interstate commerce. Beginning in Gibbons v. Ogden, Chief Justice John Marshall explained that a motivation for the Constitution was removing trade barriers between states, and the grant of power to Congress implied a removal (or at least a subordination) of the same power from the states themselves. Thus, courts can prevent state taxation of interstate commerce, or discriminatory taxation of interstate commerce, unless Congress decides otherwise.
While the Court majority laid out those precedents and the economics that support their decision to stop Maryland from double-taxing out-of-state activity, the dissenters preached judicial deference: Maryland’s taxes are the domain of Maryland elected officials and their voters, not federal judges. For Justices Ginsburg and Kagan, this is very problematic as they want to draw the line between taxes on residents (constitutional) and taxes on non-residents (unconstitutional). That amounts to little more than cunning draftsmanship: a tax on in-state residents’ income from out-of-state activity would be okay but a tax on the activity of out-of-state companies paid to in-state residents would not, even though they are economically identical.
Justice Scalia and Justice Thomas are more consistent, at least, in that they disagree with the whole notion of the dormant commerce clause. David Brunori of Tax Analysts weighs in to agree, saying Congress is perfectly capable of handling these problems. Maybe he’s one of those 22 percent who have a favorable view of Congress, but I’ve seen the same parochial interests that led to Maryland’s self-described tariff-like (as stated by their counsel in the case) tax policy also block any number of sensible state tax bills in Congress for years. Like it or not, courts have a good record of acting when one state tries to game the system and enrich itself by hurting the national economy.
Brunori may well agree with that analysis of policy and implications; his argument is a legal one and deserves a legal response. I have two.
First, the Constitution also prohibits states from levying “any Imposts or Duties on Imports or Exports,” plus specifying that “[n]o Tax or Duty shall be laid on Articles exported from any State.” We don’t rely much on the Import-Export Clauses because we rely on the dormant commerce clause, but a constitutional originalist should reach the same result using it. It’s even tougher than the dormant commerce clause – specifying that any state taxes on imports or exports beyond inspection fees be deposited with the U.S. Treasury – which is probably why we haven’t opened that box much. Justice Thomas previously mentioned the Import-Export Clause in his dissent in Camps Newfound/Owatonna, Inc. v. Town of Harrison (1997), but got hung up (as he did in Wynne, although he tellingly did not mention the Clause) on the nearly non-existent evidence of what early Congresses did about interstate commerce. In Wynne, Justice Alito snarkily replied to Thomas that not a lot of people in 1787 were commuting “to Manhattan from New Jersey by rowboat or from Connecticut by stagecoach.” The Constitution’s powers and rights were meant to be timeless, not frozen by whatever the first or second Congress did or did not do with them. Absence of evidence is not evidence of absence.
Second, we could put an end to the defiance of Justices Scalia and Thomas by passing a statute codifying the dormant commerce clause doctrine. Here’s a first stab at my modest proposal:
“No state shall impose any tax on interstate commerce unless that tax (a) has substantial nexus with the taxing state, a sufficient and clear connection between a state and a potential taxpayer; and (b) is nondiscriminatory between in-state activity and out-of-state activity; and (c) is fairly apportioned, designed to tax only the state’s fair share of interstate activity; and (d) is fairly related to services provided by the state, with the taxpayer enjoying state-provided services while in the state. The federal courts shall have jurisdiction to hear cases relating to this section.”
All that does, of course, is codify the Complete Auto decision already in existing case law. There are some vagueries that we live with now – what is fair, what is nexus, what is enjoying, etc. If we wanted to get a little spicy, we could clarify those terms by rolling in state tax power clarifications from the proposed Marketplace Fairness, Mobile Workforce, and Business Activity Tax Simplification, and Digital Goods Fairness acts. But as I’ve written it, it just codifies existing law so states shouldn’t try to fight it. (They probably would, anyway, since the taxpayer-funded Multistate Tax Commission (MTC) opposes anything that suggests state tax power has limits of any kind.) But such a law on the books would mean we could get back to arguing about the limits of state tax powers, rather than denying that the Constitution and the courts are the ones ultimately responsible for policing those limits.