Abstract

The states' provision of tax incentives designed to encourage economic development within their borders has long been a feature of the American legislative landscape. Today every state provides tax incentives as an inducement to local industrial location and expansion. Indeed, scarcely a day goes by without some state offering yet another tax incentive to spur economic development, often in an effort to attract a particular enterprise to the state.

The debate over the efficacy and wisdom of state tax and other business incentives is intense and important, as other articles in this Symposium plainly reveal. My purpose here, however, is not to enter this fray. Instead, it is to consider the central legal question that state tax incentives raise under the dormant Commerce Clause of the Federal Constitution: How is a constitutionally benign tax incentive designed to attract industry to a state to be distinguished from an unconstitutionally discriminatory tax incentive designed to do the same thing?

This question reflects a palpable tension in the Supreme Court's Commerce Clause opinions. The Court has declared that its decisions "do not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry." The Court, however, has disapproved state tax measures designed to achieve that very objective on the ground that they "foreclose[] tax-neutral decisions" and “provid[e] a direct commercial advantage to local business."'

This Article explores the ill-defined distinction between the constitutional carrot and the unconstitutional stick in state tax cases. In examining the restraints that the Commerce Clause imposes on state tax incentives, the Article canvasses the general principles limiting discriminatory state taxation, explores the Court's decisions addressing state tax incentives, and proposes a framework of analysis for adjudicating the validity of such incentives. The Article considers the constitutionality of a variety of state tax incentives within the suggested framework. It concludes that many state tax incentives commonly employed by the states cannot survive Commerce Clause scrutiny while identifying several categories of state tax incentives that should pass constitutional muster.