Cornell Law Review, Vol. 81, No. 4 (May 1996), pp. 789-878


In this Article, we explore the ill-defined distinction between the constitutional carrot and the unconstitutional stick in state tax, subsidy, and related cases. Part I examines the restraints that the Commerce Clause imposes on state tax incentives. It 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. Part I concludes by considering the constitutionality of a variety of state tax incentives within our suggested framework and also under alternative approaches that courts might utilize. Part II examines the restraints that the Commerce Clause imposes on state subsidies. It begin with a consideration of the Court's seminal case in this field, West Lynn Creamery, Inc. v. Healy. After demonstrating that West Lynn Creamery does not jeopardize ordinary business subsidies, Part II considers the constitutionality of subsidies along two dimensions. First, it looks at subsidies in terms of their intended beneficiaries, focusing on whether it matters for Commerce Clause purposes that the subsidy targets a particular firm rather than a general class of businesses. Second, it evaluates whether the particular form the subsidy takes--for example, a cash grant, a property transfer, or a user fee waiver--alters the constitutional calculus in applying the dormant commerce clause. Part II concludes that neither the target nor the form of the subsidy ordinarily makes a difference. Rather, discriminatory subsidies, unlike discriminatory tax breaks, are almost always constitutional. In Part III, we consider the theoretical underpinnings of the strong tax-break/subsidy distinction that permeates this field. We suggest that this distinction resonates with the law's deep regard for considerations of form. We observer, in particular, that the distinction may grow out of the same "cautionary function" that helps explain many rules that require use of specified formal structures to achieve legally enforceable results in the private-law context.