Pre-emption: federal statutory intervention in state taxation.

Wildasin, David E. "State and Provincial Corporation Income Taxation: Current Practice and Policy Issues for the US and Canada." Canadian Tax Journal 48 No. 2 (2000): 424-41.

Wildasin, David E. "Tax Coordination: The Importance of Institutions." Swedish Economic Policy Review 9 No. 1 (Spring, 2002): 171-94.

Wildasin, David E. "Fiscal Competition." In The Oxford Handbook of Political Economy, edited by Barry Weingast and Donald Wittman, 502-20. Oxford: Oxford University Press, 2006.

Wildasin, David E. "Local Government Finance in Kentucky: Time for Reform?" Kentucky Annual Economic Report 2007, 11-22. Lexington, KY: University of Kentucky, Center for Economic and Business Research, 2007.

Wildasin, David E. "Fiscal Federalism." In The New Palgrave, 2nd Edition, edited by Steven Durlauf and Lawrence Blume. New York: Palgrave Macmillan, forthcoming.

David E. Wildasin

Martin School of Public Policy, University of Kentucky, Lexington, KY 40506-0027

(1) See 126 S. Ct. 1854 (2006). In this case, it was argued that the state of Ohio and the city of Toledo should not be permitted to use tax policy to encourage investment by DaimlerChrysler in a new plant. The Supreme Court ultimately dismissed this particular case on technical grounds, but the fundamental issue seems likely to arise again in future litigation. See Enrich (forthcoming) for a legal analysis of the issues in Cuno.

(2) The MTC was established partly in order to forestall federal legislation, which would likely have restricted state corporation income taxes more severely than PL86-272 (Multistate Tax Commission, 1969). It seems to have succeeded in this respect, although recent proposed federal legislation, discussed further in the fourth section below, reopens the issue. The interplay between Supreme Court rulings on corporate taxation, federal legislative proposals, and the states that culminated in the founding of the MTC is discussed in Anonymous (1968).

(3) Local taxation varies by state. Kentucky's system provides an interesting illustration. In addition to property taxes, many but not all localities are permitted tax wage income and business net income, at rates that vary within specific limits, depending on the size and type of jurisdiction. Taxes on property insurance premiums are an important revenue source for some localities. Property tax rates can vary among localities, but a state law limits the annual rate of growth of property tax revenues for most localities. Proposed reforms of this system would necessitate a combination of state legislation and amendments to the state constitution. These and other intricacies are discussed in detail in the report of a recent Task Force on Local Taxation (see Wildasin (2007).

(4) See Oates (1972) for a classic treatment. See Wildasin (2006, forthcoming) for concise and nontechnical discussions of some basic themes of fiscal federalism research as well as references to other works that survey some of the large and rapidly growing literature in this field.

(5) Rather than attempt to tax every transaction at the rate required by the destination jurisdiction, states could impose origin-based taxes on all transactions and then remit a portion of the revenues to other states, pursuant to a voluntary interstate compact (presumably based on reciprocity arrangements). Such a tax might not violate any constitutional constraints, but many economists would prefer a system of destination-based sales taxes because they would more closely approximate a consumption tax.

(6) Many personal services (lawn and garden care, laundry, personal grooming) avoid sales taxation but should, of course, be taxed as part of personal consumption. The exemption of services complementary to the sale of taxed tangible goods--automobile repair, for instance--creates incentives for tax avoidance through pricing distortions (reduced prices for taxable "parts" and increased prices for untaxed "labor").

(7) Of course, it is possible that both states could try to tax retirement distributions, resulting in double taxation. A possible solution to the double-taxation problem would be for states to offer credits for taxes paid to other states, as in fact was generally the case prior to the passage of PL104-85, which has obviated the issue.

(8) In general, neither a residence-based nor a source-based consumption tax is a perfect congestion toll. If the cost of public service provision is highly dependent on the level of employment within a state, employment-based taxes like a source-based consumption tax or taxes on earnings or payrolls might be preferable to residence-based consumption taxes or possibly retail sales taxes. Many public services, however, depend principally on the size of the population being served rather than on the level of employment, in which case a residence-based consumption tax is likely to be a better implicit congestion toll. This is especially true for congestible public services consumed disproportionately by the elderly, such as nursing-home care.

(9) See the report of the House Committee on the Judiciary (1995) for discussion of the policy background of PL104-85. The report notes (p. 3) that "One State in particular, California, ... aggressively sought to tax annuity payments made to retirees who have moved elsewhere." "Elsewhere," in this context, includes Nevada, a state with no income tax--a problematic situation from the viewpoint of source-based consumption taxation but quite acceptable from the residence perspective.