FINANCIALLY STRAPPED states are endlessly creative when it comes to raising revenue. Business taxes have been especially popular. But in two separate rulings this week, the Supreme Court sent a long-overdue warning to state legislatures that offer unwarranted tax breaks to their own constituents.
The court reaffirmed a fundamental principle that too many states conveniently have forgotten: taxes that favor an in-state business over an out-of-state competitor for no reason other than location are unconstitutional.The environment surrounding Pennsylvania's heavy truck axle tax, which the court struck down, may be the most instructive. The Keystone State sought to raise revenue by imposing a flat tax on trucks - a tax that, by its nature, would pose far heavier burdens on out-of-state trucks passing through Pennsylvania than on trucks based in the state. Six other states followed a similarly discriminatory course. In return, seven states adopted retaliatory taxes aimed only at trucks from states with discriminatory taxes. Suddenly, the trucking industry found itself in the middle of an interstate tax war.
Taxes such as Pennsylvania's, the court rightly found, unconstitutionally
pressure businesses to ply their trade within the state that passed the levy and penalize those that do not. Any other decision would have invited a stream of Byzantine state tax policies that would hopelessly frustrate interstate commerce.
Pennsylvania and Washington, which had a manufacturing tax overturned by the court, may pay a high price for their me-first attitudes. In both cases, multimillion-dollar refunds may be ordered by state supreme courts.
The court's ruling puts an end to the beggar-thy-neighbor approach to state taxation. Left unchecked, location-based state taxes ultimately could create a domestic trade war every bit as serious as an international trade dispute.