Tuesday, July 26, 2005

Who said tax competition between US States was not an issue in the US?

In Europe, tax competition between member states has been an issue for more than a decade now. The EU is marked by a significant diversity of company tax systems. The Ruding Committee in its 1992 report concluded, on the basis of an empirical survey, that tax differences among Member States distort foreign location decisions of multinational firms, and cause distortions in competition, especially in mobile activities. But what about the US?

The United States Court of Appeals for the Sixth Circuit recently ruled, in Cuno v. DaimlerChrysler that an Ohio investment tax credit designed to enhance business-investment in the state violated the Commerce Clause of the U.S. Constitution because it discriminated against interstate commerce. The Cuno decision has far-reaching implications that threaten tax competition between the states and point toward court-imposed state tax uniformity.

In the US, low-tax states out-perform high-tax states, and states without income taxes do best of all. This encourages states to lower tax rates and demonstrates the value of tax competition. But some states pursue a less desirable form of competition, keeping tax rates high but offering special exemptions for some companies. A federal court has just ruled against this practice. A Washington Times column by a former Bush Administration criticizes the Court and argues that states should be allowed to offer special preferences. The Tax Foundation on the other hand filed an amicus brief with the U.S. Supreme Court recommending review of the ruling in Cuno v. DaimlerChrysler—which invalidated an Ohio tax credit for business investment—on grounds that it is legally flawed and threatens state tax competition.


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