Tax Discrimination: A Comparative Analysis of U.S. and EU Approaches

Abstract:     
Both the United States and the European Union were founded in part because of the need for economic unity. Just as the U.S. Constitution established the dual sovereignty of the states and the federal government, the EU's Founding Treaty also divided competencies between the Community and the Member States. Both systems struggle to promote a subnational tax policy that balances state or Member State sovereignty against the needs of a Single Market. This article focuses on these two "federalist" systems and their respective approaches to thwarting tax discrimination.

Unlike the EU where the Member States play a double role, decision-making in the U.S. Congress is currently independent from that of the fifty states. Originally, the U.S. Constitution required that two Senators be chosen by the legislatures of each respective state because the Framers wanted to safeguard the interests of the state governments. However, in 1913, the states ratified the 17th Amendment calling for the direct election of Senators. This article argues that one unfortunate consequence of this change is that special interests are overshadowing the needs of the state governments as Congress increasingly interferes with state tax legislation.

The article details the three provisions of the Constitution that an individual taxpayer may use to challenge a discriminatory state tax: the Privileges and Immunities clause; the Equal Protection Clause; and the Commerce Clause. However, after 200 years of jurisprudence, the Supreme Court is increasingly resistant to hearing these cases. The article discusses the Supreme Court's most recent decision in Lunding v. New York Tax Appeals Tribunal and the ECJ's probable approach to the same case. The EU's Founding Treaty contemplated the removal of obstacles to the free movement of goods, persons, services, and capital between the Member States. The ECJ must determine whether a Member State's national tax law violates one of these "Four Freedoms." Because the ECJ does not have discretion as to whether to hear a case, the ECJ adjudicates a far greater number of tax cases compared to the U.S. Supreme Court.

This article recommends that the ECJ accept more justifications of a Member State's tax law. Given the progress made towards the Internal Market, it is time for a more balanced approach that takes into account the Member States' needs to finance their governments. With respect to the U.S., the article recommends more judicial oversight and an additional procedural constraint on Congress to ensure less Congressional interference with state tax laws.

Keywords: Federalist Systems, European Union, Tax Discrimination

JEL Classifications: H20, H71, H70, O57

Accepted Paper Series