Excluding the Income of State and Local Governments: The Need for Congressional Action

83 Pages Posted: 24 May 2018

Date Written: May 23, 2018


This article, although more than 25 years old, has renewed importance in light of the 2017 tax legislation. The 2017 legislation introduced limits on the deductibility of state and local taxes as well as an excise tax applicable to various exempt organizations, including some governmental affiliates, on certain kinds of excess compensation. These legislative changes have focused attention on how the federal government categorizes state governmental entities and their affiliates. The many potential categories include states, their political subdivisions, integral parts of states or political subdivisions, governmental instrumentalities, entities with income derived from an essential governmental function, and governmental affiliates exempt under section 501(c)(3).

The article describes the criteria for and the implications of each of these categories, including their eligibility for deductible contributions. It examines the legislative history of these various statutory provisions as well as administrative and judicial interpretations of them. It explains that, in exempting the income of states and political subdivisions, the Internal Revenue Service relies on an implied statutory immunity rather than on the now discredited doctrine of a constitutional intergovernmental immunity. The contrast between this implied statutory immunity and the history of section 115(1), the provision that excludes “income derived from . . . the exercise of any essential governmental function and accruing to a State or any political subdivision thereof,” demonstrates how the understanding of the federal taxing power over states, their political subdivisions, and their affiliates has changed dramatically since the early 20th century.

The constitutional, statutory, administrative, and judicial issues raised by this piece can usefully inform current debates, such as proposals to allow credits against state taxes for contributions to charitable programs established by state governments.

Suggested Citation

Aprill, Ellen P., Excluding the Income of State and Local Governments: The Need for Congressional Action (May 23, 2018). 26 Georgia Law Review 421 (1992); Loyola Law School, Los Angeles Legal Studies Research Paper No. 2018-20. Available at SSRN: https://ssrn.com/abstract=3183983

Ellen P. Aprill (Contact Author)

Loyola Law School Los Angeles ( email )

919 Albany Street
Los Angeles, CA 90015-1211
United States
213-736-1157 (Phone)
213-380-3769 (Fax)

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information