State Tax Shelters and U.S. Fiscal Federalism

12 Pages Posted: 3 Apr 2007

See all articles by Kirk J. Stark

Kirk J. Stark

University of California, Los Angeles (UCLA) - School of Law


Over the past two decades, litigation has exploded over state corporate tax shelters. In the typical transaction, taxpayers devise corporate structures so as to shift income (most commonly income from intangible assets) to low or no tax jurisdictions. Much of the literature on these transactions has focused on whether and how states should combat corporate tax avoidance behavior. State courts across the country have opined on various tax shelters, and Congress has considered legislation restricting the states' authority to tax income from these transactions. This essay takes a somewhat different perspective, situating the problem of state tax shelters within the broader context of optimal design of institutions of fiscal federalism. Viewed through that lens, state corporate tax shelters are better understood not as tax avoidance schemes (or, rather, not merely tax avoidance schemes) but rather as a symptom of our flawed intergovernmental fiscal structure. State tax shelters are just one manifestation (and not the most serious manifestation) of the difficulty of taxing corporate income in a multijurisdictional setting. At the same time state tax shelters have proliferated, revenue from state corporate income taxes has fallen off sharply, but for reasons going far beyond the shelter phenomenon. The core problem is one of tax assignment - i.e., which taxes should be assigned to which level of government? A more rational approach, consistent with the basic principles of fiscal federalism, would be to increase federal corporate income tax rates by some small percentage and distribute the revenues generated by that supplemental corporate income tax to the states.

Keywords: tax policy, fiscal federalism, state tax shelters

JEL Classification: H71, H72, H77

Suggested Citation

Stark, Kirk J., State Tax Shelters and U.S. Fiscal Federalism. Virginia Tax Review, Vol. 26, 2007, UCLA School of Law, Law-Econ Research Paper No. 07-06, Available at SSRN:

Kirk J. Stark (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-825-7470 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics