Tax Everyone--Wherever They Live

The Wall Street Journal recently ran an article entitled "The Albany-Trenton-Sacramento"disease. Although the article addresses the specific issue of big government and taxes, it's worth a discussion which expands a bit on the underlying problem of government intrusion across state lines and Constitutional barriers.

California, New York and New Jersey were wealthy thriving states with healthy economies. Not true today. Each shared a common philosophy of governance. Big government, social welfare programs for everyone and everything. Each spent decades spending more than incoming revenue. All believe in grossly progressive income taxes which “soak the rich.” Each has a very high per-capita income. But today, each also suffers from high unemployment, low job creation, high minimum wage, heavy unionization, and most recently, mass emigration to states with healthier economies.

Studies which have been conducted since the beginning of the Cold War invariably showed that the bigger a country’s (or state’s) government portion of the economy, the slower the growth of its gross domestic product. The private sector must generate enough wealth to sustain both itself and the governments they are forced to support, since government can spend, but it can’t earn. The bigger the government, the larger its economic burden on the sole creator of wealth—the private sector.

Then Arthur Laffer came along and demonstrated that as government taxes decrease, actual revenue increases. The three states (and the Democratic national administrations) have never liked those facts, so they simply ignored them and plowed on with bigger government and bigger taxes.

Having run low on ways of taxing their own in-state private enterprises, the states turned to taxing businesses in other states. Since the Constitution specifically forbids one state to tax businesses in other states, you may begin to wonder how it’s possible. One way is easy. Wal-Mart has its headquarters in Arkansas. California, New York and New Jersey can’t tax that. But Wal-Mart is huge, and has facilities located in all fifty states. Those facilities make use of state services, and so the states are entitled to tax Wal-Mart locally for the use of those services (fire, police, sewers, use of state roads, courts, etc.).

But what of Mom-And-Pop-Mart, who has no stores, no warehouses, no trucks, no nothin’ outside of its home state of, say, North Dakota? But as a successful manufacturer of Acme Widgets, its fame has spread far and wide. So people all over the nation now order Acme Widgets from the Mom-And-Pop-Mart catalog. With the powerful philosophy of “leave no stone untaxed,” California, New York and New Jersey are not about to let Acme Widgets import privileges stand in the way of collecting taxes.

Direct state taxes by one state on the products of a company which has no physical presence in the taxing state are forbidden tariffs under Article I, Section 9, Paragraph 5 of the United States Constitution: “No Tax or Duty shall be laid on Articles exported from any State.” Article I, Section 10, Paragraph 2 goes on to say: “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports.” And if such a duty or import is imposed with the consent of Congress, it must be for the purpose of encouraging interstate commerce, and turned over to the federal Treasury. So the states couldn’t use the money in any event. Where’s the fun in that?

But the big government states have found a way around this Constitutional prohibition. Instead of imposing direct taxes (duties and import fees), they simply change the name of the tax to “income tax.” The companies have no presence in the taxing states, impose no burden of any kind on the taxing states, and most importantly of all, have no voting rights in the taxing states. A Revolution was fought in large part to stop taxation without representation. Now isn’t that a silly concept when it gets in the way of a state getting something-for-nothing and raising the standard of living of the poor working folks in the tax-happy states? Mom-And-Pop-Mart must now pay for the immense privilege of having its products end up in a consumer’s hands in California, New York, or New Jersey. A rather dubious privilege, I’d say.

As recently as June, the U. S. Supreme Court was afforded the opportunity to fix this by hearing a case from Massachusetts upholding that state’s tax on out-of-state businesses. The Court failed in its duty, refusing even to hear the case (“denied Certiorari”). Some states are even more devious by declaring that the out-of-state business must pay a tax “equal to the amount” of business tax which would have been collected had such business been a resident of the state. So it isn’t a business tax, it’s an income tax merely equal to the exact amount of business tax which would have been paid otherwise.

Decisions (or rather non-decisions) such as the one mentioned empower states to follow California, New York and New Jersey in finding creative ways of taxing businesses they have no Constitutional right to tax. We can only hope that other states will first take a closer look at the financial status of near-bankruptcy in those three states before following them over the cliff. The Interstate Commerce Clause was written to encourage free trade and competition among “the several states.” Legislatures, including the federal jurisdiction, continue to find ways to tax businesses into oblivion by completely misapplying the underlying purpose of the Clause. Worse yet, we are not even free to rely on the restraining authority of the Supreme Court to protect us from paying taxes to states to which we have no residential connection.