Section of Taxation Publications
The Tax Lawyer, Winter 2000
 ttlogo.gifVOL. 53
NO. 2
Abstract | Contents | TTL Home

 The Effectiveness and Constitutionality of State Tax Incentive Policies for Locating Businesses: A Simple Game Theoretic Analysis
James R. Rogers*


* Assistant professor of Political Science, Texas A&M University. The author thanks Barry Friedman for his comments on an earlier draft of this article. Remaining errors are my own.

1 See Georganna Meyer and John Hassig, Economic Development Policy, 5 State Tax Notes (TA) 1229 (Nov. 22, 1993).

2 See Peter D. Enrich, Saving the States from Themselves: Commerce Clause Constraints on State Tax Incentives for Business, 110 Harv. L. Rev. 377, 384 n.31 (1996).

3 Id. at 387 n.50.

4 As shown below, while it is individually rational for states to offer tax incentives to locating businesses, it is nonetheless collectively irrational because all states are left worse off as a result of the tax competition than they would be without it. See generally Enrich, supra note 2; Mark Taylor, A Proposal to Prohibit Industrial Relocation Subsidies, 72 Tex. L. Rev. 471 (1994).

5 The dormant Commerce Clause literature criticizes state tax incentives not for decreasing state tax revenues, but for distorting the efficient distribution of businesses among states and, hence, for offending one of the central principles of the dormant Commerce Clause. See Enrich, supra note 2; Jerome R. Hellerstein and Dan T. Coenen, Commerce Clause Restraints on State Business Development Incentives, 81 Cornell L. Rev. 789 (1996).

6 For example, in Allied Stores of Ohio v. Bowers, the Supreme Court held that "[I]t has long been settled that a classification, though discriminatory, is not arbitrary nor violative of the equal protection clause of the Fourteenth Amendment if any state of facts reasonably can be conceived that would sustain it." 358 U.S. 522, 528 (1959) (emphasis added).

7 304 U.S. 144, 152-153 n.4 (1938).

8 The Supreme Court has appealed to a "process" criterion for triggering heightened judicial scrutiny in a variety of cases litigating issues as diverse a federalism ( see Printz v. United States, 521 U.S. 898, 930 (1997); New York v. United States, 505 U.S. 144, 168-169 (1992); cf. Garcia v. San Antonio Metro Transit Auth., 469 U.S. 528, 544 (1985), intergovernmental tax immunity ( see Helvering v. Gerhardt, 304 U.S. 405, 412 (1938); McCulloch v. Maryland, 17 U.S. 316, 428 (1819)), the dormant commerce clause ( see South Carolina v. Barnwell Bros., 303 U.S. 177 184 n.2 (1938)), as well as in cases litigating state statutes that seek to regulate political process or touch on "discrete and insular" minority groups. See Carolene ProductsCo., 304 U.S. at 152-153 n.4; see also Part IV, infra; cf. James R. Rogers, Legislative Incentives and Two-Tiered Judicial Review: A Game Theoretic Reading of Carolene Products Footnote Four, 43 Am. J. Pol. Sci. 1096 (1999).


Published by
Section of Taxation, American Bar Association
With the Assistance of
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