Congress needs to stop state tax shakedowns

The Manhattan Institute's Steven Malanga in City Journal has an article titled “The State Tax Grab” on how states —especially New York, New Jersey, California, Massachusetts and Michigan -- have been extending their tax reach beyond all reasonable bounds. Here is one example, from New Jersey:

"Until recently, one of the most aggressive — and, to businesses, infuriating — assertions of tax nexus took place in New Jersey. According to congressional testimony by owners of trucking companies and the American Trucking Associations, beginning around 2000, revenue agents from New Jersey’s department of taxation began descending on truck stops, weigh stations, and loading docks and waylaying trucks, demanding that the owners pay at least Jersey’s $1,100 minimum corporate-franchise tax before letting the drivers proceed. Many of the vehicles — about 40,000 have been stopped — worked for companies with zero connection to New Jersey, other than making a pickup or delivery there. New Jersey was, in essence, charging a $1,100 entry fee into the state."

As Malanga points out, such tax-grabbing is probably prohibited by Article I, Section 8, Clause 3 of the Constitution giving Congress power to regulate interstate commerce. But small businesses socked with such taxes often choose to pay up rather than bear the expense of litigation. Congress could act to stop such tax-grabbing, but as Malanga shows it has been dithering instead.

Conservatives like to talk about federalism as if the Constitution was written to limit the government and give leeway to the states. But as Michael Greve (a former colleague at the American Enterprise Institute) writes in his brilliant and fascinating book The Upside-Down Constitution, when it came to commerce, the Framers were interested in preventing the states from putting burdens on interstate commerce and discriminating in favor of local interests, particularly local cartels and monopolies.

The idea was to create a wide internal free trade zone to allow commerce, entrepreneurialism and innovation to flourish. Taxes like New Jersey’s shakedown of truck drivers, in this view, are exactly the sort of thing the Framers wanted to prevent.

The efficient way to do this is for Congress to step in, as it has by temporarily banning state taxes on Internet sales. States should not be able to tax people who are just passing through.

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