Opinion ID: 1613623
Heading Depth: 1
Heading Rank: 2

Heading: the purported state interest in promoting domestic development

Text: The majority and Justice BRICKLEY rely very heavily on language in some opinions of the United States Supreme Court to the effect that the promotion of in-state investment and economic development is not, generally speaking, an impermissible state goal. See RILEY, J., ante, pp 424, 425-426; BRICKLEY, J., post, pp 480-481. My colleagues rely principally on passages in three United States Supreme Court opinions: Boston Stock Exchange, 429 US 336-337, Armco, Inc v Hardesty, 467 US 638, 645-646; 104 S Ct 2620; 81 L Ed 2d 540 (1984), and Trinova, 112 L Ed 2d 912. Because this issue appears to dominate my colleagues' analysis and conclusions, and because I believe my colleagues have misconstrued the United States Supreme Court's case law in this regard, I discuss this issue in some detail. Trinova would seem, at face value, to afford the greatest support to my colleagues' position. The Court there stated: It is a laudatory goal in the design of a tax system to promote investment that will provide jobs and prosperity to the citizens of the taxing state. States are free to structur[e] their tax systems to encourage the growth and development of intrastate commerce and industry. [112 L Ed 2d 912, quoting Boston Stock Exchange, 429 US 336.] Such sweeping language, if taken out of context and in isolation, would seem to flash a green light to economic protectionism. But this language can only properly be understood in context. In the first place, the Court in Trinova, in the passage containing the quoted language, was simply disposing of a claim that the three-factor SBT apportionment, although otherwise nondiscriminatory on its face and in its effect, had an unconstitutional discriminatory purpose as revealed in a speech by former Governor Blanchard, who stated that the SBT was enacted `to promote the development and investment of business within Michigan.' Trinova, 112 L Ed 2d 912. The Court was simply holding that such a broadly stated beneficial purpose, without more, did not establish unconstitutional discrimination. It is inappropriate to read such generalized language endorsing a state's right to promote in-state economic development as a license to discriminate against interstate commerce, when the Court has otherwise emphatically and uniformly condemned such discrimination. There are many ways in which a state might promote domestic development without discriminating in any way against interstate commerce. To take the easiest example in the tax area, a state could simply reduce its uniform rate of taxation on all business activity conducted in, or fairly apportioned to, the state, with regard to all economic entities, both in state and out of state. Given the long and emphatic line of United States Supreme Court case law condemning state taxes that discriminate against interstate commerce, I think the only fair conclusion that can be drawn is that, however legitimate in general terms it may be for a state to promote domestic development, it may not pursue that goal by means of taxes that discriminate against out-of-state economic entities or interstate economic activities. Boston Stock Exchange, on which the above-quoted passage in Trinova relied, stated: Our decision today does not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry. Nor do we hold that a State may not compete with other States for a share of interstate commerce; such competition lies at the heart of a free trade policy. We hold only that in the process of competition no State may discriminatorily tax the products manufactured or the business operations performed in any other State. [429 US 336-337. Emphasis added.] In Armco, the Court addressed a West Virginia gross receipts sales tax that exempted companies engaged in manufacturing in West Virginia, thereby disfavoring manufacturers based out of state that wished to sell their products in West Virginia. The asserted justification for the exemption was that West Virginia imposed a separate and higher tax on manufacturing conducted in West Virginia. West Virginia argued that, unless an out-of-state company subject to the gross receipts tax could demonstrate that it was also subject to a manufacturing tax in the state or states where it manufactured its goods, to the extent that the overall tax burden on the out-of-state company exceeded the overall burden on the instate company, no improper discrimination would be established. See 467 US 639-644. The Court rejected this argument and struck down the tax as discriminatory on its face, stating: Any other rule would mean that the constitutionality of West Virginia's tax laws would depend on the shifting complexities of the tax codes of 49 other States, and that the validity of the taxes imposed on each taxpayer would depend on the particular other States in which it operated. [ Id. at 644-645.] Most relevant to present purposes, the Court continued: It is true, as the ... amicus curiae points out, that Armco would be faced with the same situation that it complains of here if Ohio (or some other State) imposed a tax only upon manufacturing, while West Virginia imposed a tax only upon wholesaling. In that situation, Armco would bear two taxes, while West Virginia sellers would bear only one. But such a result would not arise from impermissible discrimination against interstate commerce but from fair encouragement of in-state business. [467 US 645.][ [5] ] Thus, the Court indicated that a state may indeed fashion its tax laws to promote its domestic economy and compete with other States for a share of interstate commerce, Boston Stock Exchange, 429 US 336-337, but only in ways uniformly affecting a given type of economic activity, without any discriminatory treatment of out-of-state entities or activities. In other words, according to Armco, West Virginia could repeal its manufacturing tax altogether in order to compete, but it could not grant domestic manufacturers a discriminatory exemption from its gross receipts tax. [6] This conclusion has been repeatedly emphasized in other United States Supreme Court opinions. Quotations from two cases decided in the Court's most recent term should suffice to underscore my point. In Chemical Waste Management, Inc v Hunt, 504 US ___; 112 S Ct 2009; 119 L Ed 2d 121 (1992), the Court, after reciting a number of its earlier decisions condemning discrimination under the Commerce Clause, stated: To this list may be added cases striking down a tax discriminating against interstate commerce, even where such tax was designed to encourage the use of ethanol and thereby reduce harmful exhaust emissions, New Energy Co of [ Indiana v Limbach, supra ], or to support inspection of foreign cement to ensure structural integrity. For in all of these cases, a presumably legitimate goal was sought to be achieved by the illegitimate means of isolating the State from the national economy. [119 L Ed 2d 131-132. Some citations omitted; emphasis added.] And in Kraft General Foods, Inc v Iowa Dep't of Revenue & Finance, 505 US ___; 112 S Ct 2365; 120 L Ed 2d 59 (1992), the Court, in striking down yet another discriminatory state tax, declared: Absent a compelling justification, ... a State may not advance its legitimate goals by means that facially discriminate against foreign commerce. [120 L Ed 2d 69. Emphasis added.][ [7] ]