Constitutional Issues in State and Local Taxes

This article will give a general overview of issues in state and local taxation, from regulation and collections authority, to how the Constitution separates federal and local jurisdictions in matters of taxation. Here are a few highlighted issues related to tax reform and jurisdiction, including internet sales tax, corporate taxes, and the use of tax incentives as an instrument of public policy.

State and Local Taxes (SALT)

State and local taxes (SALT) are, by Constitutional law, differentiated from federal taxes. In addition, there are certain Constitutional clauses that are more important than others, when it comes to tax law.[1] The Supremacy Clause gives precedence to federal laws over state laws, when it comes to taxes, and McCulloch V. Maryland established that, under this clause, states are not allowed to tax the federal government.

Moreover, the Due Process Clause from the 14th Amendment forbids any state from depriving any taxpayer “of life, liberty, or property without due process of law.”[2] In other words, after taking both clauses into account, we can conclude that states must provide benefits to taxpayers conducting business in said state if they wish to exercise their taxing powers. Therefore, out-of-state taxpayers are the most likely to question a state’s right to tax them without any tenable connection.

What does all this mean for the average taxpayer?

State Income Taxes

One current issue on the table is the question of use tax, which affects interstate mail-order and Internet sales tax for sales via e-commerce sites like Amazon—prompting what’s known as the “Amazon” laws recently adopted by some states.[3]

Although it was ruled in 1992 that interstate tax is unconstitutional, the fact that such a large proportion of business is now conducted online on a national level is likely to factor into future rulings.[4] The ubiquitous nature of this new e-commerce model begs the question of when, not if, this issue will come up again in a federal court of law.

Local Tax Proposals

Depending on your state of residence, your share of income taxes may be higher or lower than average. For example, in Washington state, there is no state income tax, though there is a recently-proposed income tax unique to the city of Seattle—though that particular tax is already being challenged in court.[5] Critics argue it is unconstitutional (hence illegal), while proponents argue it is necessary to help alleviate the disproportionately high taxes on lower-income households as a result of the absence of state income tax.[6] [7]

Property Taxes

Another issue being debated, at the moment, is the question of state and local tax deduction.[8] That is, should taxpayers be allowed to deduct their SALT taxes on their federal tax returns? That question is currently on the table—in part because of the high and rising cost of property taxes in many locales, and in part because the majority of taxpayers who claim the SALT deduction earn an income of $100,000 or more.

Because of this, as well as because of the ever-present budget deficit, Congress is considering a repeal of the SALT deduction—a proposal that is bound to be highly controversial and contentious, especially given the high-income states and individuals who will be disproportionately affected by the potential ruling.[9]

Property tax rates related to mortgage deductions, according to current proposals on the table, should not be directly affected.[10] This doesn’t change the problem of disproportionate property taxes in different states and districts, which is likely to remain a big issue, going forward.

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Villanova University’s Master of Taxation degree program offers classes in taxation, while the Master of Laws in Taxation (LLM) program offers classes in Constitutional law and related legal coursework.

If you’re interested in a career in tax law, look into Villanova’s graduate programs in tax and business to advance your professional career in accounting.

Sources:
  1. https://www.bgdlegal.com/blog/constitutional-limitations-on-state-and-local-taxation
  2. https://www.law.cornell.edu/constitution/amendmentxiv
  3. http://www.aei.org/publication/use-tax-collection-on-interstate-sales-the-need-for-federal-legislation/
  4. https://www.law.cornell.edu/supct/html/91-0194.ZO.html
  5. https://www.seattlemet.com/articles/2017/4/26/that-uphill-battle-for-a-city-income-tax-it-s-a-very-large-hill
  6. http://www.seattletimes.com/opinion/hate-to-break-it-to-you-seattle-your-proposed-income-tax-is-illegal/
  7. https://itep.org/the-many-reasons-for-the-seattle-income-tax/
  8. https://www.urban.org/research/publication/repeal-state-and-local-tax-deduction
  9. https://www.forbes.com/sites/ryanellis/2017/07/11/tax-reform-and-the-state-and-local-tax-deduction-quandry/#103c581f6223
  10. http://www.politico.com/story/2017/08/04/trump-homeowner-tax-benefit-241328

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