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Tax Aspects of Fiscal Federalism:
A Comparative Analysis
Why this book?
Tax Aspects of Fiscal Federalism: A Comparative Analysis provides a comprehensive
survey of the distribution of the taxing authority among different levels of governments of
a selection of countries. The survey is not restricted to the traditional federal countries,
such as the United States and Switzerland, but also includes traditional unitary states (or
forms of government), such as France and the United Kingdom. The detailed approach
demonstrates the current historical trend towards a progressive increase in the local
governments’ (taxing) authority. In this way, the reaction to the crisis of the (tax) state,
and the search for the highest level of public efficiency, pass through the devolution of
the taxing powers.
This book aims to explain not only how the Constitution (or the Supreme Law) allocates
taxing powers but, in particular, how these systems work in practice. Each country
chapter discusses the constitutional structure of the state (or of the government) and
looks at how it has been implemented as well as at the effects of this design on the form
of the state (or government) and the tax system.
The structure of the book is simple and consistent. It begins with a methodological
analysis for the comparison of different constitutional tax systems. This is followed by
a description of the “fiscal federalism” systems of selected countries, beginning, for
historical reasons, with the United States and concluding with a developing system,
the People’s Republic of China. The remaining country chapters are grouped according
to either historical or geographical criteria. Also included is a chapter devoted to the
European Union, a federal system in arms, in order to highlight its peculiarities and
define the limits for the Member States’ sovereignty.
Title: Tax Aspects of Fiscal Federalism

Subtitle: A Comparative Analysis
Editor(s): Gianluigi Bizioli, Claudio Sacchetto
Date of publication: November 2011
ISBN: 978-90-8722-110-2
Type of publication: Print Book
Number of pages: 770
Terms: Shipping fees apply. Shipping information is
available on our website
Price: EUR 130 / USD 175 (VAT excl.)
Order information
To order the book, please visit www.ibfd.org/IBFD-Products/shop. You can purchase
a copy of the book by means of your credit card, or on the basis of an invoice. Our
books encompass a wide variety of topics, and are available in one or more of the
following formats:
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IBFD, Your Portal to Cross-Border Tax Expertise

Table
Table of Contents
of contents
Foreword v
Chapter 1: Analysis of Fiscal Federalism from a Comparative

Tax Law Perspective 1
Claudio Sacchetto
1. Comparative law and comparative tax law.

General remarks 1
2. Fiscal federalism or fiscal federalisms?
The need for legal comparison 8
3. Concluding remarks 19
Part One
The Original Model
Chapter 2: The United States 25

Walter Hellerstein
1. Introduction 25
2. The fiscal constitution 26
2.1. Overview 26
2.2. Federal fiscal powers 26
2.2.1. Federal taxing power 26
2.2.2. Federal spending power 28
2.2.3. Other federal fiscal powers 30
2.3. State fiscal powers 30
2.3.1. Overview 30
2.3.2. State taxing power 32
2.3.3. State spending power 35
2.4. Intergovernmental tax immunities 35
3. Fiscal federalism: Distribution of taxing powers 38
3.1. Overview 38
3.2. Property taxes 38
3.3. Income taxes 40
3.4. Consumption and other excise taxes 41
3.4.1. Uniformity requirement for federal
taxes 42
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3.4.2. Prohibition on federal taxation

of exports 44
3.4.3. Prohibition on state taxation of imports and
exports 45
3.5. Wealth transfer taxes 47
4. Fiscal federalism: Control and coordination of
taxing powers 47
4.1. Overview 47
4.2. Congress’s plenary power to control and
coordinate taxing powers 48
4.3. Property taxes 52
4.4.1. Federal-state tax base conformity 53
4.4.2. Tax “concessions” 55
4.4.2.1. Deductibility of state and local
taxes from the federal
income tax base 56
4.4.2.2. Exclusion for interest from
state and local government
bonds 57
4.4.3. Other congressional legislation addressing
state power to tax income 58
4.5. Consumption and other excise taxes 58
4.6. Wealth transfer taxes 59
4.6.1. Overview 59
4.6.2. The federal estate tax of 1916 and the
adoption of the credit for state
death taxes 60
4.6.3. Federal-state death tax coordination:
1926-2001 62
4.6.4. The phase-out of the federal estate
tax and the end of federal-state death
tax comity 63
5. Fiscal federalism: The effective exercise of taxing powers 65
5.1. Overview 65
5.2. Federal tax revenues 65
5.3. State and local tax revenues 66
5.4. State tax revenues 66
5.5. Local tax revenues 67
5.6. General observations 67
6. Conclusion 68
References 68
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Part Two
The Anglo-Saxon Federations
Chapter 3: Canada 79
Benjamin Alarie and Richard M. Bird
1. Introduction 79
2. The constitutional allocation of taxation powers 81
2.1. Federal powers over taxation 83
2.2. Provincial powers over taxation 85
2.3. Limits on taxation 86
2.3.1. No internal customs duties 86
2.3.2. No inter-governmental taxation 87
2.3.3. Democratic taxation 88
2.3.4. Delegation 89
2.4. Equalization payments 89
2.5. The special treatment of natural resources 90
3. Litigation on the exercise of taxation powers 91
3.1. Distinction between direct and indirect
taxation 92
3.1.1. Levies held to be direct taxes 94
3.1.2. Levies held to be indirect taxes 96
3.1.3. The approach of the Canadian courts 99
3.2. Licence fees 101
3.3. Limits on taxation 105
3.3.1. No internal customs duties 105
3.3.2. No inter-governmental taxation 106
4. Political developments: Sub-constitutional
federal-provincial arrangements 107
4.2. Sales taxes 114
4.3. Transfers and natural resource revenues 124
5. Conclusion 132
Chapter 4: Australia 137

Miranda Stewart
1. Overview of Australia’s federal system 137

2. Federal taxing and spending powers 139
2.1. Federal taxes 140
2.1.1. Defining “tax” for federal taxing power 143
2.1.2. Procedural limitations on federal taxing power 147
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2.2. Federal power to spend and grant money to states 149

2.2.1. The federal spending power 149
2.2.2. The federal grants power 152
3. State and local taxes 153
3.1. State taxes 153
3.2. Why no state income taxes? 157
3.3. Why no state sales taxes? 161
3.4. Local taxes 164
4. Federal fiscal coordination 166
4.1. Vertical fiscal imbalance and grants to the states 168
4.2. Horizontal fiscal equalization and the Grants
Commission 170
4.3. Intergovernmental Agreements and the Council of
Australian Governments (COAG) 172
5. Key issues for the future 174
5.1. Reform of state taxes and resource taxation 175
5.2. Local government and regionalism 177
5.3. Budgeting for fiscal federalism 180
Chapter 5: India 187

Satya Poddar and Shalini Mathur
1. Introduction 187
2. Historical perspective 188
2.1. Constitutional arrangement of taxation
powers 188
2.2. Current indirect tax structure 194
2.3. Inefficiencies in the indirect tax system 196
2.4. Current deficiencies that call for the next level
of reforms 197
2.5. Proposals for reforms – Next step forward 199
3. GST: Key issues and challenges 200
3.1. GST contours 200
3.2. Constitutional amendment: Fiscal autonomy and
harmonization 201
3.2.1. Uniform tax base 201
3.2.1.1. Excluded sectors 202
3.2.1.2. Local/municipal taxes 204
3.2.1.3. Exemption threshold
levels 204
3.2.2. Uniform rate structure 205
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3.2.3. Uniform administration 206

3.2.3.1. Proposed constitutional
framework 206
3.2.3.2. Experience in other
jurisdictions 208
3.3. Treatment of interstate transactions 209
3.3.1. Models in other jurisdictions 211
3.4. Treatment of services 214
3.5. Compensation to states 216
4. Current political impasse 216
Bibliography 218
Part Three
The European Experience
Chapter 6: The Swiss Confederation 223

Daniel P. Rentzsch
1. Introduction 223
1.1. Development of the Confederation 224
1.2. Constitutional framework 227
2. Financial constitution 230
2.1. Revenue 230
2.1.1. History 231
2.1.2. Competences 233
2.1.3. Fundamental rights and principles of
taxation 235
2.2. Expenditure 237
2.2.1. Competences 237
2.2.1.1. Limitations 237
2.2.1.2. Decision-making 238
2.3. Transfers and financial adjustment 239
2.4. Conclusion 241
3. Taxing powers 242
3.1. Confederation 243
3.1.1. Value added tax and excise taxes 243
3.1.2. Direct federal tax 244
3.1.3. Withholding tax 246
3.2. Cantons 247
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3.3. Communes 248

3.4. Conclusion 249
4. Coordination of tax systems: Tax harmonization 249
4.1. Constitutional basis 250
4.1.1. Harmonization object 250
4.1.2. Harmonization method 251
4.2. Implementation legislation – The LHDT 251
4.2.1. Scope 252
4.2.2. Legal nature 252
4.2.3. Range 253
4.2.4. Contents 254
4.2.5. Implementation 255
4.2.6. Remaining cantonal leeway 256
4.3. Conclusion 257
5. Distribution of taxing powers: Intercantonal
and intercommunal tax law 258
5.1. History 258
5.2. Basics 261
5.3. Fiscal domiciles 262
5.4. Allocation rules 263
5.5. Apportionment 264
5.6. Intercommunal tax law 265
5.7. Conclusion 265
6. Conclusion 266
References 267
Chapter 7: The Federal Republic of Germany 273

Joachim Englisch and Henning Tappe
1. The financial constitution. The fundamental rules

concerning the financial relationships between central
and local governments and their implementation 273
1.1. Introduction 273
1.2. Distribution of responsibilities and the apportionment
of expenditures 276
1.2.1. Public tasks and public expenditure 276
1.2.2. The principle of connection –
Konnexitätsprinzip, Art. 104a(1) GG 277
1.2.3. Joint tasks and responsibility for
expenditure 279
1.2.4. Financial assistance for investments –
Art. 104b GG 280
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1.3. The apportionment of tax revenue (Art. 106 GG) 282

1.3.1. Primary financial equalization:
Vertical apportionment of tax revenue 283
1.3.1.1. Joint system 283
1.3.1.2. Separating system 285
1.3.2. Primary financial equalization: Horizontal
apportionment of tax revenue 287
1.3.3. Secondary financial equalization: Levelling
between the states, Art. 107(2) GG 289
1.3.4. Supplementary federal grants and
consolidation assistance 291
1.4. Apportionment of non-tax revenue 292
2. Allocation of the power to enact tax laws 293
2.1. The system of exclusive and shared legislative
competences 294
2.2. Exclusive competences of the federation 300
2.3. Concurrent competences of federation and states 302
2.4. Exclusive competences of the states 313
2.5. Competences of the municipalities 317
2.6. Coordinating the power to tax with other public
policy competences 320
3. The distribution of tax assessment and tax collecting
powers 323
3.1. Organization of the tax administration
(Art. 108 GG) 323
3.2. Administrative and court procedures 323
3.3. Interaction between federal and state authorities 324
Chapter 8: Austria 327

Georg Kofler
1. The financial constitution 327

2. The distribution of taxing powers 329
2.1. Distribution of legislative powers 329
2.2. Distribution of revenue 331
2.3. Cost shifting and absorption 333
2.4. Vertical transfers 336
3. The power to coordinate tax systems 336
4. The effective distribution of taxing powers 337
5. Summary and conclusions 338
References 339
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Chapter 9: The Russian Federation 341

Danil V. Vinnitskiy
1. Introduction 341
2. Financial constitution. Fundamental rules concerning the
financial relationships between central and
regional authorities 342
2.1. The basis of the Russian constitutional order and
the budgetary system 342
2.2. The basis of the Russian constitutional order and the
legal regime of taxation 343
2.3. The principle of unity of the Russian
budgetary system 344
2.3.1. The unity of the RF budgetary legislation
and the principles of organization and
functioning of the budgetary system in
Russia 344
2.3.2. Uniform rules in applying sanctions for
violating budgetary legislation 345
2.3.3. Establishing uniform procedures for
collecting revenues and public spending
in the RF budgetary system 346
3. Distribution of taxing powers: The constitutional framework 346
3.1. General observations 346
3.2. Stages in the development of the concept “fiscal
federalism” in Russia (1991-present) 347
3.2.1. Stage of tax centralization (1991-1993) 348
3.2.2. Stage of tax decentralization (1994-1996) 348
3.2.3. New stage of tax centralization
(1997-present) 349
3.3. Distribution of taxing powers under the existing
model of fiscal federalism 350
4. Power to coordinate the tax systems and the effective
distribution of taxing powers 352
4.1. Centralization of tax powers and the tax rights of
regions that can be coordinated 352
4.2. Coordination of tax powers of RF regions and the
role of the courts 355
4.2.1. Regional taxation and the principle of
single economic space 355
4.2.2. Autonomy of regional budgets and their
revenues 356
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4.2.3. The issue of double inter-regional

taxation 357
4.2.4. Regional taxation and mechanisms
of fair competition 358
4.3. Conclusions: General tendencies in the coordination
of tax powers and their effective distribution 359
Chapter 10: Spain 361

Francisco Alfredo García Prats

1.1. Fundamental rules concerning financial relationships
between central and local governments and their
implementation 363
1.2. Considerations on the development of constitutional
structure of relationship between tax and financial
powers of the different territorial institutions of
the state 364
1.3. Financial structure of the state in the
Constitution 369
2. Distribution of taxing powers: The constitutional
framework 370
2.1. Central state 370
2.2. Autonomous communities 373
3. Power to coordinate tax systems 378
3.1. Coordination of the state and functions of the mixed
bilateral commissions enshrined in different statutes
of autonomy 380
3.2. Relationship between LOFCA and the statutes of
autonomy 381
3.3. Structure of fiscal federalism in Spain and
EU law 386
4. Effective distribution of taxing powers 388
4.1. Autonomous communities of common regime 389
4.1.1. Own taxes 389
4.1.2. Yielded taxes 394
4.1.2.1. Concept 394
4.1.2.2. Typology 395
4.1.2.3. Administration of yielded
taxes 397
4.1.2.4. Connecting factors 398
4.1.3. Surcharges on state taxes 400
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4.2. Local municipalities 400

4.3. Autonomous communities under charter regime 401
Chapter 11: Italy 403

Gianluigi Bizioli
1. Introduction 403
2. The historical evolution of “local autonomies”:
An overview 405
2.1. The monarchic era 405
2.2. The 1948 Constitution 409
2.3. The 2001 revision of Title V of the Constitution 412
3. The financial constitution 413
3.2. Structure and competence of local autonomies:
An overview 414
3.2.1. The regional competences and legislative
authority 414
3.2.2. The local entities’ competences and
authority 417
3.3. The regional financial system: Introduction 418
3.3.1. The regional financial autonomy and
the taxing powers in the 1948 Constitution 418
3.3.2. The other financial resources 423
3.4. The regional financial system after the 2001
constitutional reform 423
3.4.1. The regional own taxes and the coordination
of the tax system 423
3.4.2. The other financial resources 430
3.5. The financial system of the special regions 431
3.6. The financial system of the provinces and the
municipalities 435
3.6.1. The original model 435
3.6.2. The new regulation after the reform of
Title V of the Constitution 437
4. Implementation of the financial constitution 439
4.2. From centralization of the regional financial system
to the regional tax on productive activity 440
4.3. The “turnarounds” of the municipal financial system 442
4.4. The new “fiscal federalism”: Implementation
process of the reform of Title V of the Constitution 443
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4.4.1. The regional financial system and the

taxing authority in particular 446
4.4.2. The new municipal and provincial
tax system 450
5. Conclusions 453
Chapter 12: Portugal 455

Joaquim Manuel Freitas Rocha
1. Summary 455
2. Normative foundations 457
2.1. The constitutional framework 458
2.2. The infra-constitutional densification 460
3. The financial autonomy of local authorities 462
3.1. Budget autonomy 464
3.2. Patrimonial autonomy 466
3.3. Credit autonomy 467
3.4. Tax autonomy 470
3.4.1. Distribution of taxing powers 470
3.4.2. Local taxes 471
4. Equalization transfers 473
5. Expenditures 476
6. Control rules 480
6.1. (Financial) autonomy versus independence 480
6.2. The Portuguese system of control 481
6.3. The important role of the Court of Auditors
(Tribunal de Contas) 482
7. Conclusion 484
Bibliography (Portuguese) 484
Chapter 13: France 489

Pierre Beltrame and Eric Oliva
Summary 489
1. Introduction: The legal-political framework of local
administration in France 489
2. Bases of fiscal federalism in France 491
2.1. Overview 491
2.2. The start of fiscal federalism 493
2.3. Sources of fiscal federalism 496
2.3.1. The self-governing principle 496
2.3.2. The contribution of constitutional
case law 497
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3. The new constitutional framework of fiscal federalism 501

3.1. Re-centralization of local finances 501
3.1.1. The causes of re-centralization 502
3.1.1.1. The reasons behind the
tax policy 502
3.1.1.2. The reasons behind local
harmonization 503
3.1.1.3. The reasons behind a European
Community order 503
3.1.2. The dangers linked to the re-centralization
of local finances 504
3.2. The reform of fiscal federalism 506
3.2.1. The constitutional revision of
28 March 2003 507
3.2.2. The uncertainties weighing on local
financial autonomy 512
4. The taxing power of local authorities 515
4.1. Structure of the local tax system 515
4.1.1. Overview 515
4.1.2. Direct taxes 516
4.1.3. Indirect taxes 516
4.1.4. Specific tax regimes 517
4.2. The specific problem of local direct taxation 517
4.2.1. History 517
4.2.2. A common tax base 518
4.2.3. The four direct taxes 519
4.2.3.1. Taxes on real estate (les taxes
foncières) 519
4.2.3.2. Tax on furnished accommodation
(taxe d’habitation) 519
4.2.3.3. The “economic territorial
contribution” (ETC) 520
4.2.4. The reform of local direct taxation 521
4.2.5. The new allocation of local taxes between
territorial communities 521
4.3. The autonomy of local taxing power 522
4.3.1. The measurement of tax power autonomy 522
4.3.2. Tax autonomy surrounded by law 523
4.3.3. Equalization of tax revenue disparities 524
4.3.4. A tax autonomy reduced by state
initiatives 526
4.3.4.1. The state bears the cost of
relief and exemptions 526
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4.3.4.2. The state compensates the

losses of tax revenue 527
4.3.4.3. Partial and problematic financial
compensations 528
4.3.4.4. A local indirect taxation under
state influence 529
5. The future of local fiscal autonomy 530
5.1. The survival of a centralizing context 531
5.1.1. The expansion of local financial controls 531
5.1.2. The weakness of the economic
backgrounds of tax autonomy 532
5.2. Local tax autonomy under question 534
5.2.1. The uncertainties of the current territorial
reform 534
5.2.2. Local financial autonomy and local tax
autonomy 535
5.2.3. Local tax autonomy: An anachronism? 536
6. Conclusion: Prospective views 537
6.1. Towards a vertical integration of the local
tax system? 537
6.2. A substitute to local tax autonomy:
The benefit taxation principle 538
Chapter 14: United Kingdom 541

Sandra Eden
1. Central government 541

1.2. The constitution of the UK 543
1.3. Devolution 543
1.3.1. Scotland 544
1.3.2. Wales 546
1.3.3. Northern Ireland 547
1.4. Finance of the devolved administrations 548
1.5. Assessment of the current arrangements 552
1.5.1. Quantifying the block grant: The Barnett
formula 553
1.5.2. Accountability 557
1.6. Current position 557
1.6.1. Scotland 558
1.6.2. Wales 561
1.6.3. Northern Ireland 561
1.6.4. Comment 562
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2. Local government 563

2.1. Structure of local government in the UK 563
2.2. Local government finance 564
2.3. Changes in tax base 565
2.3.1. The rates to the community charge 565
2.3.2. Community charge to council tax 567
2.3.2.1. Non-domestic business rates 569
2.3.2.2. Contribution from the centre 569
2.3.2.3. Assessment of local authority
finance 572
3. Final comments 572
Appendix I 574
Appendix II Reserved and devolved powers 575
Appendix III Local authority functions 578
Chapter 15: The European Union 581

Frans Vanistendael
1. Introduction 581
2. The explanatory framework 583
2.1. The core question of fiscal federalism 583
2.2. The many faces of fiscal federalism 584
2.3. The legitimacy of the question of fiscal federalism
in the EU 585
2.4. The explanatory framework 585
3. The institutional framework for taxing and spending
in the EU 587
3.1. The aims of the EU and the principles to be
followed for achieving those aims 587
3.2. The general framework of the economic and fiscal
competences of the EU 589
3.3. The taxing powers of the EU 590
3.4. The mechanisms of economic and budgetary
coordination 593
3.4.1. The core of the coordination mechanism 594
3.4.1.1. Multilateral surveillance 595
3.4.1.2. Excessive deficit spending 596
3.4.2. Specific instruments for the implementation
of EU economic and budgetary policies 597
3.4.2.1. Council Regulation (EC)
No. 3605/93 597
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3.4.2.2. The Stability and Growth

Pact (SGP) 598
3.4.2.3. The Code of Conduct 598
4. The facts on taxing and spending in the EU 599
4.1. The budget of the EU and the budgets of the
Member States 600
4.2. Preliminary conclusions with respect
to the EU budget 602
4.3. Facts on taxing and spending in the Member States 604
4.3.1. Stabilization function budgets and
consolidated debt 604
4.3.2. Stabilization function, growth and inflation 606
4.3.3. Redistribution function 609
5. Intermediary conclusion: Does the EU dispose of the
instruments to achieve its two major goals – the internal
market and economic and monetary union? 614
5.1. The instruments for achieving the internal market 614
5.1.1. Achieving the internal market does not
depend on mechanisms of fiscal federalism 614
5.1.2. Missing tax links for the internal market 615
5.2. The instruments to achieve economic and
monetary union 617
5.2.1. The inadequacy of the existing regulatory
framework in the EU 617
5.2.2. The absence of a common decision-making
framework in the Euro-group 620
5.2.3. The facts and figures on taxing
and spending 621
6. Are concepts of fiscal federalism of any use for the EU in
forging the instruments to achieve economic and
monetary union? 622
6.1. The nature of the question 622
6.2. Federalism by way of full political integration 623
6.3. Tax harmonization is no solution 626
6.4. The minimal solution: Indirect and direct
budgetary control 627
6.4.1. La quadrature du cercle 627
6.4.2. Direct and indirect budgetary control 627
7. A proposal of temporary transfer of budgetary sovereignty
in times of monetary crisis 629
7.1. Why such a drastic step? 629
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7.2. The exact content of the drastic step 630

7.2.1. Transfer of authority 631
7.2.2. No full transfer of authority 632
7.2.3. The two-track approach 633
7.3. Conditions for starting and stopping the emergency
mechanism 634
7.4. How to fit this economic government in the existing
European treaties? 635
7.4.1. Which bodies qualify to exercise the
Euro-authority? 635
7.4.2. Incorporation of the rules on economic
and monetary union in the
European treaties 636
7.5. Any difference with the existing situation;
any lessons learned form fiscal federalism? 638
7.5.1. Order is preferable to chaos 638
7.5.2. Incorporation of an obligation to
positive continuing commitment to EMU 639
7.5.3. Lessons from fiscal federalism? 639
8. Elements of fiscal federalism in the EU without EMU? 641
9. General conclusions 642
Postscriptum 646
Part Four
The Latin American Experience
Chapter 16: Brazil 649

Flávio Rubinstein
1. Introduction 649
2.1. Political and historical context 651
2.2. The 1988 Federal Constitution 655
3. Distribution of taxing powers: Constitutional
framework 657
3.1. Tax assignment 657
3.1.1. Ability-to-pay taxes 659
3.1.2. User fees 660
3.1.3. Public improvement contribution 661
3.1.4. Social contributions 662
3.1.5. Compulsory loans 663
3.1.6. Special contributions 663
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3.2. Main deviations from the normative theory 664

3.2.1. The rise of federal social contributions 665
3.2.2. Sub-national consumption taxes 670
3.3. Revenue raising patterns 671
3.4. Fiscal imbalances 678
4. Tax sharing 681
4.1. Brazilian intergovernmental transfers
framework 681
4.2. Fiscal equalization and “participation funds” 683
4.3. Other funds and ICMS tax sharing 690
5. National coordination of state and municipal taxes 692
5.1. General remarks 692
5.2. Coordination instruments 693
5.2.1. The federal constitution 693
5.2.2. Complementary laws 694
5.2.2.1. National Tax Code 696
5.2.2.2. Fiscal Responsibility Act 697
5.2.3. Senate resolutions 697
5.3. ICMS national coordination 699
5.3.1. General remarks 699
5.3.2. Hybrid origin and destination basis 701
5.3.3. Harmful interstate tax competition 706
5.3.4. CONFAZ 707
5.4. ISS national coordination 710
5.4.1. General remarks 710
5.4.2. Harmful inter-municipal tax
competition 711
5.4.3. Federative conflicts 712
Bibliography 721
Part Five
The Asian Experience
Chapter 17: China (People’s Rep.) 733

Wei Cui
1. Introduction 733
2. Structure of government and historical background 736
2.1. Levels of government 736
2.2. Brief pre-1994 history of devolution and
re-centralization 738
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3. Framework rules on tax law-making 740

3.1. The Constitution: Minimal guidance 740
3.2. The 1993 State Council Directive 742
3.3. The current ambiguous legal framework 744
3.4. Accepted forms of devolution of tax
legislative powers 747
4. The tax sharing arrangement 749
4.1. The division of tax revenue 750
4.2. The division of tax administration 754
4.3. Tax sharing below the provincial level 758
5. Forms of decentralization in a centralized system 759
5.1. Periodic crackdowns on local tax preferences and
continuous negotiations 760
5.2. Local initiatives other than tax reductions 765
6. Conclusion 766
xxvi
Chapter
Sample 2
chapter
The United States
Walter Hellerstein*
1. Introduction
The most significant feature of fiscal federalism in the United States may
well be the absence of a discrete body of explicit foundational rules govern-
ing the fiscal relationship between national and subnational governments.1
For this reason, discussions of fiscal federalism in the United States typi-
cally have relatively little to say about specific constitutional mandates allo-
cating taxing and spending powers among different levels of government.2
Instead, they almost invariably focus on institutional arrangements derived
from shared understandings regarding the allocation of fiscal authority,
judicial interpretations of constitutional provisions addressed to concerns
far broader than fiscal federalism, and historical practice. Indeed, when it
comes to questions of American federalism, one is well advised to heed
Justice Oliver Wendell Holmes’s wise admonition that “a page of history is
worth a volume of logic”.3
The ensuing discussion necessarily reflects the untidy reality of American

fiscal federalism. Sec. 2 of this chapter provides an overview of the formal
US “Fiscal Constitution”, such as it is;4 Sec. 3 focuses in more detail on the
constitutional distribution of taxing powers between federal and state gov-
ernments and the relationship between the respective governments’ exer-
cise of such powers; Sec. 4 considers the federal government’s control over
* Shackelford Professor of Taxation, University of Georgia School of Law.

1. See, e.g. K. W. Dam, “The American Fiscal Constitution”, 44 University of Chi-
cago Law Review 2 (1977) pp. 271-320.
2. See, e.g. W. Hellerstein, “The U.S. Supreme Court’s state tax jurisprudence”, in
R. S. Avi-Yonah, J. R. Hines and M. Lang (eds.), Comparative fiscal federalism: Com-
paring the European Court of Justice and the US Supreme Court’s tax jurisprudence,
Alphen aan den Rijn: Kluwer Law International BV, 2007, pp. 66-118, at pp. 68-69; D.
Super, “Rethinking Fiscal Federalism”, 118 Harvard Law Review 8 (2005) pp. 2544-
2652.
3. New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921).
4. We put this term in quotes because, as Professor Dam (who coined the term)
observes, “[t]he notion of an American Fiscal Constitution may strike American consti-
tutional lawyers as odd”. Dam, supra n. 1, p. 271. We explain the meaning of this term
more fully in 2.1.
25
Chapter 2 - The United States
the exercise of state tax power and its coordination of the taxing power of
the federal and state governments; Sec. 5 considers the effective distribu-
tion of taxing power between various levels of government in the United
States; and Sec. 6 concludes.
2. The fiscal constitution
2.1. Overview
As we have already observed, the first point to make about the US fis-
cal constitution is that there is no US fiscal constitution in the sense of
an explicit set of constitutional rules establishing the fiscal powers of the
national and subnational governments and the relationship between them.
In fact, the provisions in the US Constitution addressed explicitly either to
spending or taxing are few and far between. Accordingly, in discussing the
US fiscal constitution, we follow Dam5 by using it to mean “the Constitu-
tion as a whole, considering provisions not specifically directed to fiscal
matters and taking into account the federal structure … including both rules
defining the fiscal competence of the branches of the federal government
and rules allocating taxing and spending powers between the federal gov-
ernment and the states”.6
2.2. Federal fiscal powers
Despite the absence of detailed constitutional provisions delineat-

ing the scope of federal fiscal powers, they may fairly be described as
“comprehensive”.7 They include the power to tax, the power to spend, the
power to coin money, and the power to borrow.
2.2.1. Federal taxing power
There are five provisions in the US Constitution explicitly addressed to the

federal government’s substantive power to impose taxes. There is also a
“procedural” limitation on Congress’s power to tax – “All Bills for raising
5. Dam, supra n. 1, p. 272.

6. Id.
7. R. D. Rotunda and J. E. Nowak, Treatise on Constitutional Law, Vol. 1, St. Paul:
Thomson/West, 4th edn, 2007, p. 719.
26
The ﬁscal constitution
Revenue shall originate in the House of Representatives”8 – but this does

not affect the scope of federal taxing power.
The most significant constitutional provision directed to the federal tax-

ing power is the grant to Congress of the “Power to lay and collect Taxes,
Duties, Imposts and Excises …”.9 This grant of power is limited in only
three respects. First, there is an outright prohibition on taxation of exports;10
second, federal taxes must be “uniform throughout the United States”,11
and third, no “direct” tax may be imposed unless it is apportioned among
the states by population.12 Finally, in response to a Supreme Court decision
construing the “direct” tax limitation as effectively barring a federal tax on
income,13 the original Constitution of 1787 was amended in 1913 to grant
Congress the power to tax income “without apportionment among the sev-
eral States”.14
In addition to the explicit limitations on the federal taxing power, the

Due Process Clause of the Fifth Amendment, which provides that “[n]o
person shall … be deprived of life, liberty, or property without due proc-
8. US Constitution, Art. I, § 7. The exclusive right of originating revenue measures

was given to the House of Representatives “[t]o compensate the large states for the
sacrifice they had made in giving the small states equal representation in the Senate”.
D. Hutchison, The Foundations of the Constitution, Secaucus: University Books, Inc.,
1975, p. 73. In addition, granting the House the exclusive power to originate revenue
measures conformed with historical tradition in Britain and in the American colonies,
which allocated the power to originate money bills to the legislative body that was dem-
ocratically elected. Id., pp. 73-74. In the original Constitution, only members of the
House were directly elected; Senators were chosen by the state legislatures. In 1913, the
Constitution was amended to provide for direct election of Senators, US Constitution,
amendment XVII, but no change was made in the power to originate revenue bills. It is
worth noting that the constitutional clause in question goes on to provide that “the Senate
may propose or concur with Amendments, as on other bills”. US Constitution, Art. I, §
7. Accordingly, the Senate is not without power to influence the final form of revenue
legislation, as it frequently does.
9. US Constitution, Art. I, § 8, cl. 1.
10. US Constitution, Art. I, § 9, cl. 5 (“No Tax or Duty shall be laid on Articles
exported from any State.”).
11. US Constitution, Art I, § 8, cl. 1 (“[a]ll Duties, Imposts, and Excises must be
uniform throughout the United States”).
12. US Constitution, Art. I, § 9, cl. 4 (“No Capitation, or other direct, Tax shall be paid,
unless in proportion to the Census or Enumeration herein before directed to be taken”);
US Constitution, Art. I, § 2, cl. 3 (“Representatives and direct Taxes shall be apportioned
among the several States….”).
13. This issue is considered further in 3.3.
14. US Constitution, amendment XVI.
27
ess of law”,15 has been construed to impose some very loose restraints on
Congress’s power to impose retroactive tax legislation16 and to create tax
classifications.17
2.2.2. Federal spending power
The federal spending power is granted as a condition on the federal

taxing power: “The Congress shall have the Power To lay and collect
Taxes … to pay the Debts and provide for the common Defense and gen-
eral Welfare of the United States”.18 Although “[t]he spending power …
is not unlimited”,19 the limits are relaxed at best. There have been no judi-
cial decisions addressing the power to spend “for the common Defense”.20
There was a historical dispute over the question of whether the power to
tax and spend to “provide for … the general Welfare” was simply a refer-
ence to other enumerated powers specifically granted to Congress by the
Constitution or, alternatively, conferred “a power separate and distinct from
those later enumerated”.21 Under this view, “Congress … has a substantive
power to tax and to appropriate, limited only by the requirement that it shall
be exercised to provide for the general welfare of the United States”.22 The
Supreme Court resolved this controversy by adopting the latter view that
“the power of Congress to authorize expenditure of public moneys for pub-
lic purposes is not limited by the direct grants of legislative power found in
the Constitution”.23
The leading modern case addressing the limits on the federal spending
power, South Dakota v. Dole,24 articulated a four-part test delineating those
limits. First, “the exercise of the spending power must be in pursuit of ‘the
general welfare’ ”.25 This is essentially no limit at all, because the Court
went on to say, effectively, that the “general welfare” is whatever Congress
15. US Constitution, amendment V. There is also a Due Process Clause of the Four-
teenth Amendment, which imposes an analogous limitation on state powers. See 2.3.2.
16. See United States v. Carlton, 512 U.S. 26 (1994).
17. Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547 (1983):
“Legislatures have especially broad latitude in creating classifications and distinctions in
tax statutes.”
19. South Dakota v. Dole, 483 U.S. 203, 207 (1987).
20. Rotunda and Nowak, supra n. 7, pp. 729-730.
21. United States v. Butler, 297 U.S. 1, 65 (1936).
22. Id., pp. 65-66.
23. Id., p. 66.
24. 483 U.S. 203 (1987).
25. Id., p. 207.
28
defines it to be.26 Second, in a point that bears pointedly on fiscal federal-

ism, “if Congress desires to condition the States’ receipt of federal funds,
it ‘must do so unambiguously …, enabl[ing] the States to exercise their
choice knowingly, cognizant of the consequences of their participation’ ”.27
Third, “conditions on federal grants might be illegitimate if they are unre-
lated ‘to the federal interest in particular national projects or programs’ ”.28
Like the “general welfare” limitation, this restraint appears to lack much
force in light of the leeway the Court grants typically grants Congress in
choosing means to implement legitimate ends. Fourth, Congress may not
authorize spending that violates other constitutional provisions that provide
“an independent bar”29 to the grant of federal funds. For example, Congress
could not authorize funding confined to religious organizations because
this would violate the First Amendment prohibition against “establishment
of religion”.30
In South Dakota v. Dole, the Court sustained Congress’s authority to with-

hold federal highway funds from states that permit the purchase of alcohol
by persons under the age of 21, even though the Constitution’s Twenty-
first Amendment gives the states complete control over the importation or
use of liquor within their boundaries.31 The Court found that the spending
measure passed its four-part test. First, the spending measure promoted the
general welfare, because “ ‘the concept of welfare or the opposite is shaped
by Congress …’ ”.32 Second, “[t]he conditions upon which States receive
the funds … could not be more clearly stated by Congress”.33 Third, there
was a reasonable relationship between ends and means because “Congress
found that the differing drinking ages in the States created particular incen-
tives for young persons to combine their desire to drink with their ability
26. Id.: “In considering whether a particular expenditure is intended to serve general
public purposes, courts should defer substantially to the judgment of Congress.” Indeed,
the Court itself recognized that “[t]he level of deference to the congressional decision is
such that the Court has more recently questioned whether ‘general welfare’ is a judicially
enforceable restriction at all”. Id., p. 207, n. 2.
27. Id., quoting Pennhurst State School and Hospital v. Halderman, 451 U.S. 1, 17
(1981).
28. Id., quoting Massachusetts v. United States, 435 U.S. 444, 461 (1978), plurality
opinion.
29. Id., p. 208.
30. US Constitution, amendment I.
31. US Constitution, amendment XXI. The Twenty-first Amendment, adopted in
1933, repealed the Eighteenth Amendment, adopted a mere 14 years earlier, that created
the era of Prohibition during which the importation, manufacture, sale, or transportation
of intoxicating liquor in the United States was barred.
32. South Dakota, 483 U.S., p. 208 (citation omitted).
33. Id.
29
to drive, and that this interstate problem required a national solution”.34

Fourth, with respect to the only controversial issue in the case, the Court
found that there was no “independent constitutional bar”35 to the spending
measure, despite Congress’s possible lack of power to impose a national
drinking age under the Twenty-first Amendment: “Even if Congress might
lack the power to impose a national minimum drinking age directly, we
conclude that encouragement to state action found in [the federal law] is
a valid use of the spending power”.36 In short, although in some circum-
stances “the financial inducement offered by Congress might be so coercive
as to pass the point at which ‘pressure turns into compulsion’”,37 the spend-
ing power is broad enough to allow Congress to accomplish indirectly what
it might not be able to accomplish directly because of the federalism-based
restraints on congressional power.
2.2.3. Other federal fiscal powers
Other federal fiscal powers, specifically, the power to borrow38 and the
power to coin money and regulate its value,39 are generally considered to
be unlimited.40
2.3. State fiscal powers
2.3.1. Overview
The first point to make about state fiscal powers and, indeed, about all state
powers under the Constitution, is that the states, which existed as political
entities prior to the adoption of the Constitution, retained all powers not
delegated to the federal government in the Constitution. Indeed, the Tenth
Amendment to the Constitution provides: “The powers not delegated to
the United States by the Constitution, nor prohibited by it to the States, are
34. Id.
35. Id., p. 209 (internal citations omitted).
36. Id., p. 212.
37. Id., p. 211 (citation omitted).
38. US Constitution, Art. I, § 8, cl. 2: “The Congress shall have Power … [t]o borrow
Money on the credit of the United States.”
39. US Constitution, Art. I, § 8, cl. 5: “The Congress shall have Power … [t]o coin
Money, regulate the Value thereof, and of foreign Coin.”
40. Rotunda and Nowak, supra n. 7, p. 764.
30
reserved to the States respectively, or to the people”.41 Accordingly, as to

their taxing and spending power, the states retained all such powers nor-
mally associated with political sovereignty, except insofar as the Constitu-
tion explicitly provided otherwise. As Alexander Hamilton, writing in The
Federalist 42 in 1788, declared:
[T]he individual States should possess an independent and uncontrollable au-
thority to raise their own revenues for the support of their own wants…. I af-
firm that (with the sole exception of duties on imports and exports) they would
retain that authority in the most absolute and unqualified sense; and that any
attempt on the part of the national government to abridge them in the exercise
of it would be a violent assumption of power unwarranted by any article or
clause of the Constitution.43
Throughout American constitutional history the Supreme Court has made

similar statements reflecting its view that the states’ fiscal powers are criti-
cal to their separate existence and are an essential element of state sov-
ereignty. Thus Chief Justice Marshall observed in 1824 that the states’
“power of taxation is indispensable to their existence”.44 Fifty years later,
the Court echoed these sentiments when it declared:
That the taxing power of a State is one of its attributes of sovereignty; that it ex-
ists independently of the Constitution of the United States, and underived from
that instrument; and that it may be exercised to an unlimited extent upon all
property, trades, business, and avocations existing or carried on within its ter-
ritorial boundaries of the State, except so far as it has been surrendered to the
Federal government, either expressly or by necessary implication, are proposi-
tions that have often been asserted by this court. And in thus acknowledging
41. US Constitution, amendment X. The first ten amendments to the Constitution, the
so-called Bill of Rights, were enacted in 1791, 2 years after the ratification of the original
Constitution and are generally considered an integral part of the original constitutional
framework.
42. The Federalist is a collection of 85 letters written (under the pseudonym of Pub-
lius) by Alexander Hamilton, James Madison, and John Jay to New York newspapers in
1787 and 1788 in support of the Constitution during the debate over its ratification. The
“work has always commanded widespread respect as the first and still most authoritative
commentary on the Constitution of the United States”. C. Rossiter, “Introduction”, The
Federalist Papers, New York: New American Library of World Literature, Inc., 1962,
p. vii.
43. The Federalist, No. 32, A. Hamilton, reproduced in id., pp. 197-201. Some of the
more extravagant statements regarding the scope of the states’ sovereign powers of taxa-
tion found in The Federalist, made to emphasize the importance of such powers to the
states’ independent political existence, are not accurate descriptions of the legal scope of
such powers under current constitutional doctrine.
44. Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 199 (1824). See also Weston v. City of
Charleston, 27 U.S. (2 Pet.) 449, 466 (1829): “The power of taxation is one of the most
essential to a state, and one of the most extensive in its operation.”
31
the extent of the power to tax belonging to the States, we have declared that it
is indispensable to their continued existence.45
The Court has reiterated these beliefs in its modern opinions: “When deal-
ing with their proper domestic concerns, and not trenching upon the prerog-
atives of the National Government or violating the guaranties of the Federal
Constitution, the States have the attribute of sovereign powers in devising
their fiscal systems to ensure revenue and foster their local interests”.46
The understanding that states’ tax sovereignty is essential to their independent

political status in the federal system has never been regarded as inconsistent
with the view that the federal government likewise possesses sovereign tax
powers. To draw once more on the words of Chief Justice Marshall:
The power of taxation … is a power which, in its own nature, is capable of
residing in, and being exercised by, different authorities at the same time. We
are accustomed to seeing it placed for different purposes, in different hands….
Congress is authorized to lay and collect taxes…. This does not interfere with
the power of the States to tax for the support of their own governments; nor is
the exercise of that power by the States an exercise of any portion of the power
that is granted to the United States.47
2.3.2. State taxing power
Only two provisions of the Constitution speak directly to state tax power:
The Import-Export Clause48 and the Duty of Tonnage prohibition.49 The
former provides:
No State shall, without the Consent of the Congress, lay any Imposts or Duties
on Imports or Exports, except what may be absolutely necessary for executing
it’s [sic] Inspection Laws: and the net Produce of all Duties and Imposts, laid
by any State on Imports or Exports, shall be for the Use of the Treasury of the
United States; and all such Laws shall be subject to the Revision and Controul
of the Congress.
The prohibition on state taxation of exports reinforced the parallel provi-

sion on federal taxation of exports,50 which originated in concerns in the
45. Railroad Co. v. Penniston, 85 U.S. 5, 29 (1873).

46. Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 527 (1959).
47. Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 199 (1824).
50. See supra n. 10.
32
Southern states that giving Congress the power to tax exports would result
in discrimination against their products in a legislature dominated by the
other states.51 In addition, states without ports of their own had concerns
(based on their experience during the colonial period) that their products
would be taxed by neighbouring states merely for the privilege of passing
through such states. The “only way to meet such a situation was to deprive
both the central and state governments of the power to tax exports”.52
By contrast, the prohibition on state taxation of imports applies only to

the states. This targeted restraint explicitly reflected considerations of fis-
cal federalism. One of major weaknesses of the federal system created by
the Articles of Confederation, which governed the states from 1777 until
the ratification of the Constitution in 1789, was that there was no secure
source of revenue of the central government. The prohibition on state
taxation of imports was a direct response to this consideration: “import
revenues were to be the major source of revenue of the Federal Govern-
ment and should not be diverted to the States”.53 By thus “committing sole
power to lay imposts and duties on imports in the Federal Government,
with no concurrent state power”, the framers reserved for the central gov-
ernment what was at the time a principal revenue source. Indeed, customs
duties were the most important source of federal revenues from 1789 until
World War I.54
The Duty of Tonnage Clause was a much narrower restraint on state tax-
ing authority. As the Supreme Court observed, “[i]t seems clear that the
prohibition against the imposition of any duty of tonnage was due to the
desire of the Framers to supplement [the Import-Export Clause], denying
to the states the power to lay duties on imports or exports by forbidding
a corresponding tax on the privilege of access by vessels to the ports of a
state”.55 It was also motivated by the “uncertainty as to whether the states
were restrained from laying tonnage duties by the power given to Congress
to regulate trade”.56
51. Hutchison, supra n. 8, pp. 143-144.

52. Id., p. 144; see also id., pp. 160-161.
53. Michelin Tire Corp. v. Wages, 423 U.S. 276, 285 (1976).
54. L. A. Talley, “Federal Income Taxation: An Abbreviated History”, 2001, congres-
sional research service, available at: http://www.taxhistory.org./thp/readings.nsf/cf7c9c8
70b600b9585256df80075b9dd/2d52a4cfd2844fab85256e22007840e6?OpenDocument.
55. Clyde Mallory Lines v. Alabama ex rel. State Docks Comm’n, 296 U.S. 261,
264-65 (1935) (citations omitted).
56. Hutchison, supra n. 8, p. 161.
33
The most significant constitutional limitations on state tax power are derived
from constitutional provisions directed to state action in general. Most of
these restraints bear on “horizontal” rather than “vertical” issues of fiscal
federalism, such as limitations on state taxation of interstate commerce,57
territorial limitations on state taxation,58 and a bar on discrimination against
non-residents.59 In addition, the states are limited in the power to classify
the subjects for taxation, but under a forgiving standard that requires only
that there be a “rational basis” for the classification.60
Apart from the Supremacy Clause, which we consider below in connec-

tion with intergovernmental tax immunities and the federal government’s
authority to limit and coordinate state taxing power,61 perhaps the most sig-
nificant clause of general application bearing on the relationship between
federal and state tax powers is the Compact Clause, which provides that
“[n]o State shall, without the consent of Congress … enter into any Agree-
ment or Compact with another State …”.62 The Supreme Court has observed
that congressional consent is required for the validity of a compact between
states only if it “is directed to the formation of any combination tending to
57. The Commerce Clause of the US Constitution by its terms is no more than an
affirmative grant of power to Congress “[t]o regulate Commerce with foreign Nations,
and among the several States, and with the Indian Tribes”. US Constitution, Art. I, § 8,
cl. 3. The US Supreme Court nevertheless has construed the clause as imposing implied
limitations on state authority, even in the absence of congressional action, including
restraints on state power to discriminate against or otherwise burden commerce through
taxes or regulations. This “dormant Commerce Clause” doctrine is considered in detail
in Hellerstein, supra n. 2.
58. The Due Process Clause of the Fourteenth Amendment provides that no state
may “deprive any person of life, liberty or property without due process of law”. US
Constitution, amendment XIV. The Supreme Court has construed the clause to limit the
territorial reach of state taxing powers. As noted above, there is a Due Process Clause of
the Fifth Amendment that limits the powers of the federal government. See supra n. 15
and accompanying text.
59. The Privileges and Immunities Clause of Art. IV of the Constitution (the so-called
“interstate” Privileges and Immunities Clause), US Constitution, Art. IV, § 2, provides
that “[t]he Citizens of each State shall be entitled to all Privileges and Immunities of
Citizens in the several States”. The clause has been construed to forbid states from dis-
criminating against non-residents in their taxing schemes. See Hellerstein, supra n. 2. The
Fourteenth Amendment to the Constitution also contains a Privileges and Immunities
Clause, which provides that “no State shall make or enforce any law which shall abridge
the privileges or immunities of citizens of the United States”. US Constitution, amend-
ment XIV, § 1, but this clause has not served as a restraint on state tax powers. See Mad-
den v. Kentucky, 309 U.S. 83 (1940), overruling Colgate v. Harvey, 296 U.S. 404 (1935).
60. Fitzgerald v. Racing Association of Central Iowa, 539 U.S. 103, 107 (2003) (quot-
ing Nordlinger v. Hahn, 505 U.S. 1, 11-12 (1992)).
61. See 2.4., 4.4.3. and 4.5.
34
the increase of political power in the States, which may encroach upon or
interfere with the just supremacy of the United States”.63 Accordingly, the
Court rejected a Compact Clause challenge to the Multistate Tax Compact,
which is designed to promote uniformity and cooperation among the states
with regard to their tax systems and tax administration,64 because it was
designed merely to address issues of tax coordination among the states
and did not implicate the allocation of the power of the states vis-à-vis the
federal government.
2.3.3. State spending power
There are no explicit federal constitutional restraints on state spending

power, although virtually all state constitutions contain requirements that
spending be limited for “public purposes”. The Supreme Court has likewise
declared that, under the Fourteenth Amendment’s Due Process Clause,65
“state taxing power can be exerted only to effect a public purpose and does
not embrace the raising of revenue for private purposes”.66 Needless to say,
the states, like the federal government, lack the power to spend for pro-
grammes that violate explicit “independent” constitutional norms, such as
discrimination on the basis of race, creed or colour. Finally, the Constitu-
tion denies to the states the specific powers granted to the central govern-
ment necessary to exercise their spending powers, including the power to
“coin Money” and “emit bills of Credit”.67
2.4. Intergovernmental tax immunities
For well over a century, one of the bedrock principles of the US Fis-
cal Constitution was that the federal and state governments, and their
63. Virginia v. Tennessee, 148 U.S. 503, 519 (1893).

64. Multistate Tax Compact, Art. I, available at: http://www.mtc.gov. The purposes of
the compact are to:
“1. Facilitate proper determination of state and local tax liability of multistate
taxpayers, including the equitable apportionment of tax bases and settlement
of apportionment disputes.
2. Promote uniformity or compatibility in significant components of tax systems.
3. Facilitate taxpayer convenience and compliance in the filing of tax returns
and in other phases of tax administration.
4. Avoid duplicative taxation.”
Id.
65. See supra n. 58.
66. Carmichael v. Southern Coal & Coke Co., 301 U.S. 495, 514 (1937).
35
instrumentalities, were exempt from each other’s taxes. The seminal case
addressing the question of intergovernmental immunities, and one of the
most important in the history of US constitutional jurisprudence, was
McCulloch v. Maryland.68 The case involved the attempt by the state of
Maryland to impose a tax on the Bank of the United States. After conclud-
ing that Congress had constitutional authority to create the bank, the Court
turned to the question of the state’s power to tax it. Issuing its famous dic-
tum that “the power to tax involves the power to destroy”,69 and observing
further that “the power to destroy may defeat and render useless the power
to create”,70 the Court concluded that Maryland’s levy upon the bank was
invalid under the Supremacy Clause.71
The question is, in truth, a question of supremacy; and if the right of the states
to tax the means employed by the general government be conceded, the dec-
laration that the constitution, and the laws made in pursuance thereof, shall be
the supreme law of the land is empty and unmeaning declamation.72
Although the Supreme Court’s decision in McCulloch was based on the

supremacy of federal over state authority, the Court subsequently extended
the principle to all assertions of intergovernmental taxing power. Thus when
the federal government sought to impose an income tax on the income of a
state judge, the Court declared:
It is admitted that there is no express provision in the Constitution that pro-
hibits the general government from taxing the means and instrumentalities of
the States, nor is there any prohibiting the States from taxing the means and
instrumentalities of that government. In both cases the exemption rests upon
necessary implication, and is upheld by the great law of self-preservation; as
any government, whose means employed in conducting its operations, if sub-
ject to the control of another and distinct government, can exist only at the
mercy of that government.73
68. 17 U.S. 316 (4 Wheat.) (1819).

69. Id., p. 431.
70. Id.
71. The Supremacy Clause, US Constitution, Art. VI, § 2, provides that “[t]his Consti-
tution, and the Laws of the United States which shall be made in Pursuance thereof; and
all Treaties made, or which shall be made, under the Authority of the United States, shall
be the supreme Law of the Land; and the Judges in every State shall be bound thereby,
any Thing in the Constitution or Laws of any State to the Contrary notwithstanding”.
72. McCulloch, 17 U.S. (4 Wheat.), p. 433.
73. Collector v. Day, 78 U.S. 113, 127 (1870).
36
The intergovernmental tax immunity doctrine barred federal and state taxes
on a broad range of activities related to the other government’s functions,
including government borrowing (taxes on government bond interest),74
leasing (taxes on government land rentals),75 and purchasing (taxes on sales
to government).76 However, as government’s commercial role increased
and with it the volume of activity exempt from taxation, the pressure on
the Court to narrow the broad view it had taken of intergovernmental tax
immunity intensified. Beginning in the 1930s, the Court reformulated the
doctrine of intergovernmental tax immunity and dramatically cut back on its
scope, especially with regard to the derivative immunity that the Court had
accorded to the private sector in its dealings with the federal government
and its agencies. In its modern cases, the Court has “consistently reaffirmed
the principle that a non-discriminatory tax collected from private parties
contracting with another government is constitutional even though part or
all of the financial burden falls on the other government”.77 As the Court
summarized the contemporary scope of intergovernmental tax immunity:
[U]nder current intergovernmental tax immunity doctrine the States can never
tax the United States directly but can tax any private parties with whom it does
business, even though the financial burden falls on the United States, as long as
the tax does not discriminate against the United States or those with whom it
deals…. The rule with respect to state tax immunity is essentially the same, ex-
cept that at least some nondiscriminatory federal taxes can be collected directly
from the States even though a parallel state tax could not be collected directly
from the Federal Government.78
Despite these constitutional principles, Congress remains free (within

broad limits) to expand or contract the scope of the immunity of the fed-
eral government and its instrumentalities from state taxation,79 a matter we
consider further below.
74. Weston v. City of Council of Charleston, 27 U.S. (2 Pet.) 449 (1829) (federal bond
interest immune from state taxation); Pollock v. Farmers Loan & Trust Co., 157 U.S. 429
(1895) (state bond interest immune from federal taxation).
75. Gillespie v. Oklahoma, 257 U.S. 501 (1922) (income derived from lease of fed-
eral lands immune from state taxation); Burnet v. Coronado Oil, 285 U.S. 393 (1932)
(income derived from lease of state lands immune from federal taxation).
76. Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218 (1928) (proceeds of
sale of product to federal government immune from state sales tax); Indian Motorcycle
Co. v. United States, 283 U.S. 570 (1931) (proceeds of sale of product to state immune
from federal sales tax).
77. South Carolina v. Baker, 485 U.S. 505, 521 (1985).
78. Id., p. 523 (citations omitted).
79. As discussed in more detail below, Congress retains the authority to expand or
contract the scope of its constitutional immunity through legislation. See 4., 4.4.3. and 4.5.
37
3. Fiscal federalism: Distribution of taxing powers
3.1. Overview
The constitutional principles described above establish the framework for

the distribution of taxing powers between federal and state governments
in the United States. The fundamental structural point to keep in mind is
that, except for relatively limited constitutional restraints and narrowly
circumscribed congressional legislation, both federal and state govern-
ments remain free to exercise their respective “sovereign” taxing powers
as they see fit, even if those exercises of taxing authority overlap and even
if they follow different rules. As the Supreme Court observed with regard
to income taxes, “[c]oncurrent federal and state taxation of income, of
course, is a well-established norm”,80 and, “[a]bsent some explicit direc-
tive from Congress, we cannot infer that treatment of … income at the
federal level mandates identical treatment by the States”.81 Accordingly,
from the perspective of the “tax assignment” problem in intergovernmen-
tal fiscal relations82 – or “which level of government should tax what?”83
– the United States has essentially embraced a laissez faire approach to tax
assignment, with limited exceptions noted above and described in some-
what more detail below.
3.2. Property taxes
The most significant “tax assignment” in the United States relates to prop-
erty taxes. As noted above, the Constitution forbids Congress from impos-
ing any “direct” tax unless it is apportioned among the states by popula-
tion.84 The clause was inserted in the Constitution to protect the Southern
states, which had vast tracts of thinly settled territory, from oppressive land
taxes imposed by the federal government.85 If no such provision had been
included in the Constitution, Southern states feared that they “‘would have
been wholly at the mercy of the other states,’ because Congress could then
80. Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 448 (1980).
81. Id.
82. C. E. Jr. McLure, “The tax assignment problem: Ruminations on how theory and
practice depend on history”, 54 National Tax Journal 2 (2001) pp. 339-384.
83. Id., p. 339.
84. See supra n. 12 and accompanying text.
85. Hutchison, supra n. 8, p. 142.
38
Fiscal federalism: Distribution of taxing powers
have taxed … the land in every part of the union, whether poor or rich and
highly productive at the same rate [at] ‘… so much an acre …’ ”.86
To satisfy the apportionment requirement, a property tax imposed by the

federal government must be levied so that the revenues derived from each
state reflect its relative population rather than the relative value of prop-
erty located in the state. There were in fact several historical examples of
such taxes: a levy of two million dollars in 1798 in anticipation of a war
with France; a levy of three million dollars in 1813 and six million dollars
in 1815 in connection with the War of 1812 with England; and a levy of
20 million dollars in 1861 in connection with the Civil War.87 Under these
taxes, each state was required to contribute its aliquot amount necessary to
raise the national total based on a state-specific valuation of the property
within the state. Needless to say, these national property taxes were admin-
istratively cumbersome at best,88 and, as a consequence, the federal gov-
ernment abandoned this method of raising revenue after the Civil War. In
effect, then, the “direct” tax provision (with its requirement of apportion-
ment) “assigned” property taxes to states and their political subdivisions.
The Import-Export Clause89 has limited the states’ power to impose per-
sonal property taxes on imported and exported goods. However, because
the federal government cannot as a practical matter tax personal property
at all, we consider the implications of the Import-Export Clause (as well as
the bar on federal taxation of exports) for the distribution of taxing powers
between federal and state governments in connection with our discussion
of consumption and other excise taxes.
86. Id., quoting from the opinion of Justice Patterson in Hylton v. United States,
3 U.S. (3 Dall.) 171, 177 (1796). Justice Patterson had participated in the Constitutional
Convention.
87. See Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429, 572-73 (1895) (describ-
ing the taxes).
88. These difficulties are revealed by the Supreme Court’s description of the 1798
levy (which was typical of these national property taxes): “[A] direct tax of two millions
of dollars was apportioned to the states respectively … which tax was to be collected
by officers of the United States, and assessed upon ‘dwelling houses, lands, and slaves,’
according to the valuations and enumerations to be made pursuant to [a related act].
Under these acts, every dwelling house was assessed according to a prescribed value,
and the sum of 50 cents upon every slave enumerated, and the residue of the sum appor-
tioned was directed to be assessed upon the lands within each state according to the valu-
ation made pursuant to the prior act, and at such rate per centum as would be sufficient
to produce said remainder”. Id.
89. See 2.3.2.
39
3.3. Income taxes
Both federal and state governments enjoy broad power to tax income;
indeed, in some major metropolitan areas even local governments (acting
under state authority) impose income taxes.90 Thus a resident of New York
City pays income taxes to the United States, the State of New York, and the
City of New York.
For a brief period of time from 1895 to 1913, the federal government was
limited in its power to tax income from property, because the Supreme Court
had construed the limitation on Congress’s power to impose “direct” taxes
as applying to income from real estate and personal property.91 Accord-
ingly, the tax on such income was invalid because it was not apportioned
among the states by population.92 In 1913, however, the Constitution was
amended by the adoption of the Sixteenth Amendment, which provides:
“The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among the several States
and without regard to any census or enumeration”.93
The Supreme Court has construed Congress’s power to tax income in

expansive terms. Although some of the Court’s earlier decisions scruti-
nized congressional legislation to determine whether it comported with the
Court’s view of “income” within the meaning of the Sixteenth Amendment,
subsequent decisions have deferred entirely to Congress’s judgment as to
what constitutes taxable income.94 In effect, Congress has virtually unlim-
ited power to delineate the concept of taxable income.
The states are not limited by the US Constitution in their power to define and
tax income, except insofar as they exceed “horizontal” restraints on their
taxing authority with regard to extraterritorial income or income derived
from interstate commerce.95 Some state constitutions have been construed
90. These include Baltimore, Cincinnati, Cleveland, Detroit, Indianapolis, Kansas

City (Missouri), New York, Philadelphia, Pittsburgh, St. Louis, and Washington, D.C.
See W. Hellerstein, K. J. Stark, J. A. Swain and J. M. Youngman, State and Local Taxa-
tion: Cases and Materials, St. Paul: Thomson/West, 9th edn, 2009, p. 9.
91. Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895) (initial decision), 158
U.S. 601 (1895) (decision on rehearing). The Court’s opinion did not address the ques-
tion of income from other sources, such as business profits.
92. See 3.2.
93. US Constitution, amendment XVI.
94. W. A. Klein, J. Bankman, D. N. Shaviro and K. J. Stark, Federal Income Taxation,
New York: Aspen, 15th edn, 2009, p. 87.
95. See supra n. 57-59 and accompanying text.
40
to limit the states’ power to tax income, but these are not restraints attribut-
able to the federal system.96
3.4. Consumption and other excise taxes
Both federal and state governments have broad power to impose consump-
tion and other excise taxes. Because such taxes are classified as “indirect”
rather than “direct”, the limitation on “direct” taxes imposed by the federal
government has no application to such taxes.97 Although the United States
has no broad-based national consumption tax such as a value added tax
or a retail sales tax, it does impose a number of selective excise taxes.
The principal constitutional restraints bearing on the federal govern-
ment’s power to impose these levies are the requirements that the taxes be
96. Almost all the state constitutions contain some provision for uniform or equal
taxes, although most of these are limited to property taxes. Hellerstein, et al., supra n. 90,
at p. 229. A number of state courts, following the Supreme Court’s characterization in
Pollock of a tax on income from property as essentially a “direct” tax on the underlying
property itself, see n. 91-92 and accompanying text, concluded that their state income
taxes should be classified as property taxes and subject to state constitutional uniformity
and equality requirements. The 1915 Advisory Opinion of the Massachusetts Supreme
Court was an early landmark decision in this area. See J. W. Newhouse, Constitutional
Uniformity and Equality in State Taxation, Buffalo: William S. Hein & Co., 2nd edn,
1984, Vol. II, pp. 1949-2025. Relying on the Pollock case, the court held that a tax on
income from property would constitute a property tax; that it would be subject to the uni-
formity and equality clause; and, if graduated, it would be unconstitutional. In re Opin-
ion of the Justices, 108 N.E. 570 (Mass. 1915). Holdings that a graduated income tax
violated state constitutional restrictions have had their repercussions to this day and have
thwarted the efforts of legislatures in Illinois, Massachusetts, New Hampshire, Pennsyl-
vania, Washington and other states to adopt progressive income taxes. See, in addition
to the Massachusetts case cited above, Bachrach v. Nelson, 182 N.E. 909 (Ill. 1932),
overruled by Thorpe v. Mahin, 250 N.E.2d 633 (Ill. 1969); Opinion of the Justices, 113
A.2d 547 (N.H. 1955); Kelley v. Kalodner, 181 A. 598 (Pa. 1935); Culliton v. Chase,
25 P.2d 81 (Wash. 1933). Some states (including Alabama, Kentucky, and Wisconsin)
dealt with the problem by adopting constitutional amendments explicitly authorizing the
enactment of graduated net income taxes. The clear trend, as Prof. Newhouse points out,
has been to exclude the income tax from the restrictive clauses. See Newhouse, supra,
pp. 2019-2025.
97. There is a continuing debate in academic quarters over the characterization of
certain forms of consumption taxes as either “direct” or indirect”. Compare, e.g. E. J.
Jensen, “The apportionment of ‘direct taxes’: Are consumption taxes constitutional?”, 97
Columbia Law Review 8 (1997), pp. 2334-2419, with B. Ackerman, “Taxation and the
Constitution”, 99 Columbia Law Review 1 (1999), pp. 1-58, and L. Zelenak, “Radical
tax reform, the Constitution, and the conscientious legislator”, 99 Columbia Law Review
3 (1999), pp. 833-856. Even those taking a broad view of the “direct tax” limitation,
however, concede that traditional consumption taxes (like the VAT and the retail sales
tax) and other familiar excise taxes are “indirect” within the meaning of the Constitution.
41
“uniform throughout the United States”98 and that they not apply to “Arti-
cles exported from any State”.99
The only significant limitation on state consumption and excise taxes that
bears on the distribution of taxing power between the federal and state
governments is the prohibition of state “Imposts or Duties on Imports or
Exports”,100 and, as we shall see, even that limitation is less significant than
it once was.
3.4.1. Uniformity requirement for federal taxes
The uniformity requirement for federal taxes is directed entirely at the

geographic uniformity of the tax throughout the United States.101 It does
not restrict Congress’s general power to classify subjects for taxation, a
power that is constrained only by the forgiving “rational basis” standard
under which “classifications are valid if they bear a rational relation to a
legitimate governmental purpose”.102 Nor does the clause bar a federal levy
because of a lack of uniformity created by differences in the states’ own
laws.103 “The Constitution does not command that a tax ‘have an equal
effect in each state’ ”.104
In describing the purpose of the uniformity clause, Justice Story, one of

the Constitution’s most respected commentators, observed that its purpose
was to cut off all undue preferences of one State over another in the regulation
of subjects affecting their common interests. Unless duties, imposts, and excis-
es were uniform, the grossest and most oppressive inequalities, vitally affect-
ing the pursuits and employments of the people of different States, might exist.
98. US Constitution, Art I, § 8, cl. 1.

100. US Constitution, Art I, § 10, cl. 3.
101. Fernandez v. Wiener, 326 U.S. 340, 359 (1945): “uniformity in excise taxes
exacted by the Constitution is geographical uniformity, not uniformity of intrinsic equal-
ity and operation”.
102. Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547 (1983).
103. Florida v. Mellon, 273 U.S. 12, 17 (1927). The Court declared that “[t]he conten-
tion that the federal tax is not uniform, because other states impose inheritance taxes
while Florida does not, is without merit. Congress cannot accommodate its legislation
to the conflicting or dissimilar laws of the several states, nor control the diverse condi-
tions to be found in the various states, which necessarily work unlike results from the
enforcement of the same tax. All that the Constitution … requires is that the law shall be
uniform in the sense that by its provisions the rule of liability shall be alike in all parts of
the United States”. Id.
104. Knowlton v. Moore, 178 U.S. 41, 104 (1900).
42
The agriculture, commerce, or manufactures of one State might be built up on

the ruins of those of another; and a combination of a few States in Congress
might secure a monopoly of certain branches of trade and business to them-
selves, to the injury, if not to the destruction, of their less favored neighbors.105
Even the requirement of geographic uniformity is quite restrained, as the

Supreme Court’s decision in United States v. Ptasynski106 reveals. The case
involved an exemption that Congress provided from the former Crude Oil
Windfall Profit Tax Act,107 enacted in 1980 to capture the “windfall prof-
its” that oil companies were expected to reap from the expiration of fed-
eral price controls on petroleum. The exemption applied to oil produced
in specified geographic areas mostly in Alaska. Indeed, the statute explic-
itly referred to “exempt Alaskan oil”.108 The question before the Court was
“whether excluding a geographically defined class of oil from the coverage
of the Crude Oil Windfall Profit Tax violates the Uniformity Clause”.109
In evaluating the exemption’s compatibility with the Uniformity Clause,

the Court observed that, despite the statute’s reference to “exempt Alaskan
oil”, the statute in fact exempted only about 20% of Alaska’s then-current
oil production and also exempted certain non-Alaska oil produced offshore
(and thus in no state). Accordingly, “[t]he exemption … is not drawn on
state political lines”.110 The Court then turned to the specific question con-
fronting it, namely, “whether the Uniformity Clause prohibits Congress
from defining the class of objects to be taxed in geographic terms”.111
The Court first concluded that there was nothing in the language of the
clause or in the Court’s prior decisions construing it that prohibited “all
geographically defined classifications”.112 Rather, “[t]he Uniformity Clause
gives Congress wide latitude in deciding what to tax and does not pro-
hibit it from considering geographically isolated problems”.113 Neverthe-
less, where Congress does frame a tax in geographic terms, the Court
105. J. Story, “Commentaries on the Constitution of the United States”, T. Cooley

(ed.), 1873, § 957, quoted in United States v. Ptasynski, 462 U.S. 74, 81 (1983).
106. 462 U.S. 74 (1983).
107. 26 United States Code § 4986 (repealed).
108. Id., § 4994(e) (repealed).
109. Ptasynski, 462 U.S., p. 75.
110. Id., p. 78.
111. Id., p. 83.
112. Id., p. 84.
113. Id.
43
“will examine the classification closely to see if there is actual geographic

discrimination”.114
On the facts in Ptasynski, the Court found no such geographic discrimina-

tion. In the Court’s eyes, Congress viewed “exempt Alaskan oil” as a unique
class of oil that merited favourable treatment, because of the disproportion-
ate costs and difficulties of extracting oil from this region. Under these cir-
cumstances, and in the absence of “any indication that Congress sought to
benefit Alaska for reasons that would offend the purpose of the Clause”,115
the Court was unwilling to second-guess a congressional “determination,
based on neutral factors, that this oil required separate treatment”.116
In short, notwithstanding the Court’s purported “close examination” of

geographic classifications under the Uniformity Clause, the Ptasynski case
suggests that there is less than meets the eye even to geographic classifica-
tions. As long as the geographic classifications do not track “state political
lines”,117 and Congress has not evidenced an intent to favour some states
qua states over others, the tax is likely to pass constitutional muster under
the Uniformity Clause.
3.4.2. Prohibition on federal taxation of exports
Like the “direct” tax limitation described above,118 the prohibition on fed-
eral taxation of exports had its historical origins in the fears of Southern
states that the federal taxing power would be used to their economic detri-
ment by a Congress dominated by the more populous Northern states.119
The Framers of the Constitution responded to these concerns “by com-
pletely denying to Congress the power to tax exports at all”.120
The prohibition against laying any “Tax or Duty … on Articles Exported

from any State”121 has served as a categorical, if narrow, limitation on fed-
eral taxing power. The Supreme Court has observed:
114. Id., p. 85.

115. Id., pp. 85-86.
116. Id., p. 86.
117. Id., p. 78.
118. See 3.2.
119. Hutchison, supra n. 8, pp. 143-144; see 2.3.2.
120. United States v. International Business Machines, 517 U.S. 843, 861 (1996).
44
We have had few occasions to interpret the language of the Export Clause, but
our cases have broadly exempted from federal taxation not only export goods,
but also services and activities closely related to the export process. At the
same time, we have attempted to limit the term “Articles exported” to permit
federal taxation of pre-export goods and services.122
Under the clause, the Court has struck down federal excise taxes on the sale
of goods in export transit,123 on export bills of lading,124 on charter parties
for carriage of goods from state ports to foreign ports,125 and on policies
insuring marine risks of export shipments.126 The prohibition extends to
taxes on exports even though they may be non-discriminatory.
3.4.3. Prohibition on state taxation of imports and exports
At the time of its adoption, the prohibition against state taxation of imports
and exports had a much more significant impact on the distribution of tax-
ing powers between federal and state governments than it has today. First,
taxes on imports and exports had been an important source of revenue for
the states,127 and the prohibition therefore deprived them of a major fis-
cal resource. Second, the limitation on state but not on federal taxation of
imports allocated exclusive taxing power to the federal government over
what was then – and until the 20th century remained – the federal govern-
ment’s principal source of revenue.
The diminished significance of granting the federal government the exclu-

sive power to tax imports is attributable to two factors. First, despite the
large role that import revenues played as a source of federal revenue for
more than a century, such revenues today account for only 1% of federal
revenues.128 Second, the limitation on the states’ power to tax imports has
been narrowed by judicial construction of the Import-Export Clause.
122. International Business Machines, 517 U.S., p. 846.

123. A.G. Spalding & Bros. v. Edwards, 262 U.S. 66 (1923).
124. Fairbank v. United States, 181 U.S. 283 (1901).
125. United States v. Hvoslef, 237 U.S. 1 (1915).
126. International Business Machines, 517 U.S. 843; Thames & Mersey Marine Insur-
ance Co. v. United States, 237 U.S. 19 (1915).
127. See Michelin Tire Corp. v. Wages, 423 U.S. 276, 285 (1976); Hutchison, supra n.
8, pp. 160-161.
128. In 2009, the federal government raised roughly USD 2.1 trillion in revenue of
which approximately USD 22.5 million came from customs duties and fees. US Office
of Management and Budget, Budget of the United States Government: Historical Tables
Fiscal Year 2011, Receipts by Source: 1934-2015, Table 2.1, available at http://www.
gpoaccess.gov/usbudget/fy11/hist.html; US Office of Management and Budget, Budget
45
For most of US constitutional history, the Supreme Court construed the

prohibition on state taxation of imports to extend to imported goods still
in their “original package”.129 The prohibition extended even to non-dis-
criminatory property taxes on imported goods.130 In its 1976 decision in
Michelin Tire Corp. v. Wages,131 however, the Supreme Court abandoned
a century of precedent in holding that the Import-Export Clause does not
bar a state from imposing a non-discriminatory ad valorem property tax on
imported goods, whether or not they remain in their original packages. In
so holding, the Court essentially narrowed the prohibition on state taxa-
tion of imports to levies that discriminated against goods by nature of their
origin or that were imposed “on goods which are merely in transit through
the State when the tax is assessed”.132 The Court applied this analysis to
excise taxes in sustaining a non-discriminatory state sales tax applied to
the transfer of cargo containers used exclusively for transporting goods in
international commerce.133
Because the federal government no longer relies on import duties as an

important source of revenue and because states rarely impose taxes that
either discriminate against imports or that apply to goods in import transit,
the ban on state taxation of imports has little practical impact on the alloca-
tion of revenue sources between the federal government and the states and
does not significantly curtail the states’ power to tax imported goods.
The prohibition on state taxation of exports complements the analogous bar

on federal taxation of exports.134 Rather than speaking to the distribution of
taxing power between federal and state governments, it reflects the intent
of the constitutional framers to deny the power to tax exports to all levels
of government in the United States. Despite the parallelism between the
constitutional bar on federal and state taxation of exports, the former pro-
hibition has been construed more strictly, at least in recent years. While the
Supreme Court has read the constitutional prohibition on federal taxation of
exports to preclude even non-discriminatory taxes on exports,135 it has fol-
of the United States Government: Historical Tables Fiscal Year 2011, Composition of
“Other Receipts”: 1940-2015, Table 2.5, available at http://www.gpoaccess.gov/usbud-
get/fy11/hist.html.
129. Brown v. Maryland, 25 U.S. (12 Wheat.) 419 (1827).
130. Low v. Austin, 80 U.S. (13 Wall.) 29 (1871).
131. 423 U.S. 276 (1976).
132. Id., p. 290. See generally W. Hellerstein, “Michelin Tire Corp. v. Wages: Enhanced
state power to tax imports”, Supreme Court Review (1976), pp. 99-133.
133. Itel Containers International v. Huddleston, 507 U.S. 60 (1993).
134. See 3.4.2.
135. Id.
46
Fiscal federalism: Control and coordination of taxing powers
lowed a path analogous to that described in the preceding discussion of state

taxation of imports, concluding that non-discriminatory taxation of exports
does not offend the clause.136 It therefore sustained a non-discriminatory
excise tax on the gross receipts from stevedoring activities (including the
handling of exports).137
3.5. Wealth transfer taxes

Both federal and state governments have authority to impose wealth trans-
fer taxes, such as estate, inheritance, and gift taxes, and they have exercised
this authority concurrently during most of the past century. By contrast to
the lack of federal-state tax coordination with regard to most taxes, federal-
state tax coordination has played an enormous role in shaping the American
wealth transfer tax structure, a matter explored below.138
4. Fiscal federalism: Control and coordination of

taxing powers
4.1. Overview
Congress lacks authority to alter the fundamental (if somewhat diffuse)

distribution of taxing powers reflected in the constitutional framework
described above. For example, Congress could not constitutionally provide
for a federal property tax unless it were apportioned among the states by
population. Nor could Congress deprive the states of the power to tax prop-
erty, income, or consumption altogether, wholly apart from the fact that any
such action would be politically inconceivable.
Congress nevertheless possesses considerable authority to control and

coordinate the exercise of federal and state taxing powers. The source of
Congress’s authority lies principally in its plenary power “[t]o regulate
Commerce with foreign Nations, and among the several States …”.139 The
Commerce Clause thus empowers Congress to require that state tax power
136. Department of Revenue v. Association of Washington Stevedoring Cos., 435 U.S.

734 (1978). See generally J. R. Hellerstein and W. Hellerstein, State Taxation, Vol. I,
Valhalla: Thomson Reuters, 3rd edn., 1998 & Cum. Supp. 2010, § 5.03[2], pp. 5-14.
137. Id.
138. See 4.6.
139. US Constitution, Art. I, § 8.
47
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Chapter 1: Analysis of Fiscal Federalism from a Comparative

1. Comparative law and comparative tax law.

Chapter 2: The United States 25

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3.4.2. Prohibition on federal taxation

Chapter 4: Australia 137

1. Overview of Australia’s federal system 137

2.2. Federal power to spend and grant money to states 149

Chapter 5: India 187

3.2.3. Uniform administration 206

Chapter 6: The Swiss Confederation 223

3.3. Communes 248

Chapter 7: The Federal Republic of Germany 273

1. The financial constitution. The fundamental rules

1.3. The apportionment of tax revenue (Art. 106 GG) 282

Chapter 8: Austria 327

1. The financial constitution 327

Chapter 9: The Russian Federation 341

4.2.3. The issue of double inter-regional

Chapter 10: Spain 361

1. Financial constitution 361

4.2. Local municipalities 400

Chapter 11: Italy 403

4.4.1. The regional financial system and the

Chapter 12: Portugal 455

Chapter 13: France 489

3. The new constitutional framework of fiscal federalism 501

4.3.4.2. The state compensates the

Chapter 14: United Kingdom 541

1. Central government 541

2. Local government 563

Chapter 15: The European Union 581

3.4.2.2. The Stability and Growth

7.2. The exact content of the drastic step 630

Chapter 16: Brazil 649

3.2. Main deviations from the normative theory 664

Chapter 17: China (People’s Rep.) 733

3. Framework rules on tax law-making 740

The United States

The ensuing discussion necessarily reflects the untidy reality of American

* Shackelford Professor of Taxation, University of Georgia School of Law.

2. The fiscal constitution

2.2. Federal fiscal powers

Despite the absence of detailed constitutional provisions delineat-

2.2.1. Federal taxing power

There are five provisions in the US Constitution explicitly addressed to the

5. Dam, supra n. 1, p. 272.

Revenue shall originate in the House of Representatives”8 – but this does

The most significant constitutional provision directed to the federal tax-

In addition to the explicit limitations on the federal taxing power, the

8. US Constitution, Art. I, § 7. The exclusive right of originating revenue measures

2.2.2. Federal spending power

The federal spending power is granted as a condition on the federal

defines it to be.26 Second, in a point that bears pointedly on fiscal federal-

In South Dakota v. Dole, the Court sustained Congress’s authority to with-

to drive, and that this interstate problem required a national solution”.34

2.2.3. Other federal fiscal powers