Business subsidies and the dormant commerce clause.

AuthorCoenen, Dan T.

CONTENTS

  1. The Problem of Subsidies and the West Lynn Creamery Case

  2. The Constitutionality of Ordinary Business Subsidies

    A. Precedent

    B. Policy

    1. The Search for a Middle Ground, Considerations of "Form,"

      and Constitutional History

    2. Functional Considerations

    3. Constitutional Theory

      1. Accountability

      2. Deliberative Decisionmaking

      3. Collaborative Lawmaking

    4. A Recapitulation

  3. The West Lynn Creamery Approaches to Distinguishing Permissible and Impermissible Subsidies

    A. Justice Stevens's Approach

    1. The Surrogate-Representation Distinction

    2. The Burden-and-Benefit Rationale

    B. Justice Scalia's Approach

    C. Chief Justice Rehnquist's Dissent

  4. Toward a Functional Framework for Tax-Linkage Analysis

    A. Other Commentators' Approaches

    1. The Low-Cost-Subsidy and Efficient-Subsidy Principles

    2. The Commerce-Creation Principle

    3. The Industry-Specific-Tax Distinction

    B. Toward a Policy-Driven Principle for Distinguishing Permissible

    and Impermissible Subsidies

  5. Applying the Policy-Based Linkage Methodology

    A. A Better Analysis for West Lynn Creamery

    1. Fairness

    2. Federalism

    3. Political Processes

    4. Considerations of Form

      B. Deciding Other Subsidy Cases

    5. The Source of Subsidy Money

    6. The Segregated Fund

      1. Fairness and Federalism

      2. Political Processes

      3. Considerations of Form

    7. Simultaneity of Enactment

    8. The Cumberland Farms II Conundrum

      1. Fairness and Federalism

      2. Considerations of Form

      3. Political Processes

      4. Constitutional Remediation

  6. Conclusion

    For more than a century, the "dormant Commerce Clause"(1) has safeguarded our "national `common market'"(2) from undue state interference.(3) Time and again, the Supreme Court has drawn on this principle to strike down laws that favor local businesses over competitors engaged in interstate operations.(4) Invoking the Commerce Clause, the Court has condemned state "customs duties."(5) It has outlawed price controls that strip away advantages of out-of-state producers.(6) It has held unconstitutional even facially neutral buyer-protection legislation that diverts market share to in-state sellers.(7) The Court has been especially aggressive in applying the dormant Commerce Clause to invalidate discriminatory state tax laws, including credits or exemptions that favor local businesses.(8) Running through these decisions is a "strict rule of equality,"(9) which mandates that a state treat out-of-state commercial interests no worse than it treats its own.(10)

    Despite the sweeping character of this dormant Commerce Clause nondiscrimination principle,(11) the cases suggest that states can favor local businesses in one particular way: by awarding outright monetary subsidies.(12) Because such bounties typically are made available only to in-state operations, they appear on their face to abridge the "prohibition against discriminatory treatment of interstate commerce."(13) At least before 1994, however, the Court seemed set in its view that monetary business subsidies lay beyond the reach of the dormant Commerce Clause. "Direct subsidization of domestic industry," the Court had decreed, "does not ordinarily run afoul of this prohibition."(14)

    In its seminal decision in West Lynn Creamery, Inc. v. Healy,(15) however, the Court signaled a potential retreat from this stance. In footnote fifteen of its opinion, which invalidated a discriminatory tax "rebate,"(16) the Court pointedly noted: "We have never squarely confronted the constitutionality of subsidies, and we need not do so now."(17) Many observers, as well as the concurring and dissenting Justices in West Lynn Creamery itself, read footnote fifteen as putting back on the table the question whether outright business subsidies violate the dormant Commerce Clause.(18) The Court still has not ruled on the issue. Indeed, in its most recent dormant Commerce Clause decision, Camps Newfound/Owatonna, Inc. v. Town of Harrison,(19) the Court reiterated its footnote fifteen disclaimer.(20) In short, both Camps Newfound/Owatonna and West Lynn Creamery pointedly invite a comprehensive reconsideration of the permissibility of subsidies under the dormant Commerce Clause.

    In this Article, I seek to respond to the Court's overture with a treatment of this subject that moves progressively from the general to the specific. Part I examines key Supreme Court cases to show that the basic question of whether state business subsidies are constitutional remains open and important. Part II then turns to how that question should be resolved, focusing on whether subsidies are fairly distinguishable from ostensibly equivalent, and concededly unlawful, discriminatory tax relief. The thrust of Part II is that both precedent and policy support the traditional, pre-West Lynn Creamery view that state subsidies almost always comport with the dormant Commerce Clause principle. In particular, Part II emphasizes that four considerations--rooted in form, fairness, federalism, and political processes--render subsidies less threatening to Commerce Clause values than economically comparable tax deductions, credits, and exemptions.

    Part III then addresses the major question that Part II leaves open: How should courts distinguish the, ordinary subsidy that is constitutional from the exceptional subsidy that is not? Part III suggests that none of the opinions in West Lynn Creamery--in which an exceptional subsidy was struck down--offers much useful guidance on this critical question. As a result, Part IV offers an alternative analytical framework for distinguishing the constitutional grant-in-aid from the unconstitutional assault upon our "federal free trade unit."(21) In essence, this proposal calls upon courts to draw the line between permissible and impermissible subsidies by focusing on the same four factors already identified in Part II to distinguish ordinary subsidies from discriminatory tax breaks as a general matter. Accordingly, Part IV advocates an approach that asks whether the challenged subsidy--because of its linkage to a particular tax--shares the essential constitutional defects of a discriminatory tax break. Using the four factors, courts would consider the following: (1) whether, consistent with conventional property-based notions of fairness, the subsidy merely permits state residents to reap where they have sown; (2) whether invalidation of the subsidy frustrates the state's federalism-based interest in experimenting with responses to distinctive local needs; (3) whether the same political dynamics that unduly encourage adoption and retention of discriminatory tax relief (i.e., reduced visibility, heightened risks of entrenchment, lowered administrative costs, and the like) mark the challenged subsidy scheme; and (4) whether the subsidy is part of a program that resembles in form a protective tariff or kindred types of unconstitutional discriminatory taxation.(22)

    Finally, Part V considers how the analytic structure outlined in this Article will operate in the real world. Evaluating a range of hypothetical and actual cases, including West Lynn Creamery itself, Part V offers evidence that this policy-centered approach is as workable in practice as it is sound in theory.(23)

    The questions addressed here involve high stakes(24) and knotty analytical problems.(25) Because business bounties take myriad forms, it would be impossible to address every constitutional question they might present. Nonetheless, this Article offers something that neither courts nor commentators have yet begun to supply: an analytic superstructure for evaluating monetary subsidies in the post-West Lynn Creamery era.

  7. THE PROBLEM OF SUBSIDIES AND THE WEST LYNN CREAMERY CASE

    Although "[g]overnments have long used subsidies as economic-development tools,"(26) state awards of cash grants to businesses raise obvious dormant Commerce Clause problems. In case after case, the Supreme Court has relied on the Commerce Clause to strike down state laws that "favor local businesses over out-of-state businesses."(28) On their face, state subsidies seem to violate this principle because their availability to targeted businesses invariably hinges on engaging in business operations within the subsidy granting state. Similarly, the Court often has decried state action that neutraliz[es] the advantage possessed by lower cost out-of-state producers."(29) Yet monetary subsidies--no less than the protective tariffs that the Court repeatedly has condemned(30)--have precisely this effect.(31) It is not uncommon for international free trade pacts to restrict member nations' power to dole out monetary subsidies because such subsidies distort the efficient distribution of productive activities.(32) Symmetry of logic suggests that state-paid subsidies should likewise offend any principle designed to safeguard our own "common national market among the states."(33)

    The case against subsidies draws its greatest strength from the Court's unstinting use of the Commerce Clause to outlaw discriminatory tax breaks.(34) Assume, for example, that the State of Oregon, wishing to help along a fashionable industry, enacts a law that gives any business that operates a winery in the state an annual $25,000 credit against state income taxes. What will happen if the law is challenged by an out-of-state winery that markets its product nationwide and thus owes and pays income taxes in Oregon? Existing authorities indicate that the credit would be unconstitutional because entitlement to it is overtly conditioned on wineries' conducting business operations in the taxing state.(35)

    Now assume that Oregon takes another route. Instead of giving local winery operators the $25,000 tax credit, the state collects in full all income taxes owed by wineries but also grants local wineries an annual $25,000 monetary subsidy. As a matter of "economic realities"(36)--which the Court has often declared the proper focal point of Commerce Clause analysis(37)--the cash bounty produces the same result as the tax credit.(38)...

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