This article examines an important and recurring question that courts frequently resolve, but rarely analyze: whether taxing and spending measures should be viewed together when a state imposes a nondiscriminatory tax but also affords relief to some taxpayers through government spending. The answer to this question will often determine whether the state's actions violate constitutional strictures against discriminatory taxation. The taxing measure and the spending measure will generally pass muster if viewed in isolation. After all, courts rarely invalidate nondiscriminatory taxing measures on constitutional grounds.(1) And true government spending measures, if considered alone, plainly fall outside the reach of constitutional restraints against discriminatory taxation. On the other hand, when taxing and spending measures are viewed together, they raise profound problems. In particular, the two measures often operate to produce precisely the result that the constitutional prohibitions against discriminatory taxation seek to avoid: the imposition of a greater burden in "practical effect"(2) on a constitutionally protected class of state taxpayers.
These questions arise in a wide variety of contexts. Invoking the Commerce Clause, taxpayers have attacked nondiscriminatory levies imposed on an industry when the state has made payments related to the tax or granted reductions in other taxes only to the extent that industry members engage in intrastate trade.(3) Invoking the intergovernmental tax immunity doctrine, taxpayers have challenged nondiscriminatory exactions imposed on federal and state retirement income when the state simultaneously has awarded increased pension benefits to state retirees.(4) And invoking uniformity and equality provisions of state constitutions, taxpayers have attacked nondiscriminatory property taxes when the government has granted credits against the tax that have produced nonuniform effective rates.(5)
In each of these settings, the essential problem is the same: whether courts should view the state taxing and spending measures as an integrated whole or as independent components of the law for purposes of constitutional analysis. If the two measures are considered together, the entire scheme will violate the operative antidiscrimination rule, because payments made to the favored group will produce the prohibited disparity in effective tax burdens. If, on the other hand, the court considers the two measures separately, they will emerge unscathed from the constitutional attack.
In Parts I, II, and III of this article, we analyze cases that have raised these sorts of tax discrimination issues under the dormant Commerce Clause, the intergovernmental-tax-immunity doctrine, and state uniformity and equality provisions. In Part IV, we step back from the cases and propose a systematic approach, applicable in all these doctrinal settings, for determining whether courts should "link" taxing and spending measures when evaluating their constitutionality. As our analysis of the existing authorities will show, courts have failed to recognize the commonality of these cases and the subtlety of the questions they present. Instead, courts have resolved the cases in an ad hoc fashion, relying at best on the conclusory shibboleth that "substance" should triumph over "form." What the law needs is a more informative and principled framework for addressing this broad set of questions. In this article, we offer such a framework in the hope that it will help courts as they are forced to apply the now-impoverished "law of linkage."
THE DORMANT COMMERCE CLAUSE
The Nondiscrimination Principle
Even absent preemptive congressional action, the Commerce Clause proscribes state laws that offend the Constitution's purpose of creating a "national common market."(6) It is a "cardinal requirement"(7) of this "dormant Commerce Clause" rule(8) that state taxes may not discriminate against interstate commerce.(9) Two cases from 1984 illustrate the operation of this constitutional requirement. In Bacchus Imports, Ltd. v. Dias,(10) the Court struck down a Hawaii tax imposed on liquor wholesalers because it exempted sales of certain liquors manufactured in Hawaii. Similarly, in Westinghouse Electric Corp. v. Tully,(11) the Court found the New York corporate income tax unconstitutional to the extent it afforded a credit solely for corporate export activities that occurred within the state. In Bacchus, Westinghouse, and many other cases, the Court has held state tax laws unconstitutional because "no State may discriminatorily tax the products manufactured or the business operations performed in any other State."(12)
Permissible Subsidization of Domestic Industry
Just as the Court has consistently held that the Commerce Clause bars state taxes that favor in-state over out-of-state interests, so it has endorsed a countervailing principle that the Commerce Clause permits state spending that favors in-state over out-of-state interests. "Direct subsidization of domestic industry," a unanimous Court has declared, "does not ordinarily run afoul of [the dormant Commerce Clause] prohibition."(13) The Court's explanation for this Commerce Clause dichotomy between state taxes that favor local interests and state subsidies that favor local interests is that "[t]he Commerce Clause does not prohibit all state action designed to give its residents an advantage in the marketplace, but only action of that description in connection with the State's regulation of interstate commerce."(14) Whatever difficulties this distinction may engender,(15) the Court has reached different conclusions on the constitutionality of domestic preference legislation depending on whether the preference takes the form of the exercise of the state's regulating or taxing power, on the one hand, or its spending power, on the other.
In New Energy Co. v. Limbach,(16) the state sought to sidestep the rule condemning taxes that discriminate against interstate commerce by drawing upon the distinction between tax relief and affirmative state spending. At issue in the case was an Ohio motor fuel sales tax that provided the seller with a credit for all sales of ethanol(17) produced in the state, but not all sales of ethanol produced in other jurisdictions. Seeking to avert the dormant Commerce Clause ban on discriminatory taxation, the state argued that the credit was a "subsidy" that the state could direct as it wished to favored local ethanol suppliers.(18)
The Court accepted the major premise of this argument by recognizing that the Commerce Clause ordinarily does not proscribe subsidies for local industry.(19) But the state's minor premise-that its tax credit involved such protected subsidization-did not fare as well. In the Court's eyes, the ethanol credit was caught up with "Ohio's assessment and computation of its fuel sales tax,"(20) requiring the Court to consider the duty-imposing terms of the tax and its relief-granting credit provision together. From this perspective, it followed without difficulty that the tax was unconstitutionally discriminatory.
West Lynn Creamery
In West Lynn Creamery, Inc. v. Healy,(21) decided six years after New Energy, the Court encountered another state effort to skirt the dormant Commerce Clause through invocation of a claimed power to subsidize. West Lynn Creamery involved a Massachusetts milk "pricing order" that, in substance, placed a tax on wholesale distributors for every local sale of milk, whether that milk was produced inside or outside the state.(22) In addition, the order stipulated that all proceeds of the tax would go into a segregated fund that the state periodically would disperse solely to in-state milk producers (that is, local dairy farmers).(23)
The issue in the case was one of characterization. Did the pricing order, as Massachusetts argued, impose a permissible nondiscriminatory tax coupled with the sort of "subsidization of domestic industry" approved in New Energy,(24) or did it embody a tax, coupled with de facto tax relief for local industry, in violation of the Court's well-settled antidiscrimination rule?(25) This characterization issue sharply divided the Court, with Justice Stevens writing for a five-Justice majority; Justice Scalia, joined by Justice Thomas, concurring in the judgment; and Chief Justice Rehnquist, joined by Justice Blackmun, writing in dissent.
For the majority, the discriminatory-tax label "clearly" fit.(26) In so ruling, the majority assumed that either an evenhanded milk tax or a state's outright payment of cash subsidies to local dairy farmers would be constitutional "standing alone."(27) But, in the majority's eyes, the tax and subsidy did not operate in isolation. Rather, the Court focused on the program "as a whole"(28) and found that the subsidy payments in effect were "rebates" or "refunds" of the tax.(29) Accordingly, the Massachusetts scheme was unconstitutional because, like a protective tariff, it allowed "Massachusetts dairy farmers who produce at higher cost to sell at or below the price charged by lower cost out-of-state producers."(30)
In a concurring opinion, Justice Scalia faulted Justice Stevens for writing so broadly as to imperil the constitutionality of virtually all state business subsidy programs.(31) Justice Scalia acknowledged that a local-industry-favoring "`exemption' from or `credit' against a `neutral' tax" would offend the ban on discriminatory taxation.(32) He also asserted, however, that "not . . . every state law which obstructs a national market violates the Commerce Clause,"(33) and that, in particular, there was no constitutional problem with a "subsidy for the in-state members of the industry" even if it was coupled with "nondiscriminatory taxation of the industry."(34) For Justice Scalia, the determinative issue was straightforward: Which of these two competing principles controlled the case?(35)