The 'new protectionism' and the American common market.

• Author: Williams, Norman R.

For nearly two centuries, the U.S. Constitution through the dormant Commerce Clause has protected the American common market from protectionist commercial state regulations and taxes. During the past two terms, however, the U.S. Supreme Court created a new exception to the dormant Commerce Clause for protectionist state and local taxes and regulations that favor public rather than private entities. In this Article, we describe this "New Protectionism" and argue that the Court's embrace of it is profoundly misguided. As we document, there is no material difference, economically or constitutionally, between public protectionism and private protectionism. As illustrated by the variety of ways in which government and private enterprise interact, there is no coherent distinction between public and private activities, and ensuing efforts to draw such a line will only serve to embroil the courts in tasks for which it is ill suited. Worse, this new exception only encourages state and local governments to engage in protectionism in a variety of contexts, such as education and local economic development, in which the dangers to national economic union are paramount. Coupled with the Court's recently declared unwillingness to subject nondiscriminatory regulations and taxes to minimal judicial scrutiny, this endorsement of public protectionism threatens to emasculate the constitutional protections for the American common market and should therefore be rethought by the Court or legislatively superseded by Congress.

INTRODUCTION I. THE DORMANT COMMERCE CLAUSE, UNITED HAULERS, AND DAVIS A. The Pre-United Haulers Dormant Commerce Clause: A Doctrinal Summary B. United Haulers C. Davis II. ANTIDISCRIMINATION AND THE NEW PUBLIC-ENTITIES EXCEPTION A. The Court's Proffered Justifications B. Evaluating the Proffered Rationales 1. The Likelihood of Nonprotectionist Motivation. 2. Traditional Governmental Functions 3. Virtual Representation 4. Public vs. Private Protectionism 5. Municipal Bond Market Exceptionalism III. THE PUBLIC-ENTITIES EXCEPTION AND THE BIRTH OF THE NEW PROTECTIONISM A. Municipal Garbage Processing and Bond Favoritism B. Public Protectionism C. Quasi Public-Private Protectionism D. Whither the Dormant Commerce Clause? IV. THE NEW PROTECTIONISM AND THE MARKET-PARTICIPANT EXCEPTION A. Summary of the Market-Participant Exception B. Davis's Market-Participant Revisionism C. The Implications of an Expanded Market-Participant Exception V. THE TWILIGHT OF PIKE BALANCING A. Davis on Balancing B. The End of Balancing? Four Readings of Davis C. Against Premature Abandonment of Balancing CONCLUSION INTRODUCTION

For close to two centuries, the United States Supreme Court has actively sought to protect interstate trade from undue disruption by state or local governments. Pursuant to the so-called "dormant Commerce Clause," the Court has reviewed state and local legislation to ensure that local measures do not unreasonably disrupt the American common market. (1) Although the Court has deployed different doctrinal formulas over the years to distinguish between legitimate state commercial regulations and illegitimate measures that unduly interfere with interstate trade, (2) one constant has been a strict prohibition on protectionist measures that seek to insulate in-state economic activity from out-of-state competition. Beginning as early as the middle of the nineteenth century, the Court actively rooted out and invalidated state laws that sought to discourage the sale of out-of-state goods or services so as to favor local economic interests. (3) Since then, numerous "discriminatory" measures have been struck down by the Court. (4) Indeed, as others have noted, this antipathy to local protectionism has been a hallmark of the Court's Commerce Clause jurisprudence. (5)

Change, however, is afoot. In the past two years, the Court has signaled that some state or local protectionism is constitutionally permissible. In 2007, in United Haulers Ass'n v. Oneida-Herkimer Solid Waste Management Authority, (6) the Court upheld county ordinances that required all solid waste be processed at a local, municipally owned facility, thereby displacing out-of-state private competition. Meanwhile, in the spring of 2008, in Department of Revenue v. Davis, (7) the Court upheld a nakedly protectionist tariff on out-of-state municipal bonds, holding that states could tax the interest on municipal bonds issued by other states (or their political subdivisions) even when they exempt the interest on their own bonds. (8) In defending the constitutionality of both measures, the Court pointed to the fact that the protected activities were governmental rather than private in nature. (9)

In our view, these decisions create a new exception to the dormant Commerce Clause, one for protectionist state and local taxes and regulations that favor public rather than private entities. Under the Court's new approach, which we call the "New Protectionism," state and local governments may not favor local private businesses as such, but they may adopt taxes and regulations that protect state or local governmental operations from out-of-state competition, whether public or private. (10) In short, in the Court's view, public protectionism is not constitutionally proscribed.

As one might expect, it is difficult normatively to reconcile the New Protectionism with the Court's longstanding condemnation of protectionism generally. In both United Haulers and Davis, the Court ruled that measures that protect governmental operations from out-of-state competition are not discriminatory and, therefore, are exempt from the rigorous judicial review reserved for discriminatory measures. (11) To the same end, in Davis, a plurality of Justices declared that public protectionism fits within the "market-participant" exception to the dormant Commerce Clause, which exempts state or local governments from constitutional review when acting as "market participants" rather than "market regulators." (12) The net effect of these doctrinal moves is to exempt public protectionism from the stringent judicial scrutiny reserved for discriminatory measures and to subject it instead to the lenient review applied to nondiscriminatory measures. (13) Meanwhile, in Davis, the Court refused to apply even that minimal level of scrutiny on the ground that such review was inappropriate for the judicial branch to perform, thereby leaving public protectionism exempt from all Commerce Clause review. (14)

In our view, the Court's embrace of the New Protectionism is profoundly misguided. Despite its best efforts, the Court has failed to provide a theoretically sound, normatively attractive justification for treating public protectionism as materially different from private protectionism, which the Court continues to condemn in earnest terms. Its conclusory designation of such protectionist measures as nondiscriminatory blinks reality. Meanwhile, the Davis plurality's capacious but bizarre reinterpretation of the market-participant exception collapses the fundamental distinction upon which that exception rests--namely, that there is a constitutionally significant difference between state taxes and regulations on the one hand and state market transactions on the other hand. Finally in this regard, although the Court has repeatedly made clear that nondiscriminatory regulations and taxes are subject to dormant Commerce Clause review, (15) the Court's refusal in Davis to perform even that minimal level of review unjustifiably leaves public protectionism exempt from all forms of judicial review, strict or lenient, under the Commerce Clause.

Such analytical shortcomings and the confusion they sow are bad enough, but the implications for interstate commerce posed by the Court's endorsement of public protectionism are truly breathtaking. The Court's embrace of taxes and regulations that favor public entities only encourages state and local governments to engage in more public protectionism. Worse, because private and public enterprises often commingle and cooperate (16)--a fact that, critically, the Court has failed to appreciate--the public-entities exception created by the Court opens the door to governmental efforts to protect private enterprises from out-of-state competition through cleverly constructed public-private partnerships. Coupled with the plurality's incomprehensibly broad and muddled conception of the market-participant exception, this endorsement of public protectionism threatens to emasculate the constitutional protections for the American common market. In other words, the logic underlying the Court's New Protectionism is not easily cabined, and could--with just a little push--lead to the elimination of the dormant Commerce Clause itself.

Recent developments only bolster these concerns. Parochial political pressures often induce lawmakers to adopt protectionist measures even in the best of times. (17) Economic crises, such as the current one, only add further urgency to calls to undertake protectionist actions to create and preserve local jobs. (18) One prominent protectionist mechanism used by state and local governments is economic development or so-called "private activity" bonds: a state issues bonds whose proceeds are given to local companies to underwrite local economic development. Despite the bond's nominal status as a government bond, the principal and interest on such bonds are typically repaid by the private companies that received the bond proceeds. (19) Nevertheless, because the bonds are technically issued by the state government, the interest earned on such bonds is exempt from federal income taxation and, because of Davis, exempt from taxation by the state that issued them (but not other states). (20) This favorable tax treatment significantly reduces the private companies' cost of borrowing, and, coupled with the protectionist tax treatment upheld as constitutional by the Court...