Document Type

Article

Publication Date

1-2006

Abstract

Last October, a group of distinguished tax experts from the European Union and the United States convened at the University of Michigan Law School for a conference on "Comparative Fiscal Federalism: Comparing the U.S. Supreme Court and European Court of Justice Tax Jurisprudence." The conference was sponsored by the Law School, the European Union Center, and Harvard Law School's Fund for Tax and Fiscal Research. Attendees from Europe included Michel Aujean, the principal tax official at the EU Commission, Servaas van Thie1, chief tax advisor to the EU Council, Michael Lang (Vienna) and Kees van Raad (Leiden), who run the two largest tax LL.M. programs on the European continent, and many other distinguished guests. The U.S. contingent included Michael Graetz of Yale Law School, Alvin Warren of Harvard Law School, Walter Hellerstein of the University of Georgia (widely recognized as the preeminent U.S. state tax scholar), and other important academics. Michigan was represented by Professors Kyle Logue and Daniel Halberstam of the Law School, Jim Hines of the Economics Department, and myself as conference organizer. The impetus for the conference, the first of its kind, was a series of decisions by the European Court of Justice (ECJ) in the last 20 years, but with increasing frequency in the last five. In those decisions the ECJ interpreted the Treaty of Rome (the "constitution" of the EU) aggressively to strike down numerous member state income tax rules on the grounds that they were discriminatory. For example, the ECJ ruled that Finland cannot grant tax credits for corporate tax paid to Finnish shareholders, but refuse them to foreign shareholders. In another case, the ECJ struck down Germany's rules that restricted the deductibility of interest to foreign lenders, even though the rules also applied to tax-exempt domestic lenders. When we compare this line of cases to the U.S. Supreme Court's treatment of state taxes under the U.S. Constitution (most often under the Commerce Clause, but sometimes under the Equal Protection and Due Process Clauses), the difference is striking. In general, the Supreme Court has granted wide leeway to the states to adopt any tax system they wish, only striking down the most egregious cases of discrimination against out of state residents. Thus, for example, the Court has refused to intervene against rampant state tax competition to attract business into the state. It has twice upheld a method of calculating how much of a multinational enterprise's income can be taxed by a state that is widely seen as both incompatible with the methods used by the federal government and other countries, and as potentially producing double taxation. And it has allowed states to impose higher income taxes on importers than on exporters through the use of so-called "single factor sales formulas," under which a business pays tax to the state only if it makes sales to residents of the state, but not if it makes sales outside the state.

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