Commerce Clause Constraints on State Business Location Incentives

Abstract

Over the past several decades, states and municipalities in the United States have engaged in an accelerating competition to reward business location and investment through the use of a wide range of financial incentives, notwithstanding overwhelming evidence of the minimal efficacy and the high costs of such incentives. This interstate competition for economic activity is reminiscent of the eighteenth-century tariff wars among the states that were a primary impetus behind the crafting of the U.S. Constitution and its assignment of responsibility for the regulation of interstate commerce to the federal government. Over the ensuing centuries, the courts have consistently applied the Constitution's Commerce Clause to constrain parochial state measures that interfered with the free flow of commerce in a national common market.

This article considers whether, and to what extent, the Commerce Clause limits the ability of states and localities to engage in the incentive competition that has proliferated in recent decades. In particular, I argue that well-established Commerce Clause principles forbid a wide range of the location-based tax incentives that states and localities offer to businesses. At the same time, it is important to recognize that judicial application of the Commerce Clause offers, at best, a blunt instrument for addressing the challenges of interstate competition for business investment. This article will also canvass a range of limitations and shortcomings of this constitutional constraint on governmental efforts to intervene in business location decisions.