States Cannot Tax Foreign Income Twice, ALEC Tells Supreme Court

The American Legislative Exchange Council filed a brief, amicus curiae (friend of the court), with the U.S. Supreme Court in a case entitled Steiner v. Utah State Tax Commission. The brief supports the Steiner’s request that the Court hear the case. The central issue in the case is whether the Constitution’s Commerce Clause prohibits states (in this case, Utah) from double taxing income the Steiners earn from foreign companies they own.

The Steiners pay taxes on the income where it is earned. Under federal law, the federal government provides a credit, or adjustment, making sure that the Steiners are not taxed twice on the same amount. But Utah does not offer this credit for the state income taxes. The result is that Utah taxes the full income earned. For example, if someone earns $200,000 from a foreign business they own in France, France will tax the income at 45%. The federal government will allow that person to claim the $90,000 earned as a credit against the federal taxes owed, but Utah will not and will collect its income tax from the entire $200,000 earned. This means that the $200,000 is taxed both by France and Utah.

Double taxing income can be a powerful disincentive for those who want to invest in, or expand their businesses to, foreign countries. And Utah’s practice discriminates against foreign investments. Utah does offer a credit—as is required by law—for income earned in other states.

This double taxation can have significant negative impacts on the economy. As stated in the brief:

ALEC legislative members have seen and understood that states following certain fundamentals of tax policy will produce economic growth. Among other principles, a state should have “[a]n effective tax system [which is] broad-based, utilize[s] a low overall tax rate with few loopholes, and avoid[s] multiple layers of taxation through tax pyramiding.” Any state tax scheme should be based on equity and fairness, which means that it should not be used to “engage in discriminatory or multiple taxation.”

A state’s tax scheme should be guided by the principle of competitiveness. The means that “[a] low tax burden can be a tool for a state’s private sector economic development by retaining and attracting competition from other states… Effective competitiveness is best achieved through economically neutral tax policies.”

See ALEC’s Principles of Taxation.

The Commerce Clause in the Constitution prohibits states from discriminating against foreign income, double taxing foreign income or potentially setting national policy through state tax policy. The Utah Supreme Court ignored U.S. Supreme Court cases saying as much. The Utah Supreme Court’s opinion could also be read to deny that the Commerce Clause protects individuals from overzealous state tax policy. One of the cases the Utah Supreme Court ignored was a 2016 case entitled Comptroller of the State of Maryland v. Wynne. In the Wynne case, the U.S. Supreme Court determined that a state policy of discriminating against income individuals earned in other states violates the Commerce Clause.

Wynne is important because the Founders intended for the Commerce Clause both to empower the federal government to protect interstate commerce, but also to preempt any state efforts to establish foreign trade policy, especially tax policy. The Founders wanted to standardize international commerce and prevent states from imposing their own taxes on it.

The brief expresses the importance of reversing the Utah Supreme Court and the need for the U.S. Supreme Court to address this important issue. Over half of the states provide credits or adjustments for income earned outside this country. But a large number of states do not. State legislators need guidance from the Court so that they can craft and implement proper tax policies.

Skip Estes, Legislative Manager in the Center for State Fiscal Reform, provided invaluable assistance compiling the policy arguments set forth in the brief. His research really helped advance the ALEC narrative in the brief, explaining why state legislators need the Court’s final determination on the issues presented.