West Lynn Creamery and the Constitutionality of State Tax Incentives

One of the more perplexing questions that has surfaced from time to time in the state tax field is how a constitutionally benign tax incentive program designed to attract industry to a state is to be distinguished from an unconstitutionally discriminatory taxing scheme that “forecloses tax-neutral decisions” and “provides a direct commercial advantage to local business.” On one hand, the U.S. Supreme Court has expressed the view that its decisions do “not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry.” On the other hand, the Court has frequently invalidated state tax regimes which were designed to do just that. This article analyzes the Supreme Court’s decision in West Lynn Creamery v. Healy, in which the Court struck down a Massachusetts milk pricing and rebate program that required milk dealers to make “premium payments” for milk sold in the state, but earmarked these payments for payments to Massachusetts milk producers. The Court drew heavily on its state tax precedents in holding that the Massachusetts pricing and rebate program discriminated against interstate commerce in violation of the Commerce Clause. The article considers the implications of this decision for the constitutionality of state tax incentives