University of Chicago Law Review

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The decision to impose a commuter tax — a tax on income earned within the city by nonresidents — is typically made at the state level. There are both doctrinal and economic reasons for this allocation of authority. Cities are creatures of the states of which they are political subdivisions, and legal doctrine requires that they receive either state legislative or constitutional approval before exercising authority. States have jealously guarded their prerogatives over the taxing power. Perhaps there is nothing surprising about this state of affairs with respect to commuter taxes. After all, the natural stopping point for the exercise of unrestricted local authority is legislation that imposes significant externalities. Since, by definition, the commuter tax falls on nonresidents, the predicate of external effects appears to be satisfied. The underlying assumption is that the state legislature, which represents both city residents and commuters, is in a better position than the levying city to determine whether, in the absence of such a tax, commuters confer benefits on the city that sufficiently offset the costs they impose. In this Article, I accept the principle that the decision to tax should be allocated to that level of government that is best positioned to balance the social costs and benefits of the proposed exaction. I argue, however, that the workplace city, not the state, plausibly occupies that position. I contend that cities have incentives to take the external costs of commuter taxes into account, but that state representatives have fewer incentives to consider the benefits, as well as the costs of such a tax. I note that the decisionmaking structure of state legislatures creates a bias against a commuter tax, and contains few mechanisms that would induce the state to consider the net benefits that a city would enjoy from the tax. Finally, I suggest that a commuter tax could be a more appropriate means of defraying costs imposed by commuters than alternative fiscal instruments. Thus, I tentatively conclude that cities should be entitled to authorize the imposition of a commuter tax without prior state authorization.