Orly Mazur (SMU; Academic google) and Adam B. Thimmesch (Nebraska; Academic google), Cooperative federalism and the digital fiscal gridlock51 Fla. St. Rev. UL __ (2023):
The digital economy is changing faster than the law can respond and has challenged legal systems around the world. In the tax space, the digital economy has undermined traditional tax systems in ways that have created significant tax compliance and enforcement challenges, substantial tax revenue losses, and unwarranted market distortions between digital and traditional transactions. These problems are well recognized both in the legal literature and in the public sphere. Unfortunately, needed legal reforms in this space have been held back by a combination of technical, conceptual, and political impediments. This article focuses on the digital tax landscape at the US subnational level to demonstrate how those factors are impeding meaningful legal reform and why a novel approach to tax reform may succeed in breaking the current impasse.
The difficulty of the reform is particularly problematic in the tax context because ideally the reform includes multi-jurisdictional uniformity in fundamental aspects such as tax bases, the characterization of digital income and supply rules. Legal reform is quite complicated on a one-sided basis. Asking for uniformity in these reforms in all jurisdictions may seem almost impossible. To answer these issues, many scholars apply a fiscal federalism lens to assess whether the responsibility for reform is better placed with the US federal government than with the states themselves. However, this article does not agree that the digital fiscal gridlock can only be fixed through state or federal efforts. Instead, we argue that the conditions in this area of the law are right for lawmakers to explore a cooperative federalism framework. A cooperative federalism structure represents a compromise solution in which Congress could use its resources to encourage interstate uniformity but leave substantive tax regulation to the states. This specific type of federal intervention would better leverage the strengths of the federal and state governments, preserve state tax sovereignty, and overcome many of the shortcomings of previous digital tax reform efforts.