The federal role in state taxation: A normative approach

Federal intervention in state taxation is normatively supportable when state tax policies generate negative externalities or result in excessive compliance burdens. States usually do not have sufficient incentive to cooperate to eliminate these distortions, and state cooperative cartels tend to break down over time. Although the national government can in principle correct for these defects, it similarly lacks the incentive in many instances to adopt efficiency-enhancing corrective measures. One promising approach is efforts such as the International Fuel Tax Agreement or the Streamlined Sales Tax Project, which reinforce (or seek to reinforce) state cooperative initiatives with federal mandates or incentives.