Lending a Helping Hand: Two Governments can Work Together (Federal-State Tax Relations‪)‬

INTRODUCTION States rely heavily on the federal income tax regime; however, they also reflect their own preferences, for example, by legislating deviations from federal taxable income. These differences in taxing systems have created a compliance and administrative burden that is exacerbated by the mobility of modern businesses and individuals and by the growth in businesses that operate across many state lines. Taxpayers have to deal with both state and federal tax systems, and the burden is even greater for multi-jurisdictional businesses as they deal with several states" tax regimes. Furthermore, economic inefficiencies can arise when changes in the federal law affect states (e.g., vertical externalities) or when changes in one jurisdiction have consequences on others (e.g., horizontal externalities). (1)