Policy Experimentation

allows the states to conduct regulatory experiments.154

Even when residents of all states agree on a particular policy goal, there may be different ways of achieving it. Similarly, if a problem shared by all the states has different causes in different locations, then the most effective strategy for combating that problem will differ regionally. For example, although residents of many states may share the goal of reducing reliance on fossil fuels, each state’s tax incentives should promote the use of alternative energy resources appropriate to that state’s particular climate and energy consumption profile. By adopting broadly targeted federal tax incentives for green

151. Kelo v. City of New London, 545 U.S. 469, 482 (2005) (“Viewed as a whole, our jurisprudence has recognized that the needs of society have varied between different parts of the Nation, just as they have evolved over time in response to changed circumstances. Our earliest cases in particular embodied a strong theme of federalism, emphasizing the ‘great respect’ that we owe to state legislatures and state courts in discerning local public needs.” (quoting Hairston v. Danville & W. Ry. Co., 208 U.S. 598, 607 (1908))); Wallace E. Oates, An Essay on Fiscal Federalism, 37 J.ECON.LITERATURE 1120, 1121–22 (1999) (noting that fiscal federalism combines the federal government’s financial power and stability with the states’ abilities to know what the public needs).

152. Because state tax rates are lower than federal tax rates, state tax subsidies that take the form of deductions or exemptions have a smaller incentive effect than their federal equivalents. Nevertheless, if states go to the trouble (and revenue expense) of providing tax subsidies at all, they have an interest in ensuring that those subsidies are as efficient as possible.

153. See generally TAQUESHA CAIN, INTERNAL REVENUE SERV., INDIVIDUAL INCOME

TAX RETURNS, BY STATE, 2007 (2011), available at http://www.irs.gov/pub/irs- soi/11inbystatesprbul.pdf (analyzing and reproducing data from the IRS’s Statistics of Income Bulletin showing differences across states in taxpayers’ claims for tax expenditures).

154. See New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting) (reasoning that states may devise different ways to pursue similar policy goals, thus serving as “laborator[ies]” for “social and economic experiments”).

technologies through incorporating the federal tax base, however, states miss the opportunity to incentivize technologies that are particularly effective for their state. Many states have enacted their own energy tax incentives in addition to those they incorporate from the federal government.155

For example, Arizona subsidizes solar energy,156 and Montana subsidizes geothermal energy.157 But to the extent that states use these tailored credits in addition to, rather than as a substitute for, federal one-size-fits-all solutions, they risk wasting revenue on inefficient subsidies.158

Moreover, state-level tax policies may conflict with federal tax policies imported into state law by incorporation. For example, Georgia’s deviating tax incentive for low- and zero-emission vehicles coexists with its federally derived “SUV loophole,” which allows expensing of a significant portion of the cost of heavy, low-mileage vehicles used in a trade or business.159 Georgia imported the federal SUV loophole by incorporating (without deviation) the federal calculation of business income.160

155. See OLIN &SWAIN, supra note 17, at 6 (noting that thirty-eight states provide energy or environmental credits).

156. ARIZ.REV.STAT.ANN. § 43-1085 (2006 & Supp. 2012) (providing a tax credit for installing a solar energy device in a residence).

157. MONT.CODE ANN. § 15-32-115 (2012) (providing a tax credit for installation of a geothermal heating or cooling system in a principal dwelling).

158. Generally, states enact their own green credits in addition to the green tax incentives that they import from the federal tax base. Individuals can take advantages of federal energy credits covering a wide variety of technologies, including biomass stoves, insulation, geothermal pumps, wind turbines, solar and fuel cells, energy-efficient HVAC units and water heaters, and energy-efficient cars, such as fuel cell, hybrid, and electric cars. See JOINT COMM. ON

TAXATION, TAX EXPENDITURES FOR ENERGY PRODUCTION AND CONSERVATION 5–9 (2009) (listing federal credits for energy efficiency available to individuals). But see Roberta F. Mann, Federal, State, and Local Tax Policies for Climate Change: Coordination or Cross-Purpose?, 15 LEWIS &CLARK L. REV. 369, 386–91 (2011) (arguing that the failure of federal and state governments to coordinate their responses to climate change results in inefficiencies and conflicts).

159. Compare GA.CODE ANN. § 48-7-40.16 (2009) (providing Georgia taxpayers with tax credits for zero- and low-emission vehicles), with I.R.C. § 179 (2006) (allowing immediate expensing of up to $25,000 for the costs of SUVs weighing 14,000 pounds or less and not covered by § 280F), and id. § 280F (restricting depreciation deductions for “luxury automobiles” weighing 6,000 pounds or less). See generally Lawrence Zelenak, The Loophole That Would Not Die: A Case Study in the Difficulty of Greening the Internal Revenue Code, 15 LEWIS &CLARK

L.REV. 469, 473–79 (2011) (giving the history of the federal SUV loophole). Professor Zelenak remarks that “[a]lthough the SUV loophole is neither the most economically significant nor the most environmentally damaging of the Internal Revenue Code’s offenses against the environment, it is among the most transparent and the most outrageous.” Id.

160. See OLIN &SWAIN, supra note 17, at 22 (indicating that Georgia does not deviate from the federal calculation of business, rent, or farming income); see also GA.DEP’T OF REVENUE, FORM 500,INDIVIDUAL INCOME TAX RETURN 5 l. 3 (2010), available at https://etax.dor.ga.gov/