Suppose a state taxes corporations through an income-based franchise tax. It's finally pressured by jurisdictional competition – indeed, by every other state – to have a limited liability company statute. If you allow the LLC, you need to make sure that everybody's not going to just switch to that to avoid the corporate franchise tax. But you can't have the same tax for LLCs as for corporations because of the difference between the two regarding double taxation.
Well, California addressed this by enacting a gross receipts tax that did not apportion for receipts outside California. A lower state court struck this down under the Commerce Clause. (HT, Paul Caron).
Lesson: competition between jurisdictions and among business forms restricts states' regulatory and tax options. Here's my latest on this general topic.
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