The movement of people and the movement of money are often discrete. As such, governments can address the effects of each separately. Because residence provides a general jurisdictional basis for state personal income taxation, however, money often moves with people. States must disentangle the two to prevent tax base erosion and improve distributional equity, particularly with many highnet-worth individuals migrating to states with more favorable tax regimes. A state exit tax may be the answer.

This Article begins by examining exit tax theory and advancing novel applications of theories that support subnational exit taxation, both domestically and internationally. With a robust theoretical and technical foundation, this Article turns to state and local exit tax design. This discussion examines constitutional constraints to address specific tax base migration challenges focusing on the justifications, distributional impact, and optimal exit tax design features to address each situation.

If a state has a solid theoretical foundation and incorporates proper design principles, as this Article provides, an exit tax can effectively mitigate tax base migration while aligning with prevailing policy goals and avoiding constitutional infirmities.

In October 1998, Congress enacted the Internet Tax Freedom Act (ITFA), a temporary three-year “moratorium” on the enactment of new state and local “taxes on Internet access” and on “multiple or discriminatory taxes on electronic commerce.” After extending the act temporarily several times, Congress, in 2016, finally and controversially struck the language temporarily extending the act, thereby making it permanent.

With its idiosyncratic legislative history and statutory language, as well as the recent attention it has received in connection with legal challenges to digital services and analogous taxes, we thought it would be appropriate to commemorate ITFA’s 25th birthday by reviewing the act and the litigation it has spawned and to consider whether it is “fit for service” in today’s digital economy.

The binary legislative choice between state and federal regulation of a firm’s internal affairs is deeply entrenched in the existing literature and policy discussions. Alas, this regulatory menu contains a false and distortive dichotomy. The state-federal dichotomy is false because multistate formation and regulation of business entities are possible as well. This dichotomy is distortive because it deprives policymakers of the advantages of multistate corporations and other business entities. In this Article, we demonstrate that a multistate business entities regime can resolve multiple predicaments that presently bring about unfairness and inefficiencies in both business entities law and business entities taxation.

A multistate business entity regime promises to be beneficial for both the participating states and the business entities themselves. For example, by choosing to co-compete, states that have so far lost in the market for corporate charters would be able to generate—and divide among themselves—substantial business and tax revenues by offering the corporations formed under their regime unique tax and corporate law benefits. In this way, for example, a “tri-state” co-op, offered by New York, Connecticut, and New Jersey, could compete with Delaware; and a “rust belt” coalition could retain industry charters within its multistate jurisdiction.

The hitherto unnoticed potential for a multistate entity regime aligns with the Framers’ vision for state cooperation under the Constitution’s Compact Clause. Further yet, setting up this regime would vastly improve the functioning of the market for both corporate charters and other business entities. This regime would allow states to vigorously compete for both managers and investors, boost stakeholder advocacy, and accomplish ESG goals to the benefit of their constituents.