This paper examines the implications of Federal statutory restrictions on state government taxing powers. Such pre-emption can prevent states from pursuing policies that are best adapted to their economic circumstances and objectives, inefficiently constraining decentralized state tax policymaking. States policy choices may, however, harm the efficient operation of the US federation as a whole; in such cases, the visible hand of Federal pre-emption may lead to improved policy outcomes. Existing and proposed statutes that regulate state taxation of retail sales, retirement savings distributions, and corporation income illustrate the potential advantages and disadvantages of pre-emption.

JEL classification: H7, H1, K34

Keywords: Preemption; State Taxation; Fiscal Federalism.