This week, Jeff Gordon (Vanderbilt, Google Scholar) reviews Daniel Hemel (NYU, Google Scholar) and Adam Kern (University of San Diego, Google Scholar), Separation of Bases and the Fiscal Constitution, 105 Tex. L. Rev. _ (forthcoming 2027).

Daniel Hemel and Adam Kern have written an ambitious article that aims to reshape our understanding of the relationship between the federal and state-level tax powers. The target of their analysis is the “separation of bases” principle—the idea that each level of government in a federal system should have its own exclusive tax base. Hemel and Kern argue that the principle’s two traditional justifications, efficiency and federalism, are both weaker than generally assumed. They then offer a game-theoretic replacement that reframes a surprising range of doctrinal and policy issues.

The article opens with a rich and entertaining historical tour, tracing the separation of bases principle from the founding era through Moore. The contested limitations on federal tax power—most evident in the perennially unclear concept of a “direct tax”—make more sense when understood in relationship to states’ protectiveness over their own taxing powers. Hemel and Kern are particularly attentive to the history of federal-state cooperation on tax enforcement. I found the recounting of Prohibition-era alcohol taxation very interesting: federal collection of liquor excise taxes in dry states angered prohibitionists because the federal government refused to share collection information with state prosecutors, who would have used it to shut the trade down. As that episode suggests, federal enforcement can contribute to or undermine state priorities, and the authors deploy this insight deftly to set up their main analytical move.

The central move turns on a distinction between two fiscal externalities. The first, more familiar in the literature, is a negative rate externality: when both governments tax the same base, each rate increase shrinks the revenue available to the other, producing a tragedy of the fiscal commons. The second, drawn from a smaller and more recent literature, is a positive enforcement externality: one government’s enforcement efforts (e.g., audits, valuation assessments, or information reporting) make enforcement easier for the other government. The authors propose a “relative externalities principle”: base separation is efficient only when the rate externality dominates the enforcement externality; by contrast, when the enforcement externality dominates, sharing the same tax base is actually preferable.

In light of the conflicting externalities, the question is under what conditions would the federal government and the states prefer to share tax bases versus divide them up. Hemel and Kern analyze this question through a game-theoretic model. They set up a two-stage game to be played between the federal government and a representative state. In the constitutional stage, the two governments bargain for whether to place any constitutional restraints on their taxing powers. And then in the legislative stage, each government simultaneously decides which base to tax—for simplicity, either income or property. By hypothesis, the federal government has a slight preference for income while the state has a slight preference for property. If both parties expect the rate externality to dominate, they will want to tax separate bases. If both parties expect the enforcement externality to dominate, they will want to coordinate on the same base, but they may disagree on which one to choose. Hemel and Kern’s most striking observation is that, either way, it would be strategic for the federal government to bind itself against taxing property. That way, when it turns out to be convenient for both parties to share a base, coordination will have to occur on the federal government’s preferred terms: sharing the income tax. They show that this result will be acceptable to the state because it insures against a worse outcome where the parties try but fail to coordinate, even if it is not the state’s most-preferred outcome overall.

The conclusion that the federal government’s dominant strategy is to bind itself against taxing property unlocks a fascinating set of conclusions about constitutional law and ordinary tax policy. On this reading, the Direct Tax Clauses are not protection for the states; they are self-interested federal strategy. The authors further observe that even beyond constitutional commitments, Congress could nudge states in the direction of whichever base the federal government prefers via tweaking the SALT deduction to make different forms of state taxes more and less attractive. They also connect their framework to the foreign tax credit and the OECD global minimum tax—in various settings, one jurisdiction can steer other jurisdictions to its preferred tax in order to benefit from the enforcement externality.

The argument is extremely elegant, but it rests heavily on a symmetry assumption that deserves more pressure than the article gives it: that enforcement externalities flow in both directions. The key premise behind the game theory is that, at least in many realistic states of the world, both governments benefit from the other’s enforcement. The case is clear that states benefit from federal income tax enforcement. And it is plausible that a hypothetical federal property tax would benefit from state and local enforcement, insofar as those actors might have an advantage in property tax assessment. But I have not yet seen evidence that the federal government substantially benefits from state income tax enforcement.

Hemel and Kern cite a number of examples that establish the reverse relationship, where the states incorporate federal income tax concepts and reporting requirements. The one study claiming a state law effect on federal tax avoidance pertains to a New York whistleblower law passed in 2010, but that study does not control for any federal tax law changes in the same period, in particular, substantial changes to the IRS whistleblower statute passed in 2006 and regulations finalized in 2014. More generally, it is tricky to articulate a mechanism by which state income tax enforcement, with its narrower audit reach and reliance on federal computation of adjusted gross income or taxable income, could produce meaningful federal enforcement gains. I do not mean to rule out any possibility of state-to-federal synergies—there probably are some, however difficult to measure—but I do think the limited evidence might call into question whether a rational federal government would value the enforcement externality as a consideration in constitutional bargaining.

If enforcement spillovers are asymmetric, an additional reading of the Direct Tax Clauses could come into play. The Clauses might be interpreted as a straightforward victory for the states: not for the traditional tragedy of the commons reason, but because the states get coordination on the base where federal capacity helps them (income) without coordination on the base where state enforcement machinery would have been conscripted into federal service (property). Of course, the story might not be quite so clean, because federal property taxation would likely spill over and help the states as well. Still, the main point is that the states seem to benefit much more from income tax coordination than the federal government does, so the Direct Tax Clauses redound to their benefit. This conclusion would not be visible without Hemel and Kern’s clarifying “relative externalities” framework, even if it is not the precise one they endorse. This article figures to be the leading theoretical treatment of tax base separation in federal systems going forward.

Here is the rest of this week’s SSRN Tax roundup:

Grace Ifeoluwa Aruwajoye (U. Lagos), Taxation Policy Considerations: The Effect of the Provisions of the Petroleum Industry Act on Investments in Nigeria (Nov. 10, 2024)

Reuven Avi-Yonah (Michigan), Should the Ordinary Income Rate Apply to Carried Interest? (Apr. 28, 2026)

Mohamed El Bachir Berroho (Independent), From Methodology to Legality: Rethinking Transfer Pricing Disputes in Morocco (Apr. 30, 2026)

Nikhil Daswani (Independent), Keeping Circular 230 in the Middle (Mar. 20, 2026)

Can Eken (Durham U.), Costs and Funding Investment Arbitration Cases: What Are the Problems? What Are the Solutions? (July 15, 2026)

Andrea Ghanimah (Iowa) et al., Tax Policy Whiplash: Recent Tax Developments and Questions They Raise (Apr. 30, 2026)

Tarun Jain (Supreme Court of India), Interjecting Unilateral Indian GAAR Inquiries in Cross-Border Setting: Revisiting Tax Normativism Post Tiger Global (Apr. 24, 2026)

Tarun Jain (Supreme Court of India) & Kushagra Devan Malpani (Supreme Court of India), Supreme Court on Redistribution of Community Resources: Realizing Dr. Ambedkar’s Vision of Economic Justice (Apr. 14, 2026)

Yoshihiro Masui (U. Tokyo), Japan’s Corporate Income Tax: 1995–2021 (Nov. 5, 2021)

Yoshihiro Masui (U. Tokyo), The Role of Residence-Based Taxation in Business Income Taxation (Apr. 14, 2026)

Shu-Yi Oei (Duke), Arthur Cockfield’s Digital Economy: A Retrospective Analysis, Can. Tax J. (forthcoming 2026)

Krativ Raj Pathak (Jagran Lakecity U.), A Comparative Study of the Income-Tax Act, 1961 and the Income Tax Law, 2025 (Apr. 24, 2026)

Kodandaraman Sethuraman (Indian Law Institute New Delhi), Designing a Mechanism for the Levy of Multiple Goods and Service Taxes, Duly Aiming to Serve the Public Interests (Apr. 30, 2026)

Poonam Khaira Sidhu (Independent), MNE Roadkill? Why Pillar 2 Survives with or Without the U.S. (May 19, 2025)

Poonam Khaira Sidhu (Independent), Substance Wins: The Development of Fixed-Place PEs in India (Sept. 1, 2025)