|Moving State Tax Systems Into the 21st Century
In the past year, a few states have released recommendations of tax commissions formed to study tax system modernization. What have they learned?
March 12, 2009
It is not uncommon for governors or state legislatures to form commissions to study possible tax system improvements. Public hearings are held, people submit ideas and a report is issued. Sometimes the report is actively discussed by the legislature and other times it is ignored. In recent years, commissions have often been directed to find ways to bring the tax system into the modern era of global business and digital goods. This article looks at recent state tax commission activities.
Abundance of Reports
There are numerous reports of state-tax commissions. Some commissions were charged with looking at an entire tax system, while others at a particular area, such as telecommunications taxes. A 2002 report from the Washington State Tax Structure Study Committee included a summary of recent reports of nine other states. It found that most were prompted by either concern over high taxes or budget shortfalls (Appendix F (PDF)). A list of most state-tax reports can be found at the National Conference of State Legislatures Web site. The NCSL notes that a majority of states have issued reports since 2000.
State tax study work of recent years has often focused on changes needed to modernize a state's tax system. Recommendations vary from state to state depending on their current system and the nature of existing problems. For example, while several states have proposed reducing their corporate income tax, a Wyoming tax commission, proposed an income tax to help address budget deficits and an inequitable structure that relied too heavily on regressive taxes.
Following are summaries of recent tax commissions that focused on tax system modernization:
Several recent state tax commissions have focused on ways to improve the competitiveness of the state's tax system in addition to the reports listed above. Examples include:
Relevance of a 21st Century Focus
No doubt, today's economy is much different than what existed when most state tax systems were created decades ago. Businesses of all sizes are more likely to be global, borders and physical location are much less important to business operations, some tangible products can be delivered in digital form and capital and labor are more mobile. Some of the issues that exist in state tax systems that warrant review include the following:
Supporting businesses in a global economy: The Minnesota Tax Commission summarized the problem of outdated state tax systems as follows:
"State tax systems are not only failing to keep up with dramatic shifts in the U.S. and world economies, but are a drag on economic growth." (2009 Report (PDF)).
New inequities: Sales taxes in most states have also become outdated as they primarily only apply to tangible personal property despite increased personal consumption of services and digital goods. Inequities for consumers and providers can result from taxing some forms of consumption but exempting others despite similar outcomes (e.g., purchasing a song on a taxable DVD versus a nontaxable digital download).
Technological changes: Tax structures that may have made sense decades ago may no longer meet principles of sound tax policy due to changes in society, technology and the economy. For example, years ago when telecommunications involved regulated providers of land line services, telecom taxes may have made sense. However, today's practices of bundled services, billing based on time rather than distance and mobile users makes telecommunications taxes outdated and inefficient. Similarly, changes in energy sources for vehicles makes the gasoline excise tax for funding road maintenance outdated.
There is no shortage of studies on state tax systems. Many of the proposed changes are significant, such as repealing the corporate-income tax. Thus, despite strong reasons given for such bold reforms, change is unlikely to be enacted soon given today's state budget shortfalls.
Several of the tax commissions have included tax practitioners. In addition to that role, practitioners can play a role in the reform work by keeping abreast of the recommendations, helping clients to understand them and working with policymakers to modernize tax systems to better promote economic growth within the principles of good tax policy.
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Annette Nellen CPA, Esq., is a tax professor and Director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA's Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.