Tax Policy

The reach of the Internet into the lives of Americans, particularly in the area of commerce, continues in near-limitless fashion and will, undoubtedly, expand even further in the future. The Internet, however, has exposed a gaping structural chasm in state tax and revenue systems that will only continue to widen unless policymakers, primarily at the federal level, initiate remedial action. 

State tax performance since 2008 shows that effects of recessions on revenues can last five years or more. Policymakers planning for potential revenue shortfalls must consider relatively long time periods. This article addresses two key revenue policy issues. First, it provides a brief summary of state tax revenue performance during the past several years, with a focus on how collections stand relative to their previous peak. This section shows the relative revenue performance for state governments in aggregate since 2008. Second, it describes key sales tax issues associated with the dramatic movement towards digitization and identifies some policy options.

More than 76 percent of North Dakota voters said “no” to abolishing the state’s property tax in yesterday’s initiative vote. The proposal – also called Measure 2 – would have amended the state’s constitution and made North Dakota the only state in the U.S. without a property tax. Opponents of the measure said that ending the property tax would drain the state fiscally: the tax represents 23 percent of North Dakota's state and local tax revenue. Proponents argued that the tax was a burden to homeowners and inhibited economic growth opportunities.

Voters in California turned back an effort to add $1 to the cost of a pack of cigarettes. The rate increase would have been the first one in California since 1998. Without the increase, California’s 87 cent tax remains well below the current national average of $1.46 per pack.

Revenues from the tax, Proposition 29 on California’s June 5 ballot, would have supported medical research on tobacco related diseases and programs to prevent and control tobacco use. First year collections were estimated at $735 million.

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With Congress considering bipartisan legislation to allow states to enforce online sales tax collection, state leaders participating in The Council of State Governments’ National Leadership Conference in La Quinta, Calif., discussed this critical issue May 19.

Washington Rep. Ross Hunter says he’s a nuts-and-bolts type of guy when it comes to tax policy. He didn’t understand why his state would have a tax policy that focuses on bricks-and-mortar stores—whose sales are flat—and not concentrate on collecting taxes from online retailers, whose sales grew 15 percent last year. “For Washington state, this is somewhere between half (a billion) and a billion dollars in revenue a year that we are losing to (online) sales,” Hunter said. “We don’t have an income tax. … It’s a huge deal for us. Our annual budget is in the $15 billion range. Half to a billion dollars is real money.”

At the recently concluded National Leadership Conference held in La Quinta, California, the CSG Executive Committee approved eight policy resolutions on a wide range of topics, including export promotion, preventing Medicaid fraud, exploring a telehealth interstate compact, state sales taxation on e-commerce, and the Mercury and Air Toxics Standards rule.
 

States' ability to tax Internet-based transactions has remained a topic of heated debate in the 20 years since the Supreme Court ruled that states could not compel merchants without "substantial nexus" within their boundaries to collect and remit sales taxes. Three separate bills that could allow states to begin imposing sales taxes on Internet transactions are working their way through Congress. This session will include discussion of those bills and the potential impact any legislation may have on state budgets.

 NOW, THEREFORE BE IT RESOLVED, that The Council of State Governments supports efforts by Congress to regulate e-commerce through legislation that allows states to enforce their existing sales and use tax laws, regardless of the method of transaction, and to collect taxes under state law. 

The U.S. House of Representatives on Tuesday, May 15, considered H.R. 1864, known as the Mobile Workforce State Income Tax Simplification Act. The bill would limit a state’s ability to tax the income of nonresidents if they work in the state for 30 days or less.

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