Expert: Now Is the Time to Improve State Tax Structures

Capitol Ideas Growth and Prosperity Special Edition / April 21, 2011

Just about every state’s corporate taxes leak like a sieve and their sales taxes are “riddled with inefficiency and waste,” Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut and a nationally recognized tax expert, said.

In fact, Pomp added, there should be a sign at each state’s airports inviting tax lawyers to “pick our pockets.” Pomp was one of the featured speakers during the “Challenges to State Revenue Structures and Response to Revenue Reductions” session during The Council of State Governments’ Growth and Prosperity Virtual Summit of the States.

“We have given away the store and it’s hard to get it back,” Pomp said of state tax policies. “… The current (state fiscal) crisis really gives us the opportunity to clean up our act. We have met the enemy and it is us.”

Pomp called for states to be more transparent when it comes to spending and taxing policies, particularly with tax credits, special exemptions and deductions given to companies to entice them to set up shop in a state. Companies that receive such exemptions or credits, he said, should be required to report in one document the value of the exemptions and how much the business pays in state taxes so people can see what they’re getting for their money.

Pomp said he doesn’t believe states create many jobs by offering companies tax credits or exemptions to relocate a facility. “There’s about 30 to 40 years worth of literature on the subject that shows it just doesn’t work,” he said. “It isn’t efficient.”

Rep. Jim Fannin of Louisiana, chair of the House Appropriations Committee, said he would like to get out of the tax incentive game, but that’s hard to do when it is such a widespread practice among states.

“It’s popular; it looks good,” Fannin said. “I don’t see how we can stop it now since it seems to be that runaway train. … It just doesn’t seem to me, as a representative, that we’re actually getting what we should be getting for the dollars that we’re spending. Consequently, it leaves us short when we have to have the dollars for the needed services.”

Fannin said one area Louisiana policymakers are looking at for increasing revenue is how to capture the sales tax due to the state through purchases made at online-only stores by residents. He estimates if the state could capture that income, it could mean an additional $300 million to $500 million annually. That would go a long way toward solving the state’s projected $1.6 billion budget deficit for the next fiscal year.

Pomp said online sales taxes are a hard nut for states to crack. Some online-only retailers have been fighting state efforts in court or simply pulling out of states trying to enforce state sales tax laws. One option, he said, could be for legislation that would require these retailing giants to provide a list of residents and the dollar value of merchandise to state tax departments. That would leave the state with the responsibility of collecting the taxes owed.

“That’s a reasonable way to proceed,” Pomp said. “… The stakes are so high, almost anything you can do will invite litigation. That should not make us gun-shy.”

Pomp stressed that now is the time to make much-needed changes to state tax structures, even though it will be painful for many.

“We have a tremendous opportunity in front of us,” he said. “We don’t have to reinvent the wheel. The best practices have been known for years. … Anyone who has been in this field could sit for 30 minutes and sketch out a couple million dollars’ worth of proposals to make the tax system more fair. … What we need is the backbone.”