Coming Today in this Coming Today in this Presentation - - PDF document

4/22/2009 1

State Taxes and Economic Turmoil

April 30, 2009 Albuquerque

by by

Jim Eads Jim Eads Executive Director Executive Director Federation of Tax Administrators Federation of Tax Administrators

a presentation to the a presentation to the

6th Annual NMTRI Tax Policy Conference

The information presented herein represents the views of the presenter only and are not necessarily those of NMTRI or the Federation of Tax Administrators or its members.

Coming Today in this Coming Today in this Presentation Presentation

 Principles of a Good Tax System Principles of a Good Tax System  Economic Turmoil: Opportunity or Armageddon? Economic Turmoil: Opportunity or Armageddon?  Economic Stimulus: Are we there yet? Economic Stimulus: Are we there yet?  Federal legislation affecting state taxation: Federal legislation affecting state taxation: Good, Bad or Ugly? Good, Bad or Ugly?  The Fundamental Problem The Fundamental Problem

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Principles of a “Good” Tax System Principles of a “Good” Tax System

 Taxes should be adequate to provide an appropriate level of those goods Taxes should be adequate to provide an appropriate level of those goods and services best provided by the public sector, such as education, public and services best provided by the public sector, such as education, public safety and transportation. safety and transportation.  Taxes should do the least harm to the private economy. Taxes should do the least harm to the private economy.  Tax bases should be as broad a possible so that tax rates can be as low Tax bases should be as broad a possible so that tax rates can be as low as possible. as possible.  Taxes should not only be fair and equitable towards individuals and Taxes should not only be fair and equitable towards individuals and businesses similarly situated, but also they must be perceived as fair by businesses similarly situated, but also they must be perceived as fair by

• taxpayers. Individuals with the same income level should bear the same
• taxpayers. Individuals with the same income level should bear the same
• r similar tax burden. Businesses engaged in similar commercial activities
• r similar tax burden. Businesses engaged in similar commercial activities

should be subject to the same level of taxation. should be subject to the same level of taxation.

Principles of a “Good” Tax System (2) Principles of a “Good” Tax System (2)

 Taxes should not be costly for government to administer and should be Taxes should not be costly for government to administer and should be easily understood by taxpayers so as to maximize taxpayer easily understood by taxpayers so as to maximize taxpayer understanding and minimize taxpayer compliance costs. understanding and minimize taxpayer compliance costs.  Taxes should be evaluated on the basis of the impact of all taxes levied Taxes should be evaluated on the basis of the impact of all taxes levied

• n taxpayers, not just a single tax or tax rate.
• n taxpayers, not just a single tax or tax rate.

 Deviations from sound tax policy in pursuit of economic development, Deviations from sound tax policy in pursuit of economic development, social or other goals should be well social or other goals should be well-reasoned and implemented only reasoned and implemented only when established tax policies are not significantly undermined and the when established tax policies are not significantly undermined and the results of such deviations can subsequently be evaluated. results of such deviations can subsequently be evaluated.

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State Revenue Performance by Tax State Revenue Performance by Tax

Source: Nelson A. Rockefeller Institute of Government

Sales Tax Revenues: Sales Tax Revenues: Some Reports from the States Some Reports from the States

 down down 8.63% from February 2008 8.63% from February 2008  1.2% 1.2% below below  down down 10.3% 10.3%  down down about 5% about 5%  down down about 8 percent about 8 percent  down down 6.9% 6.9%  down down in February from the previous February by 11.2% in February from the previous February by 11.2%  YTD we're YTD we're down down about 5% about 5%  down down 7.9% from February 2008 7.9% from February 2008  down down 18.5% from February 2008 18.5% from February 2008

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Economic Turmoil: Opportunity or Economic Turmoil: Opportunity or Armageddon for the States? Armageddon for the States?

 State Tax Revenues are Declining State Tax Revenues are Declining – Deficits are Prohibited Deficits are Prohibited  Corporate Income: UDITPA Revision, Combined Corporate Income: UDITPA Revision, Combined Reporting, Single Sales Factor, Incentives, De Reporting, Single Sales Factor, Incentives, De-Coupling, Coupling, Penalties Penalties  Reserves: Draw down Reserves: Draw down  Tax Increases: Tobacco, Sin, Fees, “Temporary” fixes, Tax Increases: Tobacco, Sin, Fees, “Temporary” fixes, Amnesty Amnesty  Spending Cuts: Layoffs, Furloughs, Salary reductions Spending Cuts: Layoffs, Furloughs, Salary reductions  Federal Funds Flowing to States: To take or not to take? Federal Funds Flowing to States: To take or not to take?

Tax Provisions Affecting States in the Tax Provisions Affecting States in the Economically Stimulating Legislation Economically Stimulating Legislation

 5 year (currently 2 year) NOL carry 5 year (currently 2 year) NOL carry-

• back for 2008 losses; limited to

back for 2008 losses; limited to companies with annual revenues of less than $15 million; companies companies with annual revenues of less than $15 million; companies that receive TARP bailout money from Treasury are not eligible. that receive TARP bailout money from Treasury are not eligible.  Deduction for sales taxes paid on purchase of new motor vehicles; Deduction for sales taxes paid on purchase of new motor vehicles; the deduction taken by non the deduction taken by non-itemizers will not flow through to most itemizers will not flow through to most existing state tax codes; the deduction taken by itemizers will. existing state tax codes; the deduction taken by itemizers will.  Businesses that buy equipment and make investments in plants can Businesses that buy equipment and make investments in plants can expense up to $250,000 directly from their tax liabilities. expense up to $250,000 directly from their tax liabilities.  The 50 percent bonus depreciation deduction for qualified property is The 50 percent bonus depreciation deduction for qualified property is extended by one year, applying to property placed in service before extended by one year, applying to property placed in service before 2010 and in a few cases 2011. 2010 and in a few cases 2011.

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Congress to the States: “We’re from Congress to the States: “We’re from Washington and we’re here to help you.” Washington and we’re here to help you.”

 Main Street Fairness Act Main Street Fairness Act  Business Activity Tax Simplification Act Business Activity Tax Simplification Act  Permanent Internet Tax Freedom Act of 2009 Permanent Internet Tax Freedom Act of 2009  Mobile Workforce State Income Tax Fairness Mobile Workforce State Income Tax Fairness and and Simplification Act Simplification Act  State State & Local Taxation of Electronic Local Taxation of Electronic Commerce Commerce  Cell Tax Fairness Act Cell Tax Fairness Act  State Video Tax Fairness Act State Video Tax Fairness Act  Hotels, Rental Cars, Energy: all need help from DC Hotels, Rental Cars, Energy: all need help from DC

Main Street Fairness Act Main Street Fairness Act

(S. 37; H.R. 3396, 110 (S. 37; H.R. 3396, 110th

th Congress)

Congress)

 State State that that simplifies simplifies its sale and use taxes its sale and use taxes may require may require sellers sellers not physically present in the state to not physically present in the state to collect and collect and remit that state’s use tax remit that state’s use tax  Congress consents to the Streamlined Sales and Use Congress consents to the Streamlined Sales and Use Tax Agreement Tax Agreement  Legislation is independent, Legislation is independent, but but similar to similar to the Streamlined the Streamlined Sales Tax Sales Tax Agreement Agreement  Expanded jurisdiction Expanded jurisdiction is provided is provided only to “Member States

• nly to “Member States

under the Streamlined Sales and Use Tax Agreement” under the Streamlined Sales and Use Tax Agreement” §4(a)(1) 4(a)(1)

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Business Activity Tax Simplification Act Business Activity Tax Simplification Act

(S. 1726; H.R. 5267, 110th Congress) (S. 1726; H.R. 5267, 110th Congress)

 Nexus Criteria: Employees in state for more than 14 days Nexus Criteria: Employees in state for more than 14 days  Tangible personal property in state for more than 14 days Tangible personal property in state for more than 14 days  All business activity taxes, not just net income taxes, are covered All business activity taxes, not just net income taxes, are covered  All solicitations, not just those for tangible personal property, are All solicitations, not just those for tangible personal property, are protected protected  Not just solicitation, but qualitative Not just solicitation, but qualitative de minimis de minimis activities, such as activities, such as information gathering, visiting vendor, attending media event, are information gathering, visiting vendor, attending media event, are protected protected  Only if in Only if in-

• state person is performing market

state person is performing market-

• related

related activities and has only one “principal” activities and has only one “principal”

Permanent Internet Tax Freedom Permanent Internet Tax Freedom Act of 2009 Act of 2009 (S. 43, 110

(S. 43, 110th

th Congress)

Congress)  2009 Act would make the Internet Tax Freedom Act 2009 Act would make the Internet Tax Freedom Act Amendments Act of 2007 permanent Amendments Act of 2007 permanent  Introduced January 6, 2009 and referred to Committee on Finance Introduced January 6, 2009 and referred to Committee on Finance Current law: Current law:

 Prohibits state and local taxes on charges for Internet access through November, 2014 Prohibits state and local taxes on charges for Internet access through November, 2014  Continues the grandfather protection for taxes in place prior to 1998 Continues the grandfather protection for taxes in place prior to 1998  Provides that taxes may not be imposed on intermediate purchases of telecommunications Provides that taxes may not be imposed on intermediate purchases of telecommunications by ISPs after June 30, 2008 by ISPs after June 30, 2008  Provides that gross receipts Provides that gross receipts-

• based taxes in MI, TX, WA, and OH are not considered taxes on

based taxes in MI, TX, WA, and OH are not considered taxes on Internet access Internet access

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Mobile Workforce State Income Tax Mobile Workforce State Income Tax Fairness and Simplification Act Fairness and Simplification Act

(H.R. 3359, 110 (H.R. 3359, 110th

th Congress)

Congress)

 Employers required to withhold (and employee only Employers required to withhold (and employee only taxable) in only states and localities: taxable) in only states and localities:  Where employee resides, and Where employee resides, and  Where employee is physically present performing duties for Where employee is physically present performing duties for more than 60 days during a taxable year (retroactive for more than 60 days during a taxable year (retroactive for taxability for year once threshold reached) taxability for year once threshold reached)  New Legislation that is expected to be introduced is likely to New Legislation that is expected to be introduced is likely to have a 30 day threshold have a 30 day threshold

State Video Tax Fairness Act of 2008 State Video Tax Fairness Act of 2008

(S. 3418; H.R. 3679) (S. 3418; H.R. 3679)

 Prevents the states from imposing tax at a higher “net tax rate” Prevents the states from imposing tax at a higher “net tax rate”

• n one form of multi
• n one form of multi-channel video programming distribution

channel video programming distribution services compared with another form of multi services compared with another form of multi-channel video channel video programming distribution services. programming distribution services.  The bill is primarily aimed at states that impose a sales tax on The bill is primarily aimed at states that impose a sales tax on satellite operators’ comparable gross receipts, but do no satellite operators’ comparable gross receipts, but do no impose a similar tax on cable operators’ comparable gross impose a similar tax on cable operators’ comparable gross receipts receipts

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More Federal “Help” More Federal “Help”

 Cell Tax Fairness Act (H.R. 5793; S. 3249) Cell Tax Fairness Act (H.R. 5793; S. 3249)  Discriminatory State Taxes for Automobile Discriminatory State Taxes for Automobile Vehicle Renters (H.R. 2453) Vehicle Renters (H.R. 2453)  Energy Infrastructure Tax Fairness Act Energy Infrastructure Tax Fairness Act (H.R. 5558) (H.R. 5558)  Hotel Reservations Online Intermediaries Hotel Reservations Online Intermediaries Protection and Local Tax EviscerationAct Protection and Local Tax EviscerationAct

Taxation and Public Trust Taxation and Public Trust

 “Tax reform means, Don't tax you, don't tax me. “Tax reform means, Don't tax you, don't tax me. Tax that fellow behind the tree.” Tax that fellow behind the tree.”

• Senator Russell B. Long

Senator Russell B. Long  Simultaneous Belief: Simultaneous Belief: Robust public goods and services Robust public goods and services and low or no taxes. and low or no taxes.  Result: We believe the system used to raise funds for Result: We believe the system used to raise funds for those public goods those public goods – our tax system

• ur tax system – is unfair.

is unfair.  Solution: Deferral, Obfuscation, Crisis Management Solution: Deferral, Obfuscation, Crisis Management

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Questions / Follow Questions / Follow-up up

Jim Eads Jim Eads Executive Director Executive Director Federation of Tax Administrators Federation of Tax Administrators Suite 348 Suite 348 444 North Capitol Street, NW 444 North Capitol Street, NW Washington, DC 20001 Washington, DC 20001 202 202-624 624-5891 5891 jim.eads@taxadmin.org jim.eads@taxadmin.org

“Taxes are what we pay for civilized society” “Taxes are what we pay for civilized society”

Campañía General de Tabacos v. Collector, Campañía General de Tabacos v. Collector, 275 U.S. 87, 100 275 U.S. 87, 100 (1927), (1927), Justice Oliver Wendell Holmes, Justice Oliver Wendell Holmes, dissenting dissenting