I just got back to the office after testifying this morning at a Senate Finance Committee hearing on the role of the federal government in state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy. (See my oral and written statements here; you can download a PDF of my written statement here.) I was on an impressive panel of Frank Sammartino of the Congressional Budget Office, Dr. Kim Rueben of the Tax Policy Center, Professor Hellerstein of the University of Georgia, and Sanford Zinman of Zinman Accounting.
This rather broad hearing topic encompassed several sub-issues: state taxation of business travelers, interstate commercial activity, Internet sales, cell phone bills, digital downloads, and more. The (other) witnesses spent a lot of time discussing the federal deduction for state and local taxes, and Chairman Baucus’s first question asked for our thoughts on how to accomplish federal tax reform.
With so many issues, it was tough to boil my opening remarks down to five minutes, so I focused on the broader principle: that generally, Congress should let the states do what they want, even if it’s bad policy, with two exceptions:
The first is to preserve the power of the federal government. States cannot tax the Federal Reserve, for instance, and there are federal laws banning state taxes on nonresident members of Congress and nonresident members of the military.
The second situation goes to the reason why we adopted the Constitution in the first place. States went wild under the Articles of Confederation: port states punitively taxed commerce going to interior states, and vice versa. TariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. wars proliferated. So the Constitution was adopted, giving Congress the power to restrain states from enacting laws that harm the national economy by discriminating against interstate commerce.
In short, states will put their own interest ahead of the federal interest every time. They have an incentive to shift tax burdens from physically present individuals and businesses, to those who are beyond their borders, nonvoters. When this behavior is not prevented by Congress or the courts, the results can be taxpayer uncertainty, incompatible standards, and harm to national economic growth.
The hearing touched on nearly every issue, with the senators obviously interested in many different aspects of federal policy with respect to state taxation. It got a little heated when Senator Ben Cardin (D-MD) was expressing his frustration with efforts to oppose federal action on state sales taxes on Internet transactions. Since many states are passing laws that fly in the face of U.S. Supreme Court precedent, and the states have proven incapable of solving this coordination problem on their own I consider myself one person who supports federal action on the issue.
But I felt compelled to jump in when Senator Cardin said that tax simplification wasn’t really an issue anymore, because of software and how amazing computers are. (He mentioned how great his iPad is.) I responded that the problem was not one of computing power, but of tracking and interpreting rules and tax bases from over 9,600 sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. jurisdictions in the United States. States are moving away from simplicity, away from uniformity. I noted that we have trouble keeping up with it all and we’re a tax policy think tank (and not a small business). Cardin tartly replied that we should buy better software. We bickered back and forth for a bit while everyone in the room watched.
As with anything else, the best response came to me on the cab ride back to the office: Senator Cardin can download the Internal Revenue Code onto his iPad, but that doesn’t make his income taxes any easier to do. Tax simplification is still vital.
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