The Tax Policy Blog

Mexican border officials announced the weekend interdiction of a record number of Californians attempting to flee their home state, seeking to cross the border illegally in search of a better life south of the border.

Border patrol officials in Tijuana warned that the human tide has reached record levels since California raised its top income tax rate to 13.3 percent in November, joining high sales and business taxes. A separate retroactive business tax and a proposed exit tax has increased the outbound migration. Mexican officials are debating whether to construct a border fence and reinforce border agent numbers.

Professional golfer Phil Mickelson made quite a stir in January when he threated to leave the state, but it looks like he’s not the only one who does not like his new tax burden. Citizens of all income levels are leaving California in search of promise in their new land of opportunity.

“I love my new home. You just can’t survive with that broken California tax system,” said John Smith, one recently landed immigrant, said. “So I figured I would go to a place where I feel a little more welcome.”

Local residents are not so sure the American immigrants will enjoy the Mexican tax treatment much better.

“They’ll be in for a big surprise when they get their first paycheck and see the taxes are not much better,” one restaurant owner said. “But I’ll let them figure that out on their own.”

All the same, business is booming for a few borders towns. The desert city of Mexicali and the beach town of Rosarito Beach have seen the biggest difference. One local business owner said he has seen his sales soar 100 percent since November.

But the insurgence of American labor is not going unnoticed by the local authorities.

“The trouble is, these people are all here illegally,” one local labor official said. “They can’t stay.”

 “It’s creating a real problem for us,” one Mexican border security official said. “Now we’ve got to round them up and send them home ourselves, because we know they’re not going to ‘self-deport’ back to California.”

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After five years of litigation and appeals, New York's highest court today upheld the state's "Amazon tax" in a 4 to 1 decision (PDF). The law, nicknamed after its most visible target, deems an out-of-state company to be an in-state taxpayer if the company receives commissioned referrals from in-state resident "affiliates." The out-of-state company then must collect sales tax for the state. Generally, just as state services are only provided within their borders, state tax authority (or "nexus") ends at its border, with it only able to require sales tax collection from in-state companies.

On the central question of whether Amazon.com and other online retailers are "physically present" due to their affiliate contracts, despite not being physically present themselves, the Court of Appeals today found it was so:

[E]ven in the Internet world, many websites are geared toward predominantly local audiences -- including, for instance, radio stations, religious institutions and schools -– such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Indeed, the Appellate Division record in this case contains examples of such websites urging their local constituents to support them by making purchases through their Amazon links. Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.

Viewed in this manner the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as “demonstrably more than a ‘slightest presence’” under Orvis. Although it is not a dispositive factor, it also merits notice that vendors are not required to pay these taxes out-of-pocket. Rather, they are collecting taxes that are unquestionably due, which are exceedingly difficult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation.

(p. 9-10.) In short, physical presence means not just having your property or your employees in a state, but now also targeted advertising through others that resembles an in-state local sales force. The Court quickly notes in its next paragraph that "no one disputes" that "passive" advertising does not create phyiscal presence. (p. 10). Consequently, the line the Court draws is between passive advertising (no nexus with the state) and active advertising (nexus with the state).

Judge Robert Smith dissented, saying that the statute unconstitutionally expands the physical presence rule, and rejecting the majority's apparent constitutional distinction between advertising paid per result (tax nexus) and advertising paid as a flat fee (no tax nexus).

This is obviously not the decision we wanted, having filed briefs in the case urging that the statute be struck down as unconstitutional. The parties may yet appeal the case to the U.S. Supreme Court and we'd say the same thing. 

However, three thoughts to keep in mind nevertheless.

• First, New York's courts remain alone in having upheld these laws; similar ones elsewhere have been struck down (Illinois, North Carolina, Colorado).
• Second, these state nexus expansion laws remain bad policy, generating far less revenue than expected while failing to solve the overall problem of how to tax Internet commerce in an equitable and non-stifling manner. A federal solution remains the better approach: one that prevents excessive state tax overreaching while establishing a system that allows states to collect taxes owed by their residents in a simplified manner, balancing uniformity of administration with competitiveness in rates.
• Third, the New York Court of Appeal's decision rejects a facial challenge--the difficult standard of proving that a statute is unconstitutional on its face with no legitimate application. The Court did not address what might be next; an as applied challenge finding the statute's application in a particular context to be unconstitutional. Given how nebulous the line between "passive advertising" and "active advertising" is, the Court might have to rethink that standard when real cases start heading their way.

​Check out everything we've ever done on nexus (including my most recent congressional testimony on the topic) here.

We earlier described Virginia’s passage of new transportation taxes, which include higher sales taxes in the northern Virginia and Hampton Roads regions and higher hotel and real estate taxes in northern Virginia. Although not exactly the plan Governor Bob McDonnell (R) asked for, it looked close enough to most observers and he was expected to sign it into law.

Enter Virginia Attorney General Ken Cuccinelli, widely expected to the 2014 Republican gubernatorial nominee. He noted in an advisory opinion (PDF) last Friday that Virginia’s Constitution contains a uniformity clause, which requires that all taxes imposed by the Legislature be uniform across the entire state.

Because the law does not impose the new taxes equally across the state geographically, but only in certain areas, it violates the uniformity clause. (A similar law was struck down in 2008 for allowing regional authorities to impose new taxes without voter approval, to get around northern Virginia voters’ consistent habit of rejecting regional taxes.)

So, McDonnell exercised his power to amend the statute and expand the new taxes statewide. Sort of. The new taxes apply “statewide” to any region that meets the following carefully convoluted criteria: any planning district with at least 1.5 million people as of 2010, at least 1.2 million registered vehicles, and at least 15 million transit passengers. Not surprisingly, only the Hampton Roads region and northern Virginia fit this criteria. From the Stafford County Sun:

McDonnell's amendments to the bill, filed late Monday night, would: reduce a proposed annual fee on hybrid and alternative fuel vehicles from $100 to $64; trim a 1.3-percentage point increase in the sales tax on motor vehicles to 1.15 percentage points, phased in over three years; decrease new taxes on real estate transactions and overnight lodgings in Northern Virginia for regional initiatives there; and tie the new taxes for regional initiatives — including a higher retail sales tax than the rest of the state — to specific criteria such as population, vehicles, and transit use as proxies for highway congestion and pollution.

"So empirical criteria as opposed to naming regions," said McDonnell, who added that the criteria "theoretically could be met by any region of the state."

Currently, only the Northern Virginia and Hampton Roads planning districts meet the criteria — at least 1.5 million people in the 2010 census, at least 1.2 million registered motor vehicles, and at least 15 million transit passengers a year.

This dodge allows Virginia’s new taxes to get around the Constitution’s requirement that taxes be imposed uniformly across the state. Now they are uniform technically but not for practical purposes. Maybe it’s the right policy, given the greater transportation needs of the two regions in question, but it’s bad constitutional practice.

This week's map shows the top corporate income tax rate in each state. Iowa has the highest rate at 12%; three states, (Nevada, South Dakota, and Wyoming) have no corporate income tax.

Click on the map to enlarge it.

View previous maps here.

Good news out of Vermont this week, as the House Ways and Means committee voted 6-5 to kill the proposed $1.28 per gallon sugar-sweetened beverage excise tax that was being considered in the state. Back in late February, I testified to the House Ways and Means and Health Care committees on the bill. While the Health Care committee sent the bill through (after a few shenanigans), the Ways and Means committee seems to have taken the arguments against using the tax code to change behavior to heart.

As I argued in my testimony:

[…] the influence of soda taxes on obesity outcomes is questionable. We know from the law of demand that raising the price of a product will make people consume less of that product, but people don’t behave in a vacuum. A 2010 study found that soda taxes do reduce soda consumption, but that children and adolescents tend to perfectly substitute in calories from other sources. This resulted in no net change in caloric consumption. A 2007 study found that an increase of 1 percentage point in the state soft drink tax rate would lead to a decrease in BMI of just 0.003 points. For perspective, the CDC defines a “healthy” BMI for a six foot tall adult male as between the large range of 18.5 and 24.9.

There is also evidence that taxes on soda lead people to drink more beer. A 2012 study by economists at Cornell University showed that for households prone to buying alcohol, there was a 172.4 ounce increase in beer consumption per month when a 10 percent tax was applied to soda. This equates to a heightened intake of 1,930 calories in the same time frame. This raises concerns about potentially switching one public health problem for another. As an interesting side note, Vermont currently taxes beer at a rate of 27 cents per gallon. The proposed rate on soda would be almost five times as high as the current tax on beer.

I think the overarching lesson to learn from this is that people respond to tax changes, but not necessarily in the way policymakers would want them to.

[…] this debate centers around moral questions. Reducing obesity is an important goal, but policy actions have costs. My largest concern is that placing a tax on soda is a blanket policy that would affect all Vermonters. There are many people that enjoy sodas regularly and make adjustments in their diet elsewhere to maintain a healthy lifestyle. These people will be affected by an excise tax as well, and I think that is why the tax code is far too blunt an instrument to address something as comprehensive and subtle as nutrition choices.

UPDATE: The final tax package that the House will vote on may expand the sales tax base to include candy and sugar-sweetened beverages (my arguments here), and also includes a 50 cent per pack hike on cigarettes (comprehensively addressed here). The budget will ultimately have to be signed by Governor Shumlin, who has expressed his opposition to tax hikes.

More on soda taxes here.

Follow Scott Drenkard on Twitter @ScottDrenkard.

Just before 5:00 AM on Saturday, the U.S. Senate passed a budget for the first time in four years in a 50-49 vote. (Sen. Frank Lautenberg (D-NJ) stayed at home on doctor's orders.)

The budget blueprint, opposed by all Senate Republicans and four red-state Democrats facing re-election in 2014, sets a level of $3.7 trillion in federal spending for fiscal year 2014. Over a ten year timeframe, the budget cancels $1.2 trillion in planned spending cuts, substitutes $975 billion in reduced projected spending, and raises taxes by $975 billion.

The budget vote sent Washington scrambling because of the "Vote-o-rama" that comes with it: every senator is able to propose amendments that the entire Senate will vote on. Lots of ideas have been sitting un-voted on after four years of no budgets, so 572 amendments were filed. The Senate methodically worked through them, one by one, into the wee hours, ultimately doing 43 roll call votes and a number of voice-only votes and unanimous consent approvals. Because the budget would need to be meshed with a House version to become law (which is unlikely), the amendments were considered by all to be non-binding in nature.

Among the tax-related votes included approving 79-20 the repeal of the "Obamacare" medical device tax, approving 51-48 the inclusion of dynamic scoring analysis in revenue estimates, rejecting 46-53 the repeal of the federal estate tax, and approved 80-19 a separate amendment to repeal or reduce the federal estate tax in a revenue-neutral manner.

The Senate also approved 75-24 a modified version of the Marketplace Fairness Act, a proposal to authorize states to collect sales tax on Internet and catalog transactions between their residents and out-of-state retailers. Presently, state tax authority over retail transactions extends only to retailers with a physical presence in the jurisdiction (just as one must have a physical presence in the jurisdiction to receive state services). The hotly controversial amendment has been pushed by an alliance of big-box retailers and state officials, and opposed by some Internet retailers and conservative groups.

I'm writing a piece for later this week on what's missing from the Marketplace Fairness Act, omissions that could threaten interstate commerce and economic growth unless remedied.

Here's the vote breakdown on the Internet sales tax vote (Enzi Amendment 656):

Note: Blog updated to correct the medical device tax vote.