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Congress Hears Testimony on Restraints on State Tax Overreaching

2 min readBy: Joseph Bishop-Henchman

Yesterday I testified as part of a panel before the U.S. House Judiciary Committee’s Subcommittee on Commercial & Administrative Law. The hearing, entitled “State Taxation: The Impact of Congressional Legislation on State and Local Government Revenues,” is the latest hearing in a series taking testimony on federal legislation to restrain 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. powers. Read my testimony here.

For the individual income tax, states are becoming more aggressive about imposing tax on business travelers; a proposed bill (H.R. 2110) would restrict such practices unless the traveler spends a minimum amount of time in the state.

For the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , states are moving further away from uniform apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. rules and the long-standing physical presence rule that determines who a state can tax. A proposed bill (H.R. 1083) would enshrine the physical presence rule and limit the ability of states to tax more than their share of corporate income.

For the 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. , states are asking Congress to reverse the Supreme Court’s 1992 Quill decision, which prevents states from demanding out-of-state companies collect sales/use taxes. The practical implication of such a reversal would be that online and out-of-state retailers would have to keep track of thousands of different sales taxes, while their brick-and-mortar retailers would track only one.

In addition to these points, my testimony discussed the important constitutional role for Congress in preventing harm to the national economy from parochial state tax policy. Particularly with many of these examples, states cannot work together because every state wants as much taxes it can get from interstate commerce, resulting in “death by a thousand cuts,” as I put it.

The Q&A was quite good. Rep. Steve Cohen (D-TN), the chair of the subcommittee, said that state and local practices of fleecing tourists through heavy taxes on rental cars and hotel rooms came across as wrong to him. Rep. Hank Johnson (D-GA) quizzed me on the complexity associated with filing multiple state tax returns and state aggressiveness in pursuing that income. Rep. Bobby Scott (D-VA) asked me about how hard it is to track and calculate sales taxes (of which there are over 8,000 with different bases, many changing constantly), and the yet net revenue wash associated with states complexly taxing nonresident income. Rep. Jim Jordan (R-OH) asked about the negative implications of a VAT.

Other witnesses at the hearing included Governor Jim Douglas of Vermont, and representatives from the National Association of State Budget Officers, the National Association of Counties, the Rockefeller Institute, and AFSCME. Many of them focused on the current state fiscal situation, with some urging that Congress should avoid interfering in state matters.