After decades of resisting, in 1977 the U.S. Supreme Court gave in and allowed states to impose taxes on interstate commerce. Since before the Constitution, this had been out of bounds due to the risk that states would shift 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. burdens out-of-state and harm the national economy. Consequently, the Supreme Court warned that state taxes on interstate activity must be fairly apportioned, cannot discriminate on out-of-state taxpayers, must be related to provided services, and have nexus.
TVW, the “C-SPAN” of Washington State so to speak, recently interviewed Janetta Taylor of the Department of Revenue, where she boasts about how effective recent tax changes will be at shifting tax burdens to out-of-staters, for the benefit of in-state residents. These remarks should be Exhibit A in proving that Washington has designed its tax laws to do exactly what the Supreme Court has forbidden:
Q: What are some of the biggest tax changes?
Taylor: Interestingly enough, a lot of the changes this year are policy changes. So they’re not necessarily that we have to change a tax return or form. The really big one is the economic nexus. I think what a lot of in-state businesses don’t understand is that this bill is quite beneficial to in-state business. What it allows them to do is reduce the amount of income that they pay the B&O tax on.
Say you’re a lawyer and you have in-state customers and out-of-state customers. Instead of paying the B&O rate on the services you provide to all of those customers, you only have to pay on your in-state customers. So that’s what’s called 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. .
The governor was brilliant in devising this bill because it shifts the burden to the larger out-of-state businesses who have not been paying taxes and it eases the burden on in-state business.
Everyone’s been very focused on the out-of-state portion. If you’re an out-of state lawyer providing services to in-state clients, you may owe tax. Before, unless you moved into the state or visited, you wouldn’t have to pay tax. There hasn’t been a lot of coverage for the benefits to the in-state businesses.
(Bold in original.) Wow. I know I’m always saying that the real motivation behind economic nexus is a political one: enable politicians to provide services to voters while giving the bill to non-voters. It’s rare that I see it openly admitted to.
As one reader wrote into us, it’s more “constitutionally suspect” than “brilliant.” Beyond that, good tax policy is about paying for the services you use. Conservatives should oppose shifting tax burdens because it creates a constituency demanding larger government but not paying for. Liberals should oppose shifting tax burdens because it results in only fair-weather support for programs and services that evaporates when out-of-staters find a way out of footing the bill. All people should oppose it because states should be creating environments favorable to economic growth, and gimmicks and economic nexus games harm economic growth.
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