Debating the “COST” of H.R. 1956

October 7, 2005

On September 21, the National Governors Association (NGA) released a report purporting to estimate the state revenue loss that would ensue if Congress passed H.R. 1956, the Business Activity Tax Simplification Act of 2005. H.R. 1956 would restrict state business taxation of corporations unless they have in-state physical presence. The NGA’s report (which has based on a partial survey of state revenue departments with help from the Multistate Tax Commission) estimated that the states would collectively lose as much as $8 billion in revenue if H.R. 1956 became law.

Yesterday, the Council on State Taxation (COST) refuted the methodology used by the NGA in its report. COST identified many problems, including:

· Inconsistent results in different states; · Incorrect interpretation of H.R. 1956; · Divergence in revenue estimating methodology; · Insufficient information on methodologies used; and · Bias in the revenue estimating procedures

As COST explains in its response, the NGA’s report does “not provide consistent or credible estimates of the expected impact of H.R. 1956. The shortcomings in the study undermine the usefulness of the estimates in the tax policy debate.”

To add my own contribution to COST’s response, another significant piece missing in the NGA analysis is the dynamic economic impact that H.R. 1956 would have on “production” states, i.e. states that are the location of significant investments in jobs, plants and machinery. Under the physical presence standard, these states would see less business income siphoned off and taxed by “market” states. This would lead to more reinvestment in jobs, plants and machinery and corresponding increases in economic growth and tax revenues for the “production” states.

You can read a press release about the NGA report here and the COST rebuttal here. We have also written on the propriety of the physical presence standard here.

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