Tax Complexity a Problem in Every State

The Progressive Policy Institute this week released a “Tax Complexity Index,” which provides a count of tax expenditures by state. The results are in line with what you might expect: state tax codes have a lot of deductions, credits, exclusions, rebates, and other goodies that make the code more complicated.

According to the report, the number of expenditures tallies into the hundreds in most states. Washington has the highest number of expenditures for which there is data available, between 550 and 600. PPI says seven states do not publish a comprehensive list of all their tax expenditures, so they rank those states “most complex” (though my initial reading is that PPI missed the New Hampshire tax expenditure report, and while they ding Indiana for not having a full expenditure report, they don’t mention that it does have one for its individual income tax). Alaska is the “least complex” state, with between 0 and 50 expenditures.

It’s important to note that while counting the number of expenditures can tell you some things about the tax code, not all expenditures are bad policy. A net operating loss deduction, for example, makes the tax code more neutral by allowing businesses that suffer in recessions to offset those losses in profitable years. Exemptions in the sales tax for business to business transactions are also essential because they make sure the sales tax doesn’t get levied multiple times in the production chain (a no-no that economists call “tax pyramiding”). Both of these are counted as “complexities” in the PPI study, but it’s not like they are unprincipled privileges cooked up in a smoke-filled room. We do more a more nuanced parsing out of tax structures in our State Business Tax Climate Index.

Caveats aside, there are a few good nuggets here. I particularly like this one quote, which gives insight into why reforming tax codes is so hard:

Some progressive analysts tend to look at tax expenditures as an indirect form of government spending that obviate the need for new programs and administrative bureaucracies. Conservatives see them as a way of cutting tax burdens on families and businesses.

This appeal to politicians on both sides of the aisle means that carve-outs are enacted quite often, which results in increased complexity. Ironically, complexity is the number one complaint from taxpayers on both sides of the aisle. In the long run, this means that wholesale tax reform is needed to simplify things.

More on tax complexity.

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