State Tax Policy Boot Camp

Tax Policy 101, Part 1: Income and Unemployment Insurance Taxes

In the first of our six sessions, we will explore individual and corporate income taxes plus the timely subject of unemployment insurance taxes.

Income taxes are the largest source of state tax revenue, generating 41 percent of state tax collections nationwide despite nine states forgoing a wage income tax and five states going without a tax on corporate income. Everyone knows income taxes—but sometimes the details can be murky.

What does it mean to conform to the Internal Revenue Code on a static or rolling basis and why does it matter? What is the difference between a personal exemption and a personal exemption credit? What determines domicile for income tax purposes? How long does someone have to work in a state to pay income taxes there, and how does that affect their tax burden in their home state? What is the purpose of inflation indexing, and why are there so many different approaches to it? Why—and how—do most small businesses pay individual income taxes, and how does this burden compare to those paid by traditional corporations?

How is corporate income apportioned among states? How do you know where a service has been performed for tax purposes? Do economic development incentives work, and how do the different types compare? What is meant by terms like throwback rules, cost recovery, net operating loss carryforwards, or GILTI, and why do they matter?

We will address these questions and more in this informative first session.

Unemployment insurance (UI) taxes, meanwhile, are opaque to even the most senior policymakers. We will walk through the basic structure of unemployment insurance taxation, explaining how each business’s rate is determined, outlining some of the key provisions of UI taxation, and highlighting how the exhaustion of state unemployment compensation funds yields automatic UI tax increases.

Areas of Focus

1. Individual income tax structure and the treatment of multistate income
2. Corporate income tax apportionment, sourcing, and income adjustments
3. Unemployment insurance tax design and the determination of UI tax liability

Session Resources

• Personal Income Tax Conformity
• Inflation Adjustments
• Convenience Rules
• Throwback Rules
• Net Operating Losses
• Corporate Income Tax Conformity (GILTI and Expensing)
• Unemployment Insurance (UI) Taxes 
• State UI Needs

Tax Policy 101, Part 2: Sales, Property, and Other Taxes

In the second part of our overview of major state and local taxes, we tackle sales and excise taxes, property taxes, severance taxes, and other forms of state and local tax revenue.

Ask an economist what the sales tax should look like and you’ll almost certainly be told that an ideal sales tax falls on all final consumption, both goods and services, while excluding intermediate transactions to avoid what is known as tax pyramiding, where the same final sale has the tax embedded multiple times over. Ask any state revenue official what your state’s actual sales tax looks like and you will receive a radically different answer.

In this session, we will discuss states’ different approaches to defining the sales tax base, and where there is room for reform. We will also explore local sales tax authority, how services are sourced for tax purposes, and how states have responded to the Wayfair court decision on the taxation of remote sales. We will discuss the design of marketplace facilitator laws, which require sales platforms to remit on behalf of their sellers, and look at some of the complexities that have arisen under these laws.

We will also tackle property taxes, both real (land) and personal (machinery and equipment, etc.), talking about assessments, split roll taxation, and other structural issues. We will also explore the merits and demerits of different state approaches to mitigating property tax burdens, either through property tax limitations or through tax swaps. And we’ll discuss the different approaches to severance taxes, and the basic theory of excise taxation, all in an informative one-hour session.

Areas of Focus

1. Sales tax bases, the taxation of remote sellers, and local option sales tax regimes
2. Property tax classifications, assessments, swaps, and limitation regimes
3. Severance tax structure and approaches

Sessions Resources

• Primer: Property Tax Limitation Regimes
• State Sales Taxes in the Post-Wayfair Era
• State Sales Tax Breadth and Reliance, Fiscal Year 2020
• Sales Tax Base Broadening: Right-Sizing a State Sales Tax
• State and Local Sales Tax Rates, 2021
• States Should Continue to Reform Taxes on Tangible Personal Property
• State Inheritance and Estate Taxes: Rates, Economic Implications, and the Return of Interstate Competition

State Taxation and Remote Work

The pandemic has changed how we live and work, and for many, some of those changes may be permanent. But what are the tax implications of remote work?

In this session, we will delve into the tax implications of multistate living or working arrangements. We’ll look at what this means for tax withholding, where an individual might have liability, how credits for work performed in another state function, and what scenarios can yield actual double taxation. We will also examine the business side, identifying scenarios in which remote workers could trigger business tax liability in a state where a company previously lacked nexus.

Remote work is here to stay, but state tax codes aren’t ready for it. This session is about how states can remove impediments to remote work, what they can expect from a dramatically more mobile workforce—and how to respond to it.

Areas of Focus

1. Multistate tax payment, withholding requirements, and credits for taxes paid to other states
2. Convenience rules, trailing nexus, and the potential for double taxation
3. Business nexus standards with a remote workforce
4. Effects of a remote work culture on business and individual migration

Session Resources

• Teleworking Employees Face Double Taxation Due to Aggressive “Convenience Rule” Policies in Seven States
• Webinar: Creating a Telework-Friendly Tax Code
• Primer: Why Working from Home Brings Greater Exposure to State Tax Codes

Excise Taxes on New and Existing Markets

With revenues short of pre-pandemic projections, many states are looking to excise taxes as a way to plug revenue gaps, sometimes by raising existing tax rates (particularly on tobacco and vapor products) and other times by legalizing and taxing new markets, like sports betting and marijuana.

States often struggle with the trade-offs inherent in these so-called “sin taxes,” trying to navigate sometimes competing public health and revenue generation goals. They must also grapple with often unstable revenues and questions of how to design taxes on newly legalized markets. How, for instance, should marijuana be taxed? By price (ad valorem), like a sales tax, or by weight or potency or something else? How can policymakers put harm reduction principles into practice? What sort of revenues can policymakers expect from taxing marijuana, or what might they forgo in tax receipts with a tobacco flavor ban?

In this session, we will explore these and similar questions related to excise taxes, along with a review of the basic theory of excise taxation.

Areas of Focus

1. Approaches to marijuana taxation
2. Revenue considerations for excise taxes on new markets like marijuana and sports betting
3. Tobacco taxes, flavor bans, the problem of cigarette smuggling, and harm reduction
4. The purpose and standard structure of excise taxation

Session Resources

• Excise Tax Application and Trends
• A Road Map to Recreational Marijuana Taxation
• Taxing Nicotine Products: A Primer
• Cigarette Taxes and Cigarette Smuggling by State
• How Stable is Cigarette Tax Revenue?
• Who Will Pay for the Roads?

New Issues in State Taxation

Recent years have seen expanded interest in new or less common forms of taxation—things like wealth taxes, digital advertising taxes, excess compensation taxes, and financial transaction taxes. States have little or no experience with these taxes, leaving basic questions about the proper structure of such taxes unresolved and creating significant uncertainty around fundamental issues such as their revenue potential, impact on tax competitiveness, and even, in some cases, constitutionality.

In this session, we will dive into several of these notable additions to the tax debate, outlining the arguments made for and against each tax, exploring some of the design and implementation challenges policymakers have encountered or are likely to encounter, and surveying the legal hurdles such tax proposals would have to clear.

Areas of Focus

1. Wealth taxes and the mark-to-market taxation of capital gains income
2. Financial transaction and stock transfer taxes
3. Digital advertising and data taxes, contrasted with sales taxation of digital goods and services
4. Excess compensation taxes, business head taxes, and other new developments in state taxation

Session Resources

• Washington State Floats a Wealth Tax Which Relies Almost Exclusively on Four People
• New York’s “Billionaire Mark to Market Tax Act”
• The Drawbacks of State Taxes on Financial Transactions
• Worse Than Advertised: The Legal and Economic Pitfalls of Maryland’s Digital Advertising Tax
• Maryland’s Digital Advertising Tax Is Unworkably Vague
• Business Head Taxes Take Aim at Having “Too Many Good Jobs”

Tax Policy and the Economic Recovery

State revenues have not taken as much of a hit as was once feared, but state lawmakers still face the difficult task of balancing responses to reduced revenues with efforts to help facilitate the economic recovery. In this final session, we will review the latest revenue data, survey state responses to the Great Recession and prior economic downturns, explore the state tax implications of federal relief packages, and outline states’ options.

Drawing upon earlier discussions, we will close out the legislative boot camp with a timely discussion of tax policy choices, on issues ranging from UI tax adjustments to tax conformity measures to the advantages and disadvantages of different revenue-raising options.

Areas of Focus

1. State tax collection figures and the latest revenue projections
2. Interactions between the federal response and state tax revenues
3. Tax policies to aid the economic recovery
4. Revenue options for states facing shortfalls

Session Resources

• State Aid in American Rescue Plan Act Is 116 Times States’ Revenue Losses
• Four Questions Treasury Must Answer About the State Tax Cut Prohibition in the American Rescue Plan Act
• Does the American Rescue Plan Ban State Tax Cuts?
• Which States Are Taxing Forgiven PPP Loans?
• More Than Half the States Will Protect Businesses from Certain COVID-19-Related Unemployment Insurance Tax Hikes
• Tax Policy After Coronavirus: Clearing a Path to Economic Recovery