Weekly Round-Up: Wide Variability in Tax Policy Among States, Annual Tax Foundation Report Says


States diverge greatly in the type and amount of taxes they collect, according to the Tax Foundation's annual report that compiles and ranks everything from states' tax rates and revenue collections to income and state debt per capita, Bloomberg BNA State Tax Law Editor Rebecca Helmes writes in this week’s issue of the Weekly State Tax Report.

The report, “ 2014 Facts & Figures: How Does Your State Compare? ,” is meant to be a quick reference for the various taxes states impose, along with corresponding revenue data.

The key take-away from the report is the astonishing amount of variety, Lyman Stone, an economist at the Tax Foundation's Center for State Tax Policy, told Bloomberg BNA March 18. He said just looking at the nation in the aggregate isn't enough to understand the full picture.

“There are radical differences in which taxes they collect, how much tax they collect,” Stone said.

For example, according to the report, while general sales taxes make up 22.5 percent of state and local revenue nationwide, dependence on that revenue varies widely by state. Several states, including Montana and Delaware, don't impose a sales tax at all. States including Washington, Tennessee and South Dakota derive more than 40 percent of their revenue from it.

The more notable changes in the report came from states that had bigger changes last year. North Carolina made one of the most significant changes when it replaced its graduated individual income tax rate system with a flat tax rate. Another big change occurred in Indiana with the repeal of its inheritance tax.

In terms of long-term change, Stone said during the past two decades the Tax Foundation has seen “state corporate income taxes kind of going the way of the dinosaur.”

He said it is already difficult for states to capture corporate income tax revenue, because businesses can easily shift sales to other states, and states compete with one another to lure business with low taxes. About 3.6 percent of state revenue comes from corporate income taxes, but Stone said even that number is “artificially propped up” by some outlier states that rely more on corporate tax than others. For example, New Hampshire gets about 11 percent of its revenue from corporate income tax, while Ohio's corporate income tax is only 0.8 percent of its budget, based on fiscal year 2011 figures.

That reliance can erode when taxpayers get tax incentives or use apportionment formulas that shift income to other states. Either way, the Tax Foundation doesn't view either as the best means of lowering taxes.

“It creates uneven taxation,” Stone said. “We see it as a very lopsided way to reduce corporate income taxes.”

Stone said that though taxes are a popular explanation for why people move to other states, those kinds of decisions are based on more than just tax motivations—family and weather, for example. But while the Tax Foundation doesn't generally make the argument that increasing or decreasing taxes or changing a state's reliance on a particular kind of tax will cause populations to shift, Stone said it does think that good tax policy can drive economic growth and affect migration in the long term.

“People do move for jobs,” Stone said.

That is where understanding the state-by-state approaches can help, he said.

“It's important for policy makers to know the lay of the land when they're piloting their states' course through it,” Stone said.

In other developments…

BBNA State Tax Law Editor  Rebecca Helmes interviews Ferdinand Hogroian , Tax & Legislative Counsel for the Council on State Taxation

An inside look at the corporate tax reform proposals in Governor Andrew Cuomo’s 2014–15 New York Budget Bill , by McDermott Will & Emery

Alabama Tax Tribunal established , PwC reports

Washington DC’s Tax Revision Commission Plan , by The Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution

Texas franchise tax reporting after claiming federal bonus depreciation , by the Texas State and Local Tax Law Blog

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