Are State and Local Revenue Systems becoming Obsolete? · 2018. 12. 5. · NATIONAL TAX JOURNAL 468 Dependence on Intergovernmental Assistance In FY1999, the latest year for which

Are State and Local Revenue Systems becoming Obsolete?

467

National Tax JournalVol. LV, No. 3September 2002

INTRODUCTION

In recent months, we public finance types have become usedto nearly universal reports of sharply declining state rev-

enues. Although cyclical factors are mostly responsible, manytax analysts believe that long–term economic and technologi-cal developments are also partially to blame and will con-tinue to constrain state and local revenue growth well intothe foreseeable future. As a result of these developments, stateand local revenue systems are becoming increasingly “out ofsync” with the economy’s changing structure. The economicstocks and flows that they are designed to “meter” comprisea shrinking fraction of the nation’s wealth and economic ac-tivity. According to some, these factors are so pervasive andpersistent that they threaten to make current state and localtax systems obsolete.

This paper discusses the impact on state and local revenuesof four such factors: 1) the shift in the nation’s mix of produc-tion and consumption from goods to services, 2) the grow-ing importance of intangible assets in generating output, 3)the proliferation of electronic commerce; and 4) the intensifi-cation of interjurisdictional competition. While I provide evi-dence that all four factors threaten the revenue productivityof state and local taxes, I have no good solutions to offer. Nu-merous plans to modernize state and local revenues systemshave been suggested, but most would sacrifice important taxpolicy goals. No solution presents state and localpolicymakers with a clear win–win situation, in which theycould halt or reverse the decline in the revenue productivityof their taxes without sacrificing autonomy, competitiveness,neutrality, or administrative simplicity.

HOW DO STATE AND LOCAL GOVERNMENTS RAISETHEIR REVENUES?

An analysis of the mix of the nation’s subnational revenuesreveals two reasons why both state and local governments areso concerned about long–run erosion of their tax capacity. First,both depend heavily on uncertain flows of fiscal assistance froma higher level of government. Second, many state and localgovernments lack a diverse mix of “own–source revenues”—taxes and user charges that they collect on their own authority.

Are State and Local RevenueSystems becoming Obsolete?

Robert TannenwaldFederal Reserve Bank ofBoston, Boston MA02106-2076

NATIONAL TAX JOURNAL

468

Dependence on IntergovernmentalAssistance

In FY1999, the latest year for which dataare available, federal grants–in–aid ac-counted for 26 percent of state general rev-enues, about the same as in FY1977 (Fig-ure 1). During these 22 years, however, thelevel and composition of federal aid haschanged considerably (Figure 2), makingstate fiscal policymakers wary of relyingso heavily on it in the future. From 1960through 1973, inflation–adjusted federalgrants–in–aid increased 111 percent. Whilegrants for capital investment shrank (asinterstate highway construction slowed),other grant categories besides transfers toindividuals grew three times faster thanthe total.1 By contrast, from 1973 to 1989,the federal government cut intergovern-mental assistance across the board, prima-rily in response to widening budget defi-cits, the spread of “devolutionist” philoso-phy, and the nation’s determination toenhance its military preparedness duringthe 1980s. As a result, state governmentswere forced to reduce their reliance on fed-eral aid considerably over the course of the1970s and 1980s. Although inflation–ad-justed federal grants have increased by 30percent since then, they have grown con-siderably more slowly than GDP. Most ofthe growth in federal aid has been concen-trated in transfers to individuals (reflect-ing mostly increases in spending for Med-icaid). This is the only category of federalaid projected to increase in inflation–ad-justed terms from federal fiscal year 2000(FFY2000) through FFY2006 by the BushAdministration in its proposed FFY2002budget. After the events of September 11,state officials will probably assume thateven less federal aid will be forthcoming.

Local governments are even more de-pendent than their state counterpartson intergovernmental assistance, most

of which comes to them from theirstate government. In FY1999, grants fromstate governments accounted for 35 per-cent of local general revenues (Figure 3).The percentage of school districts’ generalrevenues coming from state aid is espe-cially high (47 percent in FY1997).

In contrast to federal aid, state aid as aproportion of local general revenue re-mained fairly constant from 1977 to 1987and exhibited a slowly rising trend from1987 to 1997. However, nationwide aggre-gate statistics hide wide interstate differ-ences. Local governments in some stateshave seen a steep decrease in the fractionof their general revenues supplied by stategrants. For example, between 1977 and 1997state aid as a percentage of local generalrevenues fell from 40 percent to 30 percentin New York, from 47 percent to 38 percentin North Carolina, from 36 percent to 28percent in Maryland, and from 35 percentto 27 percent in Maine. Moreover, state aidto local governments has grown moreslowly than state spending as a whole since1982 (Figure 4). Consequently, many localofficials are uncertain about how much stateassistance they will receive in the future.

Lack of Diversity in Own–Source Revenues

Apart from federal aid, states rely mostheavily on the individual income tax andthe general sales tax, each of which ac-counted for about a quarter of state gen-eral own–source revenues in FY1999. Se-lective sales taxes—primarily taxes on thesale of tobacco products, alcoholic bever-ages, and motor fuels—accounted for 17percent in FY1977. However, they havesince declined in importance becauseAmericans have become more fuel–effi-cient (despite the growing popularity ofsports utility vehicles), have cut back onsmoking, and have substituted beer andwine for hard liquor.2 The states have re-

1 Other grants besides transfers to individuals are primarily for education, employment and training, socialservices, and general government.

2 Beer and wine are generally taxed at lower rates than hard liquor because they contain lower concentrationsof alcohol.


469

Figure 1. The Mix of State General Revenues, 1977 to 1999 (percent of total)

Figure 2. Percent Change in Inflation–Adjusted Federal Grants to State and Local Governments, 1960 to 2006


470

Figure 3. The Mix of Local General Revenues, 1977 to 1999 (percent of total)

Figure 4. State Aid and General Expenditures Indexed to 1982


471

sponded to this decline (as well as to rela-tively sluggish growth in corporate in-come tax receipts) mainly by increasingtheir reliance on the personal income taxand current charges.

With the general sales tax and personalincome tax accounting for one–half of theirgeneral own–source revenues, the states areconcerned about forces undermining therevenue productivity of either tax. Theirconcern has been magnified by the ex-panded fiscal responsibilities that they havebeen asked to assume during the past twodecades. Demand for state roads andbridges, prisons, higher education, andenvironmental protection has intensified.Now that the federal government is preoc-cupied with combating terrorism, the statesmay have to shoulder even more responsi-bility for domestic governmental functions.

Moreover, aggregate state revenue fig-ures obscure imbalances in the revenuestructures of some states. Five states—Alaska, Delaware, Montana, New Hamp-shire, and Oregon—lack a sales tax. Or-egon derives almost 44 percent of its gen-eral own–source state revenues from thepersonal income tax. Nine states—Alaska,Florida, Nevada, New Hampshire, SouthDakota, Tennessee, Texas, Washington,and Wyoming—impose no broad–basedpersonal income tax. Washington collects47 percent of its general own–source rev-enues from general sales taxation. Forstates with such unbalanced revenuestructures, erosion of a key tax base orconstraints on the rate at which that basecan be taxed pose an especially seriousthreat to long–run fiscal health.3

Local own–source revenues are evenless diversified than those of the states. Theproperty tax, the mainstay of local taxa-tion, accounted for 45 percent of all localown–source general revenues in FY1999.

The comparable percentage for usercharges, the second most important instru-ment of local own–source funding, wasonly 26 percent. In FY1977, local govern-ments were even more reliant on the prop-erty tax than they are today. The “prop-erty tax revolt,” epitomized by Proposition13 in California and Proposition 2 1/2 inMassachusetts, induced localities to sub-stitute user charges for property taxes intheir general own–source revenue mix.Local governments as a whole, and citiesand towns in particular, have also in-creased their reliance on the sales tax. In-come taxes have become an increasinglyimportant revenue source for cities withpopulations exceeding 500,000. However,since the property tax remains the back-bone of local revenue systems, forces erod-ing its long–term revenue productivitycontinue to worry local policymakers.

THE SHIFT FROM GOODSTO SERVICES

The United States spends a muchsmaller fraction of its resources on produc-ing goods and a much larger fraction ondelivering private services than it did 40years ago. In 1960, 42 percent of U.S.wages and salaries were earned in thegoods–producing sector (manufacturing,mining, construction, and agriculture).Forty years later, the share attributed togoods production had fallen to 24 percent.By contrast, the share generated by deliv-ery of private services rose over this pe-riod from 15 percent to 37 percent.4 Themix of personal consumption also shiftedaway from goods and toward services. In1960 American households allocated 41percent of their consumption dollars toservices. By 2000 this percentage had risento 58 percent.

3 Since such states choose to rely especially heavily on one tax, they presumably understand the tradeoffs en-tailed by such a tax structure. Economic and political constraints on how intensively they can levy their pre-ferred tax worsen the tradeoffs that these states face between revenue productivity and other tax policy goals.

4 The remainder of wages and salaries were generated by the provision of public services and the distributionof goods in the private sector.


472

Implications for the General Sales Tax

In order to understand these implica-tions, one must consider all the varioustypes of transactions that are potentiallysubject to general sales taxation (“totalpotentially taxable transactions”). (SeeFigure 5.) Such transactions consist of con-sumption by households and purchasesby businesses. Consumed items can befurther classified into those usually ex-empt from taxation or taxed at preferen-tially low rates (“tax–preferred” items)and items that are usually taxed withoutpreferential treatment (“taxed” items).Tax–preferred items consist of food con-sumed at home and services. Food con-sumed at home is taxed preferentially inthe majority of states because it is consid-ered a necessity.5 States generally tax ser-vices only to a limited extent for adminis-trative and political reasons. When statesales taxes were first implemented, dur-ing the 1930s, services were consideredtoo difficult to tax. Since delivery of ser-vices did not require records of inventoryor production and were undertaken pri-marily by very small firms with minimalrecord–keeping capacity, the obstacles toenforcing a tax on these services were con-sidered prohibitive. In addition, profes-sional services, such as those provided bylawyers, accountants, engineers, and con-sultants, were considered politically toodifficult to tax because professional orga-nizations wielded (and still wield) consid-erable political influence.

Since services accounted for a muchsmaller fraction of the economy than didgoods 70 years ago, the revenue conse-quences of excluding services from tax-able sales were not considered significant.These consequences have become muchmore serious as the importance of profes-sional and business services to theeconomy has grown (Brunori, 2001).

However, the political and administrativeobstacles to taxing services remain. At-tempts to do so by both Florida (in 1987)and Massachusetts (in 1991) were de-feated by vigorous lobbying on the partof interest groups representing those ser-vice providers who would have been mostadversely affected. As of 1996, only threestates—Hawaii, Washington, and SouthDakota—taxed a wide array of services(Federation of Tax Administrators, 1997).

Purchases by businesses can also beclassified into a tax–preferred component(services and purchases of structures) anda taxed component (purchases of interme-diate goods, machinery, and equipment).However, even purchases of taxed itemsare generally exempt from taxation if un-dertaken by firms in “sheltered” indus-tries (manufacturing, mining, and agricul-ture). Such firms have been sheltered fromsales taxation because, as exporters ofgoods to other states, they import rev-enues into a region and, therefore, arethought to drive its economic growth. Allthe purchases of governmental agenciesand of most nonprofit organizations alsofall into the tax–preferred category.

Thus, of all the potentially taxable trans-actions, only items of taxed consumptionand purchases of taxed items byunsheltered firms actually enter into salestax bases. In order to evaluate the impactof shifts in the composition of consump-tion and production on the revenue pro-ductivity of sales taxes, one must analyzehow these shifts have affected the size ofthese two taxable slices of the total trans-actions pie.

Impact of shifts in the mix of consump-tion: Services’ growing share of consump-tion has been identified as a principalcause of the sales tax’s declining revenueproductivity (Bruce and Fox, 2000, 2001;National Conference of State Legislatures

5 According to the Federation of Tax Administrators (2001), 32 of the 45 states and the District of Columbia thatimpose a general sales tax either exempt food at home or subject it to a relatively low statutory rate. Seewww.taxadmin.org/fta/rate/sales.html.


473

and National Governors’ Association,1993). The tax’s diminishing effectivenessas a revenue raiser is reflected in the long–term decline in the ratio of taxable sales(as reflected in actual sales tax collectionsand statutory sales tax rates) to gross stateproduct (GSP) generated by the privatesector in states that impose the tax. From1977 to 1992 this ratio fell by about 6 per-centage points, from 44.6 percent to 38.8percent. By 1997 it had risen slightly to justunder 40 percent.6

The ratio’s increase since 1992 has beenattributed to cyclical influences. Accord-ing to this argument, taxed consumptionis more procyclical than tax–preferredconsumption. From the early 1990s untilmid–2001, the economy enjoyed the long-est expansion in postwar history. Re-

sponding in typical procyclical fashion,sales of taxed items grew more rapidlythan gross domestic product (GDP) (Fig-ure 6). Low interest rates and a strongstock market accentuated the procyclicalresponse of these items, increasing thelevel of consumer debt and driving thenation’s savings rate below 1 percent. Thiscyclical surge, so the argument goes, morethan offset the negative impact of the secu-lar shift in consumption toward services.The ratio of taxable sales to GSP in stateslevying general sales taxes will resume itslong–run decline now that the stock mar-ket has turned bearish, consumer debt hasreached such a high level, and theeconomy is contracting, while the trendof substituting services for goods contin-ues.

Figure 5. Changing Mix of Consumer and Business Purchases of Taxed and Tax–Preferred Items,1977 and 1997

6 Statutory sales tax rates were taken from U.S. Advisory Commission on Intergovernmental Relations (1988).General sales tax collections were taken from U.S. Census Bureau, Governmental Finances, selected years. Foreach state with a general sales tax, the author divided the statutory rate into sales tax collections to obtain anestimate of taxable sales in that state.


474

While this explanation is plausible,other possible explanations also fit thefacts. For example, states may have gradu-ally expanded sales tax exemptions totransactions not traditionally tax–pre-ferred, or to purchases by businesses otherthan those in traditionally sheltered indus-tries. In characterizing state and local salestax policy in recent years, Fox (1998, pp.42–43) has noted, “The aggregate effect ofactual legislative decisions . . . appears to

be a narrowing of the [sales tax] base,thereby making the sales tax a less pro-ductive revenue instrument . . .”

Moreover, the taxable sales/GSP ratiomay not continue to decline in the future.There has been a secular as well as acyclical decline in the share of the con-sumption of goods accounted for by foodconsumed at home. As a percentage ofconsumption, this tax–preferred item hasdeclined continuously for four decades

Figure 6a. Indices of Taxed and Tax–Preferred Consumption and GDP, 1967 to 2000, Chain–Weighted 1996 Dollars (1967 = 100)

Figure 6b. Deflators of Consumption of Taxed and Tax–Preferred Items, 1967 to 2000 (1967 =1 )


475

and fell by 6 percentage points between1977 and 1997. Consequently, althoughservices’ share of consumption rose by12.5 percentage points over the same 20–year interval, taxable consumption’s shareof total consumption fell by only 6 per-centage points.7

Furthermore, consumers have reducedthe fraction of their outlays spent on taxeditems largely because they have becomerelatively cheap, not because their prefer-ence for taxed items has weakened. AsFigure 6a shows, between 1967 and 1991taxed consumption grew by about thesame percentage as tax–preferred con-sumption when adjusted for inflation.Since 1991, growth of taxed consumptionhas outstripped that of tax–preferred con-sumption, when measured in constantdollars. The price level of tax–preferreditems has grown twice as fast as that oftaxed items since 1967 (Figure 6b). Willthis trend continue? Many types of tax-able goods have become cheaper becausetheir production has shifted to overseaslocations, where labor is relatively inex-pensive. Furthermore, technological inno-vation has enhanced productivity and,therefore, reduced unit labor costs in theUnited States. The gap between U.S. andforeign labor costs will probably continuefor a long time, especially given the largepool of extremely inexpensive labor inChina. However, eventually expectationsand wage demands of foreign workerswill probably rise, causing the gap to sta-bilize or even close. Nor will technologi-cal innovation necessarily enable reduc-tions in the cost of producing taxed goodsindefinitely. Furthermore, improved cost

management may slow inflation in keyservice industries where price rises havebeen especially steep, such as medicalcare.

If the relative average price of taxablegoods rose, consumers would substitutetax–preferred items for taxed ones. How-ever, would the degree of substitution beso great that the ratio of taxed to tax–pre-ferred items would resume its decline?8

Quite plausibly, a rise in the relative priceof taxed items on net would increase theirshare of consumption when measured incurrent dollars.

Implications of shift in mix of produc-tion: While the shift in consumption fromgoods to services may have narrowedsales tax bases somewhat, the shift in pro-duction from goods to services might havebroadened them. Since unsheltered indus-tries now produce a larger share of thenation’s output than they did 25 years ago,they also account for a larger share of busi-ness–to–business purchases. As shown inFigure 5, the share of total potential busi-ness purchases accounted for byunsheltered industries increased from 41percent to 53 percent between 1977 and1997.9

However, the mix of purchases madeby unsheltered industries also changedover this 20–year period. The percentageof these purchases accounted for by taxeditems fell from 52 percent in 1977 to 40percent in 1997.10 In other words, firmsin unsheltered industries, especiallyservices, increased their reliance on tax–preferred inputs, such as purchases of ser-vices. This shift in the mix of purchasesmade by unsheltered industries offset

7 As shown in Figure 5, in 1977 consumption’s share of total taxable transactions was 39 percent, while theshare accounted for by consumption of taxed items was 15 percent. Fifteen percent/39 percent equals 0.385.In 1997, the comparable ratio was 14 percent/43 percent, which equals 0.326. The difference between the tworatios is 0.385 – 0.326, or 0.06 (0.059).

8 In the language of economics, would the price elasticity of substitution exceed 1?9 In 1977, unsheltered industries accounted for 25 percent of total transactions, while all industries accounted

for 61 percent. Twenty five percent/61 percent equals 0.41. In 1997, the comparable percentage was 30 per-cent/57 percent, or 0.53.

10 In 1977, taxed items accounted for 13 percent/25 percent, or 0.52, of purchases by unsheltered industries. By1997 the comparable percentage had fallen to 12 percent/30 percent, or 0.40.


476

unsheltered industries’ growing share ofbusiness purchases, reducing the share oftotal potential transactions accounted forby taxed items purchased by unshelteredindustries from 13 percent to 12 percent.

Thus, between 1977 and 1997 the per-centage of total potentially taxable trans-actions that fall within taxed categories fellby only 2 percentage points, from 28 per-cent to 26 percent. Thus, after taking intoaccount all potentially taxable transac-tions, the shift in the nation’s mix of con-sumption and production away fromgoods towards services seems less prob-lematic than is commonly believed.

Implications for the Property Tax

Property taxes paid by businesses areusually levied on two types of tangibleassets: realty (land and buildings) andpersonalty (machinery, equipment, andinventories). In general, goods–producing

sectors, such as manufacturing, mining,and agriculture, are more capital intensivethan other sectors of the economy. A shiftin the mix of production away fromgoods, therefore, may have slowedgrowth in the value of taxable property,diminishing the revenue productivity ofthe property tax.

Yet, on the whole, the shift in produc-tion away from goods may not haveeroded property tax bases as much assome analysts have contended. As Brunori(2001, p. 130) has observed, “In recentyears, the trend has been to eliminate ordramatically reduce taxes on businesses’tangible personal property.” As a result,the property tax in the United States hasincreasingly become a tax on realty(Youngman, 1998). On the whole, firmsproducing goods have a relatively lowratio of realty to personalty (Figure 7).Consequently, the nationwide ratio of re-alty to personalty may have risen or at

Figure 7. Ratio of Realty to Personalty for Goods–Producing Sectors and Other Sectors, 1977 to 1997


477

least remained constant during the lasttwo decades, increasing or leaving un-changed the portion of tangible businessproperty that local governments tax mostintensively.

Historical trends in this ratio can beanalyzed using nationwide inventoryand capital stock data published by theU.S. Bureau of Economic Analysis and se-lected balance sheet data from corporatetax returns compiled by the U.S. InternalRevenue Service. A proxy for realty, theratio’s numerator, is the value of land andstructures in the private sector. The proxyfor personalty, the denominator, is thesum of private inventories and machin-ery and equipment.11 Estimated in thismanner, the ratio of realty to personaltyfell between 1977 and 1999 from 1.19 to1.18, a difference of only one–hundredthof a point.12 The stability of this ratio re-flects the interplay of several offsettingtrends. On the one hand, the value of tan-gible business property grew slightlyfaster in sectors relatively intensive in re-alty than in other sectors and the percent-age of tangible business property ac-counted for by inventories declined in allsectors. On the other hand, the percent-age of tangible business property compris-ing machinery and equipment increasedin most sectors.

While these various trends may havehad a neutral impact nationwide, the shiftaway from goods production has contrib-

uted to a sharp reduction in the propertytax capacity of some local jurisdictions. Inparticular, those cities that have lost muchof their manufacturing base and have notbeen able to replace it with firms in rap-idly growing industries have experiencedconsiderable fiscal stress. Such cities havelost manufacturing jobs not only becauseof the shift in production away fromgoods but also because they have had dif-ficulty competing for factories with sub-urbs and other cities.

THE INCREASING IMPORTANCE OFINTANGIBLE ASSETS: IMPLICATIONSFOR SALES AND PROPERTY TAXES

The preceding section presents evi-dence that the ratio of generally taxed salesto total potentially taxable sales has fallenonly slightly since 1977. Similarly, the ra-tio of generally taxed property(realty) to to-tally potentially taxed property has remainedunchanged. However, the ratio of poten-tially taxable sales to Gross Domestic Prod-uct (GDP), as well as that of potentially tax-able property to GDP, have fallen markedly.These falling ratios are dangerous warn-ing signs that state and local officialsshould heed if the demand for state andlocal public services rises with private sec-tor GDP. In this section we argue that thesefalling ratios are symptoms of the grow-ing importance of intangible assets in gen-erating value added.

11 The total values of structures, machinery and equipment, and inventories were taken directly from the publicweb site of the U.S. Bureau of Economic Analysis (BEA), www.bea.gov. The total value of land was estimatedin the following manner: 1) The values of land and of depreciable assets reported by corporations filing activeU.S. corporate income tax returns (Form 1120) were compiled for each of nine major industrial divisions.These data are presented in the U.S. Internal Revenue Service’s Statistics of Income–Corporate Income Tax Re-turns (1977, 1987, 1997). The ratio of these two values was computed for each industrial division for each year.Values of this ratio for 1999 were assumed to be identical to those for 1997. It was then assumed that, for eachindustrial division, the value of this ratio was the same as the ratio of land to the sum of the stocks of struc-tures and machinery and equipment reported by the BEA.

12 As an alternative method of estimating the nationwide ratio of realty to personalty, the author used data oninventories, depreciable assets, and land from the U.S. Internal Revenue Service’s Statistics of Income—Corpo-rate Income Tax Returns for corporations. The ratio of machinery and equipment to total depreciable assets foreach industrial division was assumed to be the same as that reported in data provided by the U.S. Bureau ofEconomic Analysis. According to this method, the nationwide ratio of realty to personalty rose from 1.06 in1977 to 1.14 in 1997.


478

From 1977 to 1999, the ratio of poten-tially taxable sales to private sector GDPfell by 9 percentage points and the ratioof taxed transactions to private sector GDPfell by 6 percentage points (Table 1).13 Thecomponent of potentially taxable transac-tions that declined the most relative toprivate sector GDP was intermediate pur-chases. This decline, in turn, reflects thehigh ratio of intermediate purchases tooutput that generally characterizes shel-tered industries. As production has shiftedfrom sheltered to unsheltered industries,it has become less “intensive” in interme-diate purchases, a rich source of transac-tions potentially subject to sales taxation.

The most plausible explanation for thedeclining ratio of intermediate purchasesto private sector GDP is the growing im-portance of intangible assets (such as pat-ents, databases, software, formulas, andtrademarks) in the nation’s mix of busi-ness assets. In 1977 the ratio of intangibleto tangible assets was less than 0.01; 20

years later it was 0.15 (Figure 8). Only partof this shift in the mix of producers’ as-sets can be attributed to the shift in thecomposition of output away from goods.Although the largest absolute increasebetween 1977 and 1997 occurred in theservices sector (from 0.02 to 0.25), the ra-tio of intangibles to tangibles also rosesharply in most other industrial sectors,including those producing goods. For ex-ample, the ratio of intangibles to tangiblesin manufacturing rose from less than 0.01to 0.18, almost the same increase as theratio in finance, insurance, and real estate.The growth of “knowledge–based” pro-duction has not been confined to theeconomy’s fastest–growing sectors.

If intangible assets generate an increas-ing share of private sector GDP over time,then broadening the sales tax base to in-clude services will not necessarily arrestthe long–term decline in the ratio of thesales tax base to private sector GDP. Evenif all potentially taxable transactions were

TABLE 1COMPONENTS OF POTENTIALLY TAXABLE TRANSACTIONS AS A PERCENTAGE OF GROSS

DOMESTIC PRODUCT GENERATED IN THE PRIVATE SECTOR, 1977 TO 1997

1977 1987 1997

1 Consumer Purchases2 Taxed Items3 Tax–Preferred Items4 Business Purchases– Sheltered Industries5 Intermediate Purchases6 Machinery and Equipment7 Structures8 Business Purchases–Unsheltered Industries9 Intermediate Purchases

10 Taxed Items11 Tax–Preferred Items12 Machinery and Equipment13 Structures14 Total Potentially Taxable Transactions15 Taxed Consumption and Taxed Business Purchases

(line 2 + line 10 + line 12)

1977 1987 1997

1 Consumer Purchases2 Intermediate Purchases3 Machinery and Equipment4 Structures

Source: U.S. Bureau of Economic Analysis, Survey of Current Business: May 1984, April 1992, and January 2001.

79.130.748.471.065.34.01.7

47.339.217.421.85.42.7

197.4

53.5

79.1104.5

9.44.4

82.929.553.555.351.42.91.0

51.942.115.226.96.23.6

190.2

50.9

82.993.59.14.6

81.026.354.651.547.1

3.31.1

56.246.413.932.5

7.32.6

188.7

47.4

81.093.510.5

3.7

13 The numbers do not add up because of rounding.


479

actually taxed, the ratio of taxed transac-tions to private sector GDP would con-tinue to decline over the long run. Thiswould be true because sales taxes are de-signed to “meter” only flows of consump-tion, purchases of machinery and equip-ment, and intermediate purchases, notflows generated by intangible property.

Similarly, if the past is any indication ofthe future, the ratio of the property tax baseto private sector GDP would continue toshrink absent inclusion of intangible as-sets in its base. Because intangible assetsare so difficult to value and to locate geo-graphically, most states do not subjectthem to property taxation (Youngman,1998). Partially as a result, while the na-tionwide ratio of realty to personalty mayhave been stable between 1977 and 1997,the ratio of the value of realty nationwideto GDP fell sharply, from 0.81 to 0.69. Theshift in producers’ asset mix toward intan-gibles has slowed growth in the propertytax base considerably.

THE RISE OF ELECTRONICCOMMERCE

The proliferation of electronic com-merce poses daunting challenges to stateand local tax policymakers, especiallyin designing sales taxes and corporateincome taxes. According to the latestprojections, performed by ForresterResearch Inc. (as reported in Bruce andFox, 2001), the value of taxable salesconducted via e–commerce will mush-room from $754 billion in 1999 to $1.91trillion in 2003. Of the 2003 amount, allbut $127 billion will consist of business–to–business transactions. Other estimatesof the value of business–to–businesse–commerce in 2003 range from $634 bil-lion to $2.94 trillion (Fraumeni, 2001). Ac-cording to Bruce and Fox, Forrester Re-search, Inc. projects that by 2011 the totalvalue of e–commerce will rise to $6.09 tril-lion. Of this amount, all but $304 billionwill come from business–to–businesstransactions.

Figure 8. Growth in the Ratio of Intangible Assets to Tangible Assets, 1977 to 1997


480

Implications for the Sales Tax

The potential erosion of sales tax basesby the expansion of e–commerce is one ofthe most salient and controversial issuesin public finance today. Electronic trans-actions—and, for that matter, all remotetransactions, including catalog pur-chases—that cross jurisdictional bound-aries are currently taxable only under theuse tax. In theory, purchasers buying tax-able items from vendors located in an-other taxing jurisdiction must pay a usetax, equal in rate to the sales tax the pur-chaser would have paid had the goodsbeen purchased “in–jurisdiction.” At-tempts at enforcing use taxes, especiallyon sales from businesses to households,have met with limited success. Estimatedrates of enforcement of use taxes onbusiness–to–business sales range from 40percent to 60 percent, while estimatedenforcement rates on business–to–house-hold transactions fall into the single dig-its (Brunori, 2001). The potential spreadof remote sales, especially in electronicform, has dramatically raised the revenuestakes of limited use tax enforcement. Anumber of task forces have been examin-ing the possibility of imposing enforce-ment responsibilities on remote vendors,requiring them to collect use taxes im-posed by the jurisdictions in which theircustomers are located. To date, opponentsof taxing remote sales have persuaded theCongress that, given the large number ofstate and local jurisdictions levying salestaxes and the wide variation in their taxpractices, the costs of such enforcementarrangements would be too burdensometo be constitutional (under the due pro-cess clause and the interstate commerceclause). The 1992 Supreme Court decisionin Quill Corp v. North Dakota (504 U.S. 298)concerning state and local sales taxationof mail–order catalog sales is the seminal

ruling in this area. However, several schol-ars have questioned whether constitu-tional barriers to sales taxation of e–com-merce are insurmountable (Hellerstein,1997, 1998, 2000; McLure, 1998; Wrightand Rothstein, 1999). In particular, the de-velopment of new tax software and amovement to streamline and to simplifystate and local sales tax laws might enableremote collection and remittance both topass constitutional muster and to be ad-ministratively feasible (see Mikesell,2000).14

The revenue consequences of e–com-merce expansion on state and local salestax revenues are highly uncertain. Thewide range of the estimates that have beenreported is attributable to uncertainty overthree critical underlying issues: 1) the ex-tent to which e–commerce will spread, 2)the extent to which expanding e–com-merce will replace other forms of remotesales, and 3) the extent to which sales taxbases will erode anyway because of theshifting composition of consumption andoutput. According to the latest estimates,done by Bruce and Fox (2001), the staterevenue loss resulting from the spread ofe–commerce as a percentage of total statetax revenues will rise from 1.1 percent in2001 to 3 percent in 2006 and then fallslightly to 2.9 percent by 2011. The com-parable percentages at the local level areprojected at 0.4 percent, 1 percent, and 0.9percent. These percentages assume that asignificant proportion of ecommerce willsubstitute for telephone sales, alsountaxable under current law, therebyblunting the revenue impact.

Implications for the CorporateIncome Tax

The spread of e–commerce complicatestwo important issues in the implementa-tion of state taxes on corporate income.

14 An example of such efforts is the National Tax Association’s Communications and Electronic Commerce TaxProject. See www.ntanet.org.


481

First, under what circumstances does acorporation have a sufficiently large pres-ence within a state to render it liable forthe state’s corporate income tax? (In legalterms, under what circumstances does thecorporation have “nexus”?) Second, giventhat a corporation has nexus, how doesthe taxing state determine its fair share ofa multistate or multinational corporation’stotal taxable income, that is, how is theincome of such a corporation “appor-tioned”? Under current rules for establish-ing nexus and apportioning income, stateshave had difficulty taxing the income ofcorporations engaged primarily in elec-tronic commerce.

A federal law enacted in 1959 (P.L. 86–272) forbids a state to levy an income taxon a firm whose only business activitywithin the state’s borders is solicitation ofpurchases of tangible goods to be shippedto customers outside the state. Conse-quently, if Massachusetts residents andbusinesses buy computers over theInternet from a company with no facili-ties or workers located within the Com-monwealth, that company is not liable forthe Commonwealth’s corporate incometax. P.L. 86–272 was enacted to protectcompanies engaged in mail–order sales,not electronic commerce. Growth in prof-its subject to state corporate income taxesmay be depressed to the extent that com-panies engaging in e–commerce replacetraditional “bricks and mortar” competi-tors.15

Even if an e–commerce company hasnexus within a state, the state may be ableto tax only a small portion of its profitsgiven current state apportionment rules.Even if an e–commerce company hasnexus within a state, the state may be ableto tax only a small portion of its profitsgiven current state apportionment rules.Apportioning corporate income has beena troublesome issue since the beginning

of state corporate income taxation.Multijurisdictional entities are so thor-oughly integrated that formulas designedto allocate their income geographically arein large part arbitrary and therefore con-troversial.

The traditional factors used to appor-tion such income, chosen because theirgeographic loci are identifiable, are pay-roll, tangible property, and sales. A rela-tively large portion of the property ownedby e–commerce companies is intangible(for example, “intellectual property”). In-tangible property is generally omittedfrom apportionment formulas because, asnoted in the second section, its value andgeographic location are so difficult to de-termine. With intangible property left outof the property factor, electronic com-merce companies can locate their facilitiesand payroll in states with no corporate in-come tax, thereby avoiding most state cor-porate income taxation. Applying thesales factor to e–commerce companies alsoposes special problems. Sales of tangiblegoods are sited in the jurisdiction wherethe purchaser takes possession. Sales ofservices, however, are assigned to the ju-risdiction where the majority of the in-come–generating activity involved in pro-viding the service is performed. Electroniccommerce often entails the simultaneoussale of both services (such as electronictransfer) and tangible property. Applyingtraditional siting rules is difficult in thesecircumstances.

Furthermore, it is difficult to determinethe location of economic activity generat-ing income through electronic commerce.Should such activity be sited wherethe Internet server facilitating the trans-action is based? Where the vendor usingthe Internet is located? Where thecustomer is located? These questionsraise a host of difficult technical issuesthat have generated, and will continue to

15 There is widespread agreement, however, that favoring e–commerce over “bricks and mortar” sales distortsproduction techniques and unfairly discriminates against traditional retailers.


482

generate, contentious and costly litiga-tion.16

THE INCREASING PRESSURE ONJURISDICTIONS TO COMPETE

States, colonies, and municipalitieshave engaged in fiscal competition formore than 350 years. As Alice Rivlin askedrhetorically five years ago, “Haven’t statesand localities always competed for jobsand industry, both here and abroad, us-ing whatever incentives they could laytheir hands on?” (Rivlin 1996, p. 20).17 In-deed, to some observers, the persistenceand ubiquity of such competition implyits inevitability among fiscally autono-mous subnational governments. As longas businesses, shoppers, and vacationersare mobile, states and municipalities willcontinue to design their revenue systemsin part to attract and to retain them.

Despite its “bad rap” in the 1990s, fiscalcompetition can be beneficial. Most schol-ars would agree that in moderation it en-hances the operational efficiency of stateand local governments. Furthermore, at-tempts by cities and towns to attract spe-cific types of households and businessesincrease the likelihood that a given house-hold or firm will find a community with aset of fiscal characteristics that best suitsits tastes. (See Tiebout, 1956; Oates andSchwab, 1988; Kenyon and Kincaid, 1991;Kenyon, 1997.) Why, then, has fiscal com-petition become so controversial that somerespected scholars and officials are callingupon the federal government to curtail it?

Concern about such competition has in-tensified because it “has escalated into abidding crescendo that is injuring the win-ners as well as the losers” (Rivlin, 1996, p.21). Burstein and Rolnick (1996) character-ize it as a “negative sum game,” in whichjurisdictions shortchange themselves on

critical public goods (such as educationand infrastructure) to finance incentives forprospective employers. However, mostjobs created by such employers, so the ar-gument goes, would have been createdanyway (McEntee, 1996). Too few publicgoods are produced, and all governmentsare worse off. Competitive tactics becomeself–defeating and mutually destructive.By contrast, some analysts, such as Matteyand Spiegel (1996), contend that fiscal com-petition can enhance efficiency by offset-ting the existing bias against new invest-ment embedded in the nation’s federal,state, and local tax laws.

Fiscal competition has intensified for avariety of reasons. During the late 1970sand early 1980s, the combination of soar-ing energy costs and persistently highrates of unemployment galvanized statesand municipalities to do something to at-tract and to maintain jobs for their con-stituents. The shift to services has also beenpartially responsible. Industries requiringproximity to primary resources (such assteel) or central locations (such as autos)have declined in importance in the UnitedStates while sectors that are growing, suchas services, are more footloose. Evenwithin mature goods–producing indus-tries, new communications technologyand deregulation have enhanced firms’geographic mobility. Stiffer competitionfrom overseas has also played a role inmotivating jurisdictions to offer whateverinducements are necessary to attract andto retain businesses. Noting the greatermobility of new firms and their weak at-tachment to any particular place, critics offiscal competition contend that such firmswill be increasingly successful in playingoff one jurisdiction against the other.

Evidence that subnational fiscal compe-tition has intensified is clear–cut. For ex-ample, in a survey of the 50 states con-

16 For further discussion, see McLure (2000); Frieden (2000); Hellerstein (1997); National Conference of StateLegislatures and National Governors’ Association (1993).

17 For historical overviews, see Wilson (1989); LeRoy (1994); Chi (1989); Chi and Leatherby (1997); Burstein andRolnick (1996); Enrich (1996); Gilbert (1995).


483

ducted for the Council of State Govern-ments in 1997, Chi and Leatherby (1997)found that all 50 states had increased thelevel and variety of business tax and finan-cial incentives during the previous 20years. Thirty–eight of the 50 states reportedan increase in the use of such incentivesduring the five prior years. When askedabout expected utilization of such incen-tives during the remainder of the 1990s, 25states expected an increase, 22 no increase,and only 2 a decrease (1 did not respond).

The same trend emerges in surveys ofemployers. In 1995, Regional Finance As-sociates Inc., an economic consulting firm,surveyed over 200 manufacturing, retail-ing, and distribution companies that wereclients of KMPG Peat Marwick LLP. Ofthose responding, 73 percent indicatedthat during the previous year they wereoffered subnational financial incentivesworth more than those they were offeredfive years earlier. Another gauge of com-petitive intensity is the increase in thevalue of incentives awarded per job cre-ated. In 1980, Tennessee offered Nissan apackage of incentives worth about $11,000per job to be created by a new plant. In1993, Alabama offered $168,000 per prom-ised job to Daimler Benz for a newMercedes Benz factory. Blue Water Fibreobtained an $80 million inducement pack-age from Michigan for a paper–recyclingmill employing 34 people, a price tag ofabout $2.4 million per job (Farrell 1996).18

The damper that competition places onsubnational corporate income taxation isreflected in changes over the past 40 yearsin the ratio of state and local corporateincome tax collections to corporate prof-its (Figure 9). During the 1960s and 1970s,

this ratio increased steadily, as the de-mand for state and local public servicesgrew. After the ratio hit a local peak of 7.3percent in 1980, it dropped sharply be-cause in that year the federal governmentenacted large increases in depreciationallowances.19 These increases in effect re-duced the percentage of corporate profitssubject to federal tax. State and local cor-porate tax burdens were affected because,in the interest of administrative simplic-ity, most states and municipalities tie theirdefinition of taxable corporate profitsclosely to their federal counterpart. Thestate and local corporate tax burden rosesharply again in 1987 because the federalTax Reform Act of 1986 eliminated or nar-rowed several corporate tax deductions,including depreciation allowances. Afterpeaking again in 1986 at 7.6 percent, thestate and local corporate tax burden fellsteadily to 3.9 percent by 2000. By contrast,the ratio of state and local personal taxesand charges to personal income rose fairlysteadily from 1.1 percent in 1959 to 2.7percent in 1987 and continued to rise to3.4 percent in 2000.20 Total state and localgovernmental tax and non–tax receipts asa percentage of personal income in 2000were only slightly below their peak level,reached in 1973. Thus, while the burdenof state and local personal taxes has risenand that of state and local revenues as awhole has remained fairly constant, theburden of state and local corporate incometaxes—the type that impinges most di-rectly on corporate profitability—has beenalmost halved. These discrepancies sug-gest that competitive concerns playeda large role in cutting the corporate taxburden.

18 Examples such as these have been cited by those wishing to curtail the use of financial incentives as a competi-tive tactic as evidence of their lack of cost–effectiveness. Scholarly analyses of the degree to which state andlocal taxes in general, and fiscal incentives in particular, increase employment and investment within a regionvary widely and are inconclusive. (See Wasylenko, 1997; Bartik, 1995 and 1997; McGuire, 1997.)

19 This liberalization of depreciation allowances was part of the Economic Recovery Tax Act of 1981.20 In the National Income and Product Accounts, state and local personal tax and nontax receipts include state

and local personal income taxes, motor vehicle license taxes, fines, and selected other tax and non–tax sourcesfor which individuals, as opposed to businesses, are liable. Property taxes and sales taxes are not included.


484

Gauging the revenue impact of busi-ness–oriented state and local tax incen-tives, as opposed to other forms of stateand local tax competition, is difficult.States and localities generally do not for-mally identify and catalog all features oftheir tax systems designed to enhancetheir competitive standing, let alone at-tempt to estimate the impact of these fea-tures on revenues. The City of New Yorkis an exception to this rule. The City’sAnnual Report on Tax Expenditures (2001)analyzes those provisions of its tax lawsthat provide tax incentives for specifictypes of economic behavior or tax relieffor certain narrowly defined groups oftaxpayers under specific circumstances.According to the Report, in FY2000 the

City granted property tax relief explicitlydesigned to promote economic develop-ment costing an estimated $586 million inforgone revenue, a little more than 7 per-cent of citywide property tax revenues.Similar tax incentives embedded in theCity’s business profits taxes cost the Cityan estimated $397 million in FY1997 (thelatest year for which data are available),approximately 19 percent of revenuesfrom that source.21

CONCLUSION AND POLICYIMPLICATIONS

The economic and political forces im-posing fiscal stresses on our nation’s stateand local governments are difficult to ana-

Figure 9. Trends in Selected Ratios of State and Local Tax Burdens Ratio, 1959 to 2000

21 For New York State as a whole, tax–exempt industrial and commercial property as a percentage of total equal-ized value has been lower: 4 percent and 2 percent in FY1989 and FY1999, respectively (New York State, Officeof Real Property Services 1989, 1999).


485

lyze. A number of cyclical and secularforces have converged simultaneously,some exacerbating fiscal stress and someameliorating it. As a result, projecting fu-ture trends in the fiscal capacity of stateand local governments is fraught withuncertainty. Yet, given the possibility ofintensifying fiscal pressures, state and lo-cal policymakers should consider ways ofmaking their tax systems more stable andrevenue–productive. Unfortunately, theoptions available to them sacrifice othertax policy objectives.

Policymakers have considered includinga wider array of services in taxable sales.Inclusion of services purchased by house-holds would promote neutrality by puttingthe consumption of goods and services ona more equal tax footing. The developmentof computerized record–keeping has re-duced some of the obstacles deterring thebroader taxation of services in the past.Policymakers would probably eschew thetaxation of health services, one of the fast-est–growing components of the servicessector, on the grounds that incurring medi-cal expenses is generally involuntary.22 Thetaxation of business services, another largeand rapidly growing component, woulddiminish tax neutrality by discriminatingagainst industries that rely on them heavilyand are not vertically integrated. Profes-sional service firms, whether serving firmsor households, might be able to maintaintheir untaxed status because of their po-litical clout, even in the face of a broadmovement to tax services. Spending onthose services most likely to be made tax-able, personal services provided by non-professionals, accounts for a larger portionof the incomes of low–income and lower–middle income households than of the in-comes of middle– and high–income house-holds (Mikesell, 1993). As a result, their in-clusion in sales tax bases could increase theregressivity of state and local taxes.

Reducing sales tax preferences for pur-chases of intermediate goods and machin-ery equipment by manufacturers, miningconcerns, and farms might merely substi-tute one set of tax–induced distortions foranother. While firms in these sectorswould be treated more like those in cur-rently unsheltered industries, verticallyintegrated industries within these threesheltered sectors would gain a tax advan-tage. Any increase in the taxation of busi-ness–to–business purchases discriminatesin favor of vertically integrated industriesbecause they are not penalized by thepyramiding of the tax as it is shifted for-ward to successive stages of production.

Many state and local governments haveembarked on a major campaign to sim-plify sales taxes and to make them moreuniform across jurisdictions.23 Suchstreamlining is needed to convince Con-gress and the courts that remote collectionof use taxes on electronic transactions isconstitutional and administratively fea-sible. Achieving this goal, however, willrequire complex negotiation and compro-mise by state and local governmentsthroughout the nation and a loss of au-tonomy and discretion that subnationalpolicymakers have been reluctant to cedein the past.

How, if at all, should policymakers reinin subnational fiscal competition? At oneextreme, some scholars and officials arecalling on Congress and/or the courts topenalize or prohibit certain state and lo-cal business incentives. They argue thatthe constitutional prohibition against in-terference with the free flow of interstatecommerce (Constitution, Article I, section8) gives the federal government ampleauthority to step in (Burstein and Rolnick,1996; Enrich, 1996; McEntee, 1996;Hellerstein, 1996; Frickey, 1996; Kramer,1996). Short of prohibition, the federalgovernment could hold back grant money

22 For this reason, most states already exempt sales of medical devices and prescription drugs.23 The principal formal organization through which they are working is the Streamlined Sales Tax Project. For

further details, see the Project’s web site: www.geocities.com/streamlined2000.


486

to states and municipalities that imple-ment extremely aggressive, self–defeatingcompetitive incentives.

Yet calls for federal intervention haveelicited a negative reaction from some (forexample, Ebel, 1997; Fox, 1997; Toft, 1996).In arguing against intervention, oppo-nents offer the following points: 1) for allits flaws, a system of decentralized au-tonomous government is still the “leastworst,” as international evidence linkingdecentralization with economic growthhas shown; 2) rules implementing federalregulation of competition would have tobe so complex that, like so many other fed-eral mandates, they would create moreproblems than they would solve; 3) for-mally constraining interstate andinterjurisdictional competition within theUnited States would still leave states andmunicipalities vulnerable to competitivepressure from overseas; and 4) other tac-tics short of federal intervention couldsucceed, or at least should be tried, beforesubnational governments are compelledto sacrifice more of their autonomy.

Other recommendations to dampenmutually destructive competition includethe following:

1. Voluntary compacts among statesand municipalities to refrain fromcompetition, to create more unifor-mity in taxation, and even to sharerevenues (Rivlin, 1996). Unfortu-nately, the track record of such vol-untary compacts has not been good(see Reich, 1996). However, if thestakes become high enough,policymakers might find coordina-tion to be an increasingly attractiveoption.

2. State and municipal “right–to–know” laws, which require benefi-ciaries of fiscal incentives to provideinformation that will help citizens toevaluate these incentives’ “bang forthe buck.” Such laws would requirereporting of jobs expected to be cre-

ated or retained if the subsidizedproject were implemented, jobs ac-tually created or retained because ofthe project, and the compensationpaid to jobholders.

3. “Clawback” provisions, whichwould require incentive recipients tomeet certain conditions, such as thecreation or retention of a minimumnumber of jobs at a specified mini-mum wage for a specified minimumamount of time. If the beneficiaryfails to meet the agreed–upon objec-tives, it must repay the public subsi-dies it has received to the conferringgovernments.

4. Increased hiring of skilled cost–ben-efit analysts by state and local gov-ernments to help evaluate the costsand benefits that competitive finan-cial incentives entail.

5. Abandonment of the corporate in-come tax, the tax most prone to com-petitive erosion. As Pomp (1998) hasargued, in this age of globalizationconglomerates have become so far–flung and intricately organized thatstate and city tax officials are hav-ing increasing difficulty enforcingcorporate income taxes. Reportingrequirements that would enhanceenforcement and compliance, suchas combined reporting, have beenfervently and successfully opposedby large corporations. Quite simply,state and city tax departments areincreasingly “outgunned” in at-tempting to enforce this tax. Accord-ing to Pomp, the tax has little future.

States and municipalities are turning in-creasingly to tactics numbers 2 and 3 on thisfive–point list. According to a comprehen-sive study directed by the National Asso-ciation of State Development Agencies,

For most incentive programs, policy mak-ers have established eligibility criteria toensure sound investments in achieving


487

predetermined public policy goals. Ac-countability measures and other protec-tions such as clawback provisions arebuilt into the programs . . . States and com-munities are beginning to add theseclawback provisions as a standard ele-ment of their incentive offers to firms(Poole et. al., 1999, p. 14).

Further evidence of growing demandfor greater corporate accountability canbe found in LeRoy (1994) and periodicreports posted on the web site of GoodJobs First, a project sponsored by the In-stitute on Taxation and Economic Policy,Citizens for Taxation, Washington, D.C.(www.goodjobsfirst.org).

Whatever state and local tax reforms areadopted, long–run potential threats to therevenue productivity and stability ofsubnational revenue systems should becontinuously reevaluated. With the fed-eral government shifting its priorities inthe wake of the attacks on September 11,the states and their municipalities mightbe called upon to shoulder significantlywider domestic fiscal responsibilities.They should possess revenue systems thatwill enable them to meet these responsi-bilities effectively.

REFERENCES

Bartik, Timothy J.“Jobs, Productivity, and Local Economic De-velopment: What Do We Know and WhatCan We Know?” In Proceedings of the Eighty–Seventh Annual Conference on Taxation. Co-lumbus, OH: National Tax Association, 1995.

Bartik, Timothy J.“Discussion of Wasylenko and Fisher.” NewEngland Economic Review (March/April): 67–71. Issue entitled The Effects of State and Lo-cal Public Policies on Economic Development,published by the Federal Reserve Bank ofBoston, 1997.

Bruce, Donald, and William F. Fox.“E–Commerce in the Context of DecliningStates Sales Tax Bases.” National Tax Journal54 No. 4 Part 3 (December, 2000): 1373–88.

Bruce, Donald, and William F. Fox.State and Local Sales Tax Revenue Losses fromECommerce: Updated Estimates. Salt LakeCity, UT: Institute for State Tax Studies, Sep-tember, 2001.

Brunori, David.State Tax Policy: A Political Perspective. Wash-ington, DC: Urban Institute Press, 2001.

Burstein, Melvin L., and Arthur J. Rolnick.“Congress Should End the Economic War forSports and Other Businesses.” The Region.Special issue entitled The Economic WarAmong the States, published by the FederalReserve Bank of Minneapolis (June, 1996):35–6.

Chi, Keon.The States and Business Incentives: An Inven-tory of Tax and Financial Incentives Programs.Lexington, KY: Council of State Govern-ments, 1989.

Chi, Keon, and Drew Leatherby.State Business Incentives: Trends and Optionsfor the Future. Lexington, KY: Council of StateGovernments, 1997.

DRI/WEFA.Data Disc. Lexington, MA, August, 2001.

Ebel, Robert.“Policy Implications: A Panel Discussion,Comments.” New England Economic Review(March/April, 1997): 146–7.

Enrich, Peter D.“Saving the States from Themselves: Com-merce Clause Constraints on State Tax In-centives for Business.” Harvard Law Review110 No. 2 (December, 1996): 377–468.

Farrell, Chris.“The Economic War Among the States: An Over-view.” The Region 10 No. 2 (June, 1996): 4–7.

Federation of Tax Administrators.Sales Taxation of Services, 1996 Update. Re-search Report RR–147. Washington, D.C.,1997.

Federation of Tax Administrators.“State Sales Tax Exemptions, Food andDrugs.” www.taxadmin.org, 2001.

Fox, William F.“Policy Implications: A Panel Discussion,Comments.” New England Economic Review(March/April, 1997): 142–3.


488

Fox, William F.“Can the State Sales Tax Survive a FutureLike Its Past?” In The Future of State Taxa-tion, edited by David Brunori, 33–48. Wash-ington, D.C.: The Urban Institute Press,1998.

Fraumeni, Barbara M.“E–Commerce: Measurement and Measure-ment Issues.” The American Economic Review91 No. 2 (May, 2001): 318–22.

Frickey, Philip P.“The Congressional Process and the Consti-tutionality of Federal Legislation to End theEconomic War Among the States.” The Re-gion 10 No. 2 (June, 1996): 58–9.

Frieden, Karl.Cybertaxation: The Taxation of E–Commerce.Chicago: CCH Inc., 2000.

Gilbert, Jennifer L.“Selling the City Without Selling Out: NewLegislation on Development IncentivesEmphasizes Accountability.” Urban Law Re-view 27 (1995): 427–30.

Hellerstein, Walter.“Commerce Clause Restraints on State TaxIncentives.” The Region 10 No. 2 (June, 1996):60–66.

Hellerstein, Walter.“State Taxation of Electronic Commerce.”Tax Law Review 52 No. 3 (Spring, 1997): 425–506.

Hellerstein, Walter.“Electronic Commerce and the Future ofState Taxation.” In The Future of State Taxa-tion, edited by David Brunori, 207–24. Wash-ington, D.C.: Urban Institute Press, 1998.

Hellerstein, Walter.“Federal Constitutional Limitations on Con-gressional Power to Legislate RegardingState Taxation of Electronic Commerce.”National Tax Journal 53 No. 4 Part 3 (Decem-ber, 2000): 1307–26.

Kenyon, Daphne A.“Theories of Interjurisdictional Competi-tion.” New England Economic Review(March/April, 1997): 13–27. Issue entitledThe Effects of State and Local Public Policies onEconomic Development, published by the Fed-eral Reserve Bank of Boston, 1997.

Kenyon, Daphne A., and John Kincaid, eds.Competition among State and Local Govern-ments: Efficiency and Equity in American Fed-eralism. Washington, D.C.: The Urban Insti-tute Press, 1991.

Kramer, Larry.“The Power of Congress to Regulate Inter-state Tax Competition.” The Region 10 No. 2(June, 1996): 64–6.

LeRoy, Greg.“No More Candy Store: States and CitiesMaking Job Subsidies Accountable.” Wash-ington, DC: Good Jobs First, 1994.

Mattey, Joe, and Mark Spiegel.“On the Efficiency Effects of Tax Competi-tion for Firms.” The Region 10 No. 2 (June,1996): 50–1.

McEntee, Gerald W.“The Problem with State Bidding Wars andSome Possible Remedies.” The Region 10No. 2 (June, 1996): 41–2.

McGuire, Therese J.“Discussion of Wasylenko and Fisher.” NewEngland Economic Review (March/April,1997): 76–7. Issue entitled The Effects of Stateand Local Public Policies on Economic Devel-opment, published by the Federal ReserveBank of Boston, 1997.

McLure, Charles E., Jr.“Electronic Commerce and the Tax Assign-ment Problem: Preserving State Sovereigntyin a Digital World.” State Tax Notes 14 No.15 (April 13, 1998): 1169–81.

McLure, Charles E., Jr.“Implementing State Corporate Income Taxesin the Digital Age.” National Tax Journal 53No. 4 Part 3 (December, 2000): 1287–306.

Mikesell, John L.City Finances, City Futures. Columbus, OH:Ohio Municipal League, 1993.

Mikesell, John L.“State Retail Sales Taxes, 1995–1998: An EraEnds.” State Tax Notes 18 No. 8 (February21, 2000): 583–95.

National Conference of State Legislatures andNational Governors’ Association.

Financing State Government in the 1990s, ed-ited by Ronald Snell. Denver, CO, Decem-ber, 1993.


489

New York City.Annual Report of State Tax Expenditures, 2000.www.nyc.gov./html/dof/html/taxpol.html, 2001.

New York State, Office of Real Property Services.Exemptions from Real Property Taxation in NewYork State. Albany, NY, 1989, 1999.

Oates, Wallace E., and Robert M. Schwab.“Economic Competition among Jurisdic-tions: Efficiency Enhancing or Distortion In-ducing?” Journal of Public Economics 35No. 4 (April, 1988): 333–54.

Pomp, Richard D.“The Future of the State Corporate IncomeTax: Reflections (and Confessions) of a TaxLawyer.” In The Future of State Taxation, ed-ited by David Brunori, 49–72. Washington,D.C.: The Urban Institute Press, 1998.

Poole, Kenneth E., George A. Erickcek, DonaldT. Iannone, Nancy McCrea, and Pofen Salem.

Evaluating Business Development Incentives.Washington, D.C.: National Association ofState Development Agencies. Printed byACCRA, 1999.

Reich, Robert.“Bidding Against the Future?” The Region 10No. 2 (June, 1996): 26–30.

Rivlin, Alice.“An Economic War.” The Region 10 No. 2(June, 1996): 20–6.

Tiebout, Charles.“A Pure Theory of Local Expenditure.” Jour-nal of Political Economy 64 No. 3 (June, 1956):416–24.

Toft, Graham S.“Doing Battle Over the Incentives War: Im-prove Accountability but Avoid FederalNoncompete Mandates.” The Region (June,1996): 37–40.

U.S. Advisory Commission on Intergovern-mental Relations.

Significant Features of Fiscal Federalism, Vol-ume 1. Washington, D.C., 1988.

U.S. Census Bureau.Statistical Abstract of the United States: 2000,120th Edition. Washington, D.C.: U.S. Gov-ernment Printing Office, 2000.

U.S. Census Bureau.Census of Governments. Volume 4 GovernmentFinances. Number 5: “Compendium of Gov-

ernment Finances.” Washington, D.C.: Gov-ernment Printing Office, 1977, 1982, 1987,1992, 1997.

U.S. Census Bureau.http://www.census.gov/govs/www/cog.html, 1997.

U.S. Census Bureau.State Government Tax Collections. Table 8, 1977.

U.S. Census Bureau.City and County Data Book, 1977, 1994.

U.S. Census Bureau.Census of Manufactures, 1977, 1982, 1987, 1992.

U.S. Census Bureau.http://www.census.gov/prod/ec97/97m31–ma.pdf, 1997.

U.S. Census Bureau.Governmental Finances. www.census.gov/govs/ www/estimate99.html.

U.S. Bureau of Economic Analysis.National Income and Products Accounts. “Re-gional Accounts Data for GSP,” 2001.

U.S. Bureau of Economic Analysis.(January), 1992 (April), 1984 (May). Surveyof Current Business, 2001.

U.S. Internal Revenue Service.Statistics of Income—Corporate Income TaxReturns. Washington, D.C., 1977, 1987, 1997.

U.S. Office of Management and Budget.Budget of the United States, FY2002. http://www.whitehouse.gov/omb/budget/fy2002/budget.pdf, 2001.

Wasylenko, Michael.“Taxation and Economic Development: TheState of the Literature.” New England Eco-nomic Review (May/June, 1997): 37–52.

Wilson, Roger.State Business Tax Incentives and EconomicGrowth: Are They Effective? A Review of theLiterature. Lexington, KY: Council of StateGovernments, 1989.

Wright, Traci G., and Jesse Rothstein.“Taxes and the Internet: Updating Tax Struc-tures for a Wired World.” State Tax Notes 17No. 8 (August 23, 1999): 491–511.

Youngman, Joan M.“Property, Taxes, and the Future of PropertyTaxes.” In The Future of State Taxation,edited by David Brunori, 111–28. Wash-ington, D.C.: The Urban Institute Press, 1998.

Documents

Are State and Local Revenue Systems becoming Obsolete? · 2018. 12. 5. · NATIONAL TAX JOURNAL 468 Dependence on Intergovernmental Assistance In FY1999, the latest year for which