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State Tax Climate Issues
Douglas L. Lindholm
President & Executive Director
Council On State Taxation (COST)
NCSL Fiscal Analysts Seminar
October 5-6, 2016
State Tax Climate Issues and
Misperceptions
#1: Suggestions for improving state tax administrative climate
#2: Assertions that businesses don’t pay their fair share of state taxes
#3: State corporate income tax revenues are declining; personal income tax revenues are increasing
#4: Big businesses benefit from loopholes not available to small businesses, so let’s “level the playing field”
#5: Unitary combined reporting creates fewer tax distortions than separate entity filing, and is an effective way to close “loopholes”
#6: States should impose sales taxes on services to keep up with our expanding service economy
#7: In the name of transparency, corporate tax returns should be made publicly available
#8: Gross receipts taxes are an effective way to tax businesses
#9: State tax haven “blacklists” are an effective way to recoup millions in profits parked offshore
#10: How should states cope with targeted tax incentives?2
Tax Climate Issues
#1:
Suggestions for improving
state tax administration
(“The Best and Worst of State Tax
Administration”)
3
• Areas Evaluated:
– Independent Tax Dispute Forum
– Pay-to-Play Tax Litigation System
– Even-handed Statutes of Limitation / Interest
Rates
– Adequate Appeal/Protest Period
– Transparency
COST State Administrative
Practices Scorecard (2013)
Independent Tax Dispute Forums
HI
ME
RI
VTNH MA
NYCT
PA NJ
DC
DE
WV
NC
SC
GA
FL
ILOH
MIWI
KY
TN
ALMS
AR
LA
TX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
WA
OR
ID
NV
CA
VA
MD
WA
AK
IN
A
B
C
D
Pay-to-Play Tax Litigation System
HI
ME
RI
VTNH MA
NYCT
PA NJ
DC
DE
WV
NC
SC
GA
FL
ILOH
MIWI
KY
TN
ALMS
AR
LA
TX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
WA
OR
ID
NV
CA
VA
MD
WA
AK
IN
A
B
C
D
Even-handed Statutes of Limitation
HI
ME
RI
VTNH MA
NYCT
PA NJ
DC
DE
WV
NC
SC
GA
FL
ILOH
MIWI
KY
TN
ALMS
AR
LA
TX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
WA
OR
ID
NV
CA
VA
MD
WA
AK
IN
A
B
C
D
Equalized Interest Rates on
Assessments and Refunds
HI
ME
RI
VTNH MA
NYCT
PA NJ
DC
DE
WV
NC
SC
GA
FL
ILOH
MIWI
KY
TN
ALMS
AR
LA
TX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
WA
OR
ID
NV
CA
VA
MD
WA
AK
IN
A
B
C
D
Adequate Appeal / Protest Periods
HI
ME
RI
VTNH MA
NYCT
PA NJ
DC
DE
WV
NC
SC
GA
FL
ILOH
MIWI
KY
TN
ALMS
AR
LA
TX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
WA
OR
ID
NV
CA
VA
MD
WA
AK
IN
A
B
C
D
Transparency in Guidance & Rulings
HI
ME
RI
VTNH MA
NYCT
PA NJ
DC
DE
WV
NC
SC
GA
FL
ILOH
MIWI
KY
TN
ALMS
AR
LA
TX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
OR
ID
NV
CA
VA
MD
WA
AK
IN
A
B
C
D
Overall Grades: State Tax
Administration
HI
ME
RI
VTNH MA
NYCT
PA NJ
DC
DE
WV
NC
SC
GA
FL
ILOH
MIWI
KY
TN
ALMS
AR
LA
TX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
WA
OR
NV
CA
VA
MD
WA
AK
IN
A
B
C
D
Tax Climate Issues
#2:
Assertions that businesses don’t
pay their fair share of state taxes
12
Bumper Sticker by Citizens for Tax Justice:
13
COST Business Tax Burden Study
14
Businesses paid more than $688 Billion in U.S. state and local taxes in FY2014, an increase of 2.2% from 2013
• How Much Do Businesses Contribute to State Revenues?
– US Average for FY 2014: 44.8% of all state and local tax revenues
Remarkably, the business share of SALT nationally has been within 1% of 45% since 2000
COST Study, Total state and local business taxes: State-by-state estimates for fiscal year 2014, October 2015
What do Businesses Pay?
15
FY 2014 Total State & Local Business Taxes, Nationwide
36%
21%8%
12%
8%5% 10%
U.S.
Property
Sales
Corporate Income
Excise Tax
Unemployment Insurance
Individual Income
License & Other
FY 2014 COST Business Tax Burden Study Published 9/201516
Share of State and Local Business Taxes Paid by Businesses
See generally, COST Business Tax Burden Studies, available at www.cost.org.
SHARE OF STATE AND LOCAL TAXES
PAID BY BUSINESSES, 2000 to 2014
17
Why Tax Business at All?
• Who really pays business taxes?:
– Labor (lower wages)
– Consumers (higher prices), or
– Owners (smaller investment returns)
• Best Rationale: Businesses should pay for benefits provided
by governments
– Dilemma: How to account for spending on education
• “Tax to Benefit Ratio” for US businesses: 3.35/1 (1.23/1 if
50% of education spending benefits businesses)
18
Tax Climate Issues
19
#3:
State corporate income tax
revenues are declining; personal
income tax revenues are
increasing
20
Economic Role of the Corporate Income Tax
• Bill Fox, et al.: “…there is little [economic] justification for the state corporate income tax.”
• Charles McClure: “It is hard to think of a good reason to tax corporate income….The case against state corporate income taxes is even stronger.”
• OECD: “…corporate income taxes are the most harmful type of tax for economic growth.”
21
10.9% 10.4% 8.3% 8.5% 8.4% 9.9% 10.7% 11.3% 10.8% 9.6% 9.0% 9.3% 9.1% 9.3% 9.4%
State and local CIT and other business activity tax collections as share of total state and local business
tax collections
22
Trend to watch: Growth of Pass-Through Entities (PTEs) Taxed under the PIT
• In 1980, PTEs accounted for 20% of total US business income; In 2012, PTEs accounted for 64% of US Business income (Tax Foundation Report)
• In 2014, 52% of state income tax revenues were received from state personal income tax revenues (COST/EY Study)
• PTE’s pay a lesser average combined federal/state rate than C Corporations: 19% v. 31.8% (NBER Study)
• Growth of PTE’s will have significant future impact:– Federal tax reform implications (corporate integration?)
– Federal and state audits of partnerships as entities
– Growth of PTE’s accounts for much of the growth in income inequality over last three decades (NBER)
23
Tax Climate Issues
24
#4:
Big businesses benefit from
loopholes not available to small
businesses, so let’s “level the
playing field”
25
26
Tax Climate Issues:
#5:
Unitary combined reporting creates fewer tax distortions than separate entity filing, and is an effective way
to close “loopholes”
27
Mandatory Unitary Combined Reporting
• Judicial doctrine, vague definitions
• Assumes all entities in group have same level of profitability
• No Federal conformity for unitary groups
• Complex compliance & audits; encourages costly litigation
• Does not provide a stable revenue source
• Fiscal estimates speculative; creates winners & losers
• Does not improve “fairness” of tax system
• Other tools available to combat “income shifting”
Tax Climate Issues:
#6:
States should impose sales taxes on business services to keep up with our expanding service economy
30
45%
LEGEND
Lowest GSP
Mid GSP
High GSP
53%
36%
39%
State and Local Sales Taxes Imposed on Business Input Purchases, 2011
41%
N/A
57%
N/A
28%
53%
49%
55%47%
34%
52%
43%
39%
46%
33%
37%
55%
53%
45%
49%
53%
43%
34%
33%
44%34%
39% 35%
46%
51%
29%
32%
37%
40%
49%
N/A
33%
41%
39%
N/A
39%
46%
40%
36%
COST Sales Tax on Business Inputs Study, Published 2013
32%42%
N/A
31
“What’s Wrong With Taxing Business Services?”
• COST Study on Problems with Taxing Business Services: April 4, 2013
– “Pyramiding” of the tax leads to arbitrary and hidden differences in effective
sales tax rates on different goods and services that distort consumer choices;
– Lack of transparency in sales tax base creates higher “hidden” effective tax
rates making it difficult to determine who bears the burden of the tax;
– Taxes on intermediate purchasers put companies at a competitive
disadvantage and encourages them to relocate;
– Encourages companies to self-provide business services, reducing efficiency
and competition;
– Detrimental impacts on a state’s business tax competitiveness; and
– Extremely difficult compliance, sourcing, and definitional burdens for
taxpayers and tax administrators alike.32
Tax Climate Issues:
#7:
In the name of transparency,
corporate tax returns should be
made publicly available
33
Corporate Return Disclosure
• From the US Congress Joint Committee on Taxation (2000):
– Taxpayers have a justifiable expectation of privacy in the extensive information they furnish under penalty of fine or imprisonment.
– Our tax system is based on voluntary compliance. Many observers believe that the degree of voluntary compliance is directly affected by the degree of confidentiality given the information that is provided to the IRS.
– If returns and return information were publicly available, it would invite a variety of intrusions into a taxpayer’s privacy.
– Business competitors could use the information to gain economic advantage.
– A lack of confidentiality could also facilitate the use of return information for political gain.
34
Corporate Disclosure Examples:Abuse? You Decide.
35
Tax Climate Issues:
#8:
Gross receipts taxes are an effective way to tax businesses
• Uneven Stealth Tax: Violates principles of economic competitiveness and transparency
• Unfair Tax: Imposes Significant Tax Burden on Start-Up, Low Margin and Unprofitable Enterprises
• Tax Pyramiding: Imposed at Every Level of Production
• Least Economically Neutral Tax
• “There is no sensible case for gross receipts taxation…. [Gross receipts taxes] do not belong in any program of tax reform.”
COST/Tax Foundation: “Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance,” John Mikesell, Indiana University, Published January, 2007
Gross Receipts Taxes as a Policy Choice
COST/Tax Foundation: “Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance,” John Mikesell, Indiana University, January, 2007. (www.cost.org)
Gross Receipts Taxes as a Policy Choice
Tax Climate Issues:
#9:
State tax haven “blacklists” are an
effective way to recoup millions in
profits parked offshore
40
International Competition
41
Existing State “Tax Haven” Provisions
• Six states (Alaska, Connecticut, Montana, Oregon, Rhode Island, and West Virginia) plus DC currently have some form of a “tax haven” provision that seeks to include certain foreign entities in a state’s unitary combined return
• Two approaches:
– 1) Blacklist: Defining a “tax haven” by maintaining a statutory list of foreign jurisdictions (commonly referred to as the “blacklist” approach). MT & OR (current), CT & DC (repealed)
– 2) Criteria: Employ a facts & circumstances test that looks to certain criteria, typically modeled after the Multistate Tax Commission’s “tax haven” definition in the combined reporting model statute.
Council On State Taxation
42
“Tax Haven” State Enactment Status
and 2015/2016 Proposals
AK
HI
ME
RI
VT
NH MA
NYCT
PA
NJ
CT
DE
WV
NC
SC
GA
FL
ILOH
IN
MIWI
KY
TN
ALMS
AR
LATX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
COUT
WY
MT
WA
OR
ID
NV
CAVA
MD
DC
MTC
*
*
* DC and Connecticut have subsequently repealed or removed the “blacklist”
requirement in favor of “indicia” of tax havens.
Enacted Tax Haven Provisions
Tax Haven “Blacklist” Included or Required in Enacted Legislation
2015 Proposals- Not Enacted
2015/2016 Proposals
2016 Proposals
Paul J. Hartman State and Local Tax Forum 43
• The lists are based on an outdated OECD list developed for transparency & information sharing
• Not limited to island economies, and includes low tax rate and other tax favorable characteristics
• The list creates a huge disincentive for foreign direct investment – few states realize their extent of FDI
• The faulty premise of tax haven legislation: profits booked to these countries are per se tax evasion
• Potential constitutional infirmity (and guaranteed litigation) resulting from tax haven approach
Council On State Taxation
Problems with Tax Haven Legislation:
the Arbitrary Nature of the Lists
44
Council On State Taxation
45
Comparing US PIRG Estimates
to Actual State DOR Data
Jurisdiction
Montana
Oregon
Massachusetts
Colorado
Kentucky
New Hampshire
Dist. of Columbia
PIRG Estimate
$35 million
$225 million
$991 million
$246 million
$187 million
$98 million
$284 million
State Estimate
$7 million
$18 million
$79 million
$46 million
$65 million
$5 million
$3 million
Fiscal Impact of Proposed Tax Haven
Legislation in Various States
45
Released March 1, 2016 (www.cost.org)
46
Tax Climate Issues:
#10:
How should states cope with
targeted tax incentives?
Tax Foundation Rankings
– TF 2015 State Business Tax Climate Index:
(Best: Wyoming; Worst: New Jersey)
• North Carolina: 16th (44th in 2014)
• Louisiana: 35th (32d in 2014)
• Ohio: 44th (42d in 2014)
• Minnesota: 47th (same)
• New York: 49th (same)
– Considerations:• Measures 5 taxes: PIT, CIT, SUT, PT, UIT
• The absence of a major tax is a significant factor;
• Different business taxes are weighted differently;
• Severance taxes are not included
Tax Foundation Study: Weighting of Taxes
Source: Texas Taxpayers and Research Association