Time for State Taxes to Be REWRITTEN

Sometimes we get so caught up in the litigation and proposed legislation that we don't stop to ask whether we should even be going in this direction. Perhaps we are getting the wrong answers because we are asking the wrong questions. It's time for state taxes to be rewritten. For politics to get out of the way. 

I read an article this week, written by Michael J. Bologna and edited by Ryan Tuck for Bloomberg BNA regarding state tax policy (entitled, "Kill Corporate Income Tax, Seek Low Rates"; requires a subscription to BBNA to access). The focus of the article were comments made at the August 10th National Conference of State Legislatures program in Chicago by William Fox, a professor of economics at the University of Tennessee, and Therese J. McGuire, a professor of strategy at the Kellogg School of Management at Northwestern University.

Overall, I agree with their comments about what a fair tax system should look like, and how the current state tax regimes are complex, unfair and inefficient. The current taxing schemes cause compliance burdens for taxpayers, administration burdens for state governments, and inconsistent revenue.

If the ideal tax structure contains low rates, broad bases and simplicity, then why do states keep making their tax systems more complex? 

States continually run into budget problems and resource constraints, yet the tax systems are not adjusted to make it possible for revenue departments to operate efficiently and effectively.

Politics makes it almost impossible for tax structures to change to fit modern economies. For example, when will all services become subject to sales tax by all states? How will states tax digital and remote sales without enacting unconstitutional taxes?

If corporate income taxes only account for approximately 8% of all state taxes collected, then why is so much effort and litigation expended by both taxpayers and governments?

States keep enacting state tax schemes that favor in-state taxpayers such as single sales factor apportionment, market-based souring, unitary combined reporting and digital sales tax laws, when the simple solution is to widen the tax base and lower the rates. This may actually cause more companies to move into a state. It would more than likely decrease the compliance burden and potential for audit controversies.

Will and should more states consider replacing their corporate income tax with a gross receipts tax similar to the Ohio Commercial Activities Tax or the Washington Business and Occupation Tax? 

Like a person that creates his own problems and then spends his life complaining about them, that's what state taxes have become. We can't expect a different result if we keep doing the same thing. It's time to get off the merry-go-round.