Tax Foundation expert targets aggressive state tax practices

A day after commemorating Tax Freedom Day, the Tax Foundation’s Joseph Henchman heads to Capitol Hill this afternoon to testify in connection with a bill targeting “aggressive” state tax practices.

Here are some highlights from Henchman’s upcoming testimony on the Business Activity Tax Simplification Act:

About half the states now assert “economic nexus” in corporate taxation, claiming the power to tax corporations with no property or employees in the state. Six states have adopted aggressive sales tax stands, including Arkansas earlier this month.

These trends result from states’ incentive to shift tax burdens from physically present individuals and businesses to those who are beyond their borders. Recent examples have included door-to-door salesmen, credit card companies, franchised fast food operations, cell phone providers, online travel companies, car rental companies, and affiliate- and franchise-based operations.

Businesses must consequently deal with:

  • Complex tax statutes
  • Uncertainty about what activities create tax obligations in different states
  • Lack of uniformity between different states in tax rules and formulas
  • Generally, wasting significant time, wealth, and brainpower navigating tax compliance rather than doing more productive things.

These state actions also deter new investment by domestic and foreign businesses and entrepreneuers, who want no part of this quagmire and take their dollars and their jobs overseas.

Under the “benefit principle,” where the taxes people pay are linked to the government services they receive, individuals and businesses should pay taxes where they work and live; jurisdictions should not tax those who don’t work and live there.

The Constitution was adopted in part because of these state incentives, and a desire by the Founding Fathers to restrain states from enacting laws that harm the national economy by discriminating against interstate commerce. Until the twentieth century, states could not tax interstate commerce at all, so strong was this residual concern.

Federal “preemption” of certain state tax actions is permissible under even strict readings of the Commerce Clause, has happened in the past, and is desirable as the only effective way to prevent state tax overreaching.

State fiscal pain does not justify condoning state tax overreaching, nor does technological change overrule constitutional principles meant to restrain states from imposing burdens and uncertainty on the national economy.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...

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